As filed with the Securities and Exchange Commission on March 23, 1998
Registration No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 4813 22-3498533
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
105 Carnegie Center
Princeton, NJ 08540-6215
(609)-734-3700
(Address and telephone number of Registrant's principal executive offices)
Bruce Godfrey
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609)-734-3700
(Name, address and telephone number of agent for service)
-------------------------
Copies to:
Keith L. Kearney
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
-------------------------
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of to be Price Offering Registration
Securities to be Registered Registered Per Note(1) Price(1)(2) Fee
--------------------------- ---------- ----------- ----------- ------------
9.80% Senior Discount Notes
due 2008,Series B.......... $567,000,000 61.832% $350,587,440 $103,423.29
(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(o).
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
==============================================================================
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
state.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 23, 1998
PROSPECTUS [GRAPHIC OMITTED]
, 1998
Offer to Exchange
9.80% Senior Discount Notes due 2008, Series B
for Any and All Outstanding
9.80% Senior Discount Notes due 2008, Series A
of
RCN Corporation
The Exchange Offer will expire at 5:00 P.M.,
New York City time, on , 1998, unless extended
-----------------------
RCN Corporation ("RCN") hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange $1,000
principal amount of 9.80% Senior Discount Notes due 2008, Series B (the "New
Notes") of RCN for each $1,000 principal amount of the issued and outstanding
9.80% Senior Discount Notes due 2008, Series A (the "Old Notes," and together
with the New Notes, the "Notes") of RCN. As of the date of this Prospectus there
were outstanding $567,000,000 principal amount of Old Notes. The terms of the
New Notes are identical in all material respects to the Old Notes except that
the offer of the New Notes will have been registered under the Securities Act
and, therefore, the New Notes will not be subject to certain transfer
restrictions, registration rights and related liquidated damage provisions
applicable to the Old Notes.
The Old Notes were issued at a substantial discount from their principal
amount at maturity and the purchase discount on the Old Notes accretes from
February 6, 1998 until February 15, 2003 Cash interest will be payable
semi-annually on February 15 and August 15 of each year, commencing August 15,
2003. See "Description of the New Notes." No interest will have accrued on the
Old Notes on the date of exchange for the New Notes and therefore no interest
will be paid thereon.
The New Notes are being offered hereunder in order to satisfy certain
obligations of RCN under the Registration Rights Agreement, dated February 6,
1998, among RCN and the other signatories thereto (the "Registration Rights
Agreement"). Based upon interpretations contained in letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission"), RCN believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by each holder thereof (other than a broker-dealer, as set forth
below, and any such holder which is an "affiliate" of RCN within the meaning of
Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"))
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Each holder wishing to accept the Exchange Offer must represent to RCN in
the Letter of Transmittal that such conditions have been met. Each broker-dealer
that receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were
(continued on next page)
RCN's Common Stock is traded on the Nasdaq Stock Market ("NASDAQ") under
the symbol "RCNC."
See "Risk Factors" beginning on page 15 for a discussion of certain risk
factors that should be considered by holders prior to tendering their Old Notes
in the Exchange Offer.
-----------------------
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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
(continued from cover)
acquired by such broker-dealer as a result of market-making activities or other
trading activities. RCN has agreed that, for a period of 90 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
RCN will not receive any proceeds from the Exchange Offer. RCN will pay all
the expenses incident to the Exchange Offer. Tenders of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date. In
the event RCN terminates the Exchange Offer and does not accept for exchange any
Old Notes, RCN will promptly return all previously tendered Old Notes to the
holders thereof. See "The Exchange Offer."
Prior to this Exchange Offer, there has been no public market for the
Notes. RCN does not currently intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance than an active public market for the New Notes
will develop.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "SUMMARY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," IN ADDITION TO CERTAIN STATEMENTS CONTAINED
ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS
PROSPECTIVE. SUCH FORWARD LOOKING STATEMENTS INCLUDE, IN PARTICULAR, STATEMENTS
MADE AS TO PLANS TO DEVELOP NETWORKS AND UPGRADE FACILITIES, THE MARKET
OPPORTUNITY PRESENTED BY MARKETS TARGETED BY THE COMPANY, THE COMPANY'S
INTENTION TO CONNECT CERTAIN WIRELESS VIDEO, RESALE TELEPHONE AND INTERNET
SERVICE CUSTOMERS TO ITS ADVANCED FIBER OPTIC NETWORKS, THE DEVELOPMENT OF THE
COMPANY'S BUSINESSES, THE MARKETS FOR THE COMPANY'S SERVICES AND PRODUCTS, THE
COMPANY'S ANTICIPATED CAPITAL EXPENDITURES, THE COMPANY'S ANTICIPATED SOURCES OF
CAPITAL AND EFFECTS OF REGULATORY REFORM AND COMPETITIVE AND TECHNOLOGICAL
DEVELOPMENTS. NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE
FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. SUCH STATEMENTS ARE SUBJECT TO
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES
AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK FACTORS," BEGINNING ON
PAGE 15 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY
CONSIDER SUCH FACTORS.
SUMMARY
The following is a brief summary of the matters covered by this Prospectus
and is qualified in its entirety by the more detailed information (including the
financial statements and the notes thereto) included elsewhere herein. All
amounts regarding shares and per share data of RCN Common Stock have been
adjusted to reflect the one for one stock dividend ("Stock Dividend") declared
on March 9, 1998 to be effective on April 3, 1998. Unless the context indicates
otherwise, "RCN" or "the Company" means RCN Corporation and its subsidiaries and
those joint ventures in which the Company exercises control.
The Company
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. The region, one of the most densely populated in the United States,
represents approximately 4% of the geography of the U.S., but accounts for over
26% of the telecommunications market based upon the number of telephone access
lines. The Company believes that of the estimated 22 million homes in the Boston
to Washington, D.C. corridor, approximately 9 million homes are located in
high-density urban and suburban residential areas that will support development
of an advanced fiber optic network on an attractive economic basis. RCN believes
that its capability to deliver multiple services (telephone, video programming
and Internet access) to any given customer on its networks will provide it with
competitive advantages over other competitors. RCN's strategy is to become the
leading single-source provider of voice, video and data services to residential
customers in each of its markets by offering individual or bundled service
options, superior customer service and competitive prices.
RCN's initial advanced fiber optic networks have been established in New
York City and, through a joint venture with the Boston Edison Company ("BECO"),
in Boston and surrounding communities. RCN has also entered into a joint venture
named Starpower Communications, LLC ("Starpower") with Pepco Communications,
L.L.C. ("Pepco Communications"), an indirect wholly owned subsidiary of Potomac
Electric Power Company ("PEPCO"), to develop an advanced fiber network in the
Washington, D.C. area. On February 20, 1998, RCN acquired Washington, D.C.'s
largest Internet service provider ("ISP"), Erols Internet, Inc. ("Erols"), and
on February 27, 1998, RCN acquired Boston's largest ISP, Ultranet
Communications, Inc. ("Ultranet"). RCN also benefits from a strategic
relationship with MFS Communications Company, Inc. (now a subsidiary of
WorldCom, Inc.) ("MFS/WorldCom") in New York City and Boston and from its
interconnection and resale agreements with incumbent telephone service providers
including Bell Atlantic. RCN believes that these joint ventures and
relationships provide it with a number of important advantages including access
to rights of way and use of existing fiber optic facilities, the ability to
enter its target markets quickly and efficiently and a reduction in the up-front
capital investment required to develop its networks. In addition, the Company's
joint venture partners provide access to additional assets, equity capital and
established customer bases. The Company also benefits from its relationship with
its largest shareholder, 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.
As of December 31, 1997, the Company had approximately 267,600 connections
which were delivered through a variety of owned and leased facilities including
hybrid fiber/coaxial cable systems, a wireless video system and advanced fiber
optic networks. In addition, the Company gained approximately 325,000 Internet
service customers upon completion of the acquisitions of Ultranet and Erols.
Without giving effect to such acquisitions, RCN had pro forma revenues and
EBITDA (as defined below) before nonrecurring charges of $127.3 million and
$(7.7) million, respectively, for the year ended December 31, 1997 and $110.1
million and $23.5 million, respectively, for the year ended December 31, 1996.
The Company is deploying advanced fiber optic networks specifically designed to
provide high speed, high capacity telecommunications services for all new
network facilities. RCN also intends to upgrade certain of its hybrid
fiber/coaxial cable systems to enable them to provide the same range of voice,
video and data services, including bundled service options. See "Business--The
Delivery Platforms." Since it formally commenced operation of its advanced fiber
optic networks in New York City and Boston in September 1996, RCN has built or
acquired, through its joint venture with BECO and long term lease arrangements,
approximately 400 route miles of fiber optic cable and added approximately
15,100 customer connections to its advanced fiber optic networks. In addition,
during the same period the Company added approximately 29,700 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
December 31, 1997, RCN had approximately 82,700 total connections attributable
to customers in the New York City and Boston markets (of which approximately
42,600 were wireless video service and other connections and approximately
24,900 were resold telephone connections) and had approximately 184,900
connections attributable to its hybrid fiber/coaxial cable systems in the states
of New York (outside New York City), New Jersey and Pennsylvania, all within 75
miles of New York City. Because it delivers multiple services, RCN reports the
total number of its various service connections (for local telephone, video
programming and Internet access) rather than the number of customers. See
"Business--RCN Services--Connections."
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. In addition, the Company's management team and board of directors
benefit from experience gained in connection with the management of Commonwealth
Telephone Enterprises Inc. ("Commonwealth Telephone") (formerly C-TEC
Corporation ("C-TEC")), which prior to September 30, 1997 owned and operated
RCN. See "Description of the Distribution and Related Agreements--Background."
C-TEC 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.
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
in 1996 were approximately $210 billion (comprised of $183 billion in
telecommunications revenues and $27 billion in cable television revenues).
Approximately 50% of such revenue is estimated to be attributable to residential
users. RCN believes that density is a critical factor in the effective economic
deployment of its networks, and that the Boston to Washington, D.C. corridor is
a particularly attractive market for developing advanced fiber optic facilities
due to population density, favorable demographics and the aging infrastructure
of the incumbent service providers' network facilities in this region. The
Company applies a subscriber-driven investment strategy focusing on subscriber
density, proximity to the Company's advanced fiber optic networks and network
development costs, in order to determine if the number of potential connections
in a target area will permit network development on an attractive economic
basis.
Business Strategy
The Company believes that 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, the need for more advanced, higher capacity
networks to meet growing consumer demands for new communications products and
services and the superior technology of the Company's networks. In order to
achieve its goal of becoming the leading provider of telecommunications, video
and data services to residential customers in its target markets, RCN is
pursuing the following key strategies:
Developing Advanced Fiber Optic Networks. RCN's advanced fiber optic
networks are specifically designed to provide a single source for high speed,
high capacity voice, video programming and data services. RCN believes that its
high capacity advanced fiber optic networks provide RCN with certain competitive
advantages such as increased capacity (including the ability to offer bundled
voice, video and data services) and generally superior signal quality and
network reliability relative to the typical networks of the incumbent service
providers. By using advanced fiber optic networks capable of delivering multiple
services, RCN is able to address a larger number of potential subscriber
connections in its target markets than incumbent service providers which
typically provide only single or limited services.
Focusing on Residential Customers in High-Density Markets. RCN seeks to be
the first operator of an advanced fiber optic network providing voice, video and
data services to residential customers in each of its target markets. 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 and in striving
to connect residential customers directly to its advanced fiber optic networks.
RCN also believes that residential customers will be attracted to lower prices,
broader service offerings, enhanced levels of customer care and consumer choice.
Although the Company's primary focus is on residential customers, RCN also
serves certain commercial accounts which are located on or in close proximity to
its networks.
Implementing Subscriber-Driven Investment Strategy. RCN attempts to
efficiently deploy its capital by tying facility development to the procurement
of customer connections. In order to promote its presence in its markets and to
develop a subscriber base for its advanced fiber optic networks, the Company may
provide telephone services to customers located near its advanced fiber networks
by first reselling services, and then by establishing leased facilities (such as
unbundled local loops), in advance of constructing or extending its networks.
RCN also provides wireless video services to approximately 38,000 customers in
New York City with a view to extending the advanced fiber optic network to
service many of these existing customers. In addition, RCN intends to extend its
network to cover most of the areas currently served by Erols and Ultranet.
Utilizing Strategic Alliances and Existing Facilities to Speed and Reduce
Cost of Entry. By utilizing strategic alliances, RCN is able to enter the market
quickly and efficiently and to reduce the up-front capital investment required
to develop its networks. Through alliances with companies such as BECO, Pepco
Communications and MFS/WorldCom, which provide or are expected to provide RCN
with extensive fiber optic networks or other assets, by utilizing certain
components of its own existing cable television infrastructure, and through the
strategic acquisitions of Ultranet and Erols, RCN has been able to expedite and
reduce the cost of market entry and business development and has created the
opportunity to leverage existing customer relationships.
Offering Bundled Voice, Video and Data Services. RCN believes that, as a
full service voice, video and data programming provider, it will be able to
offer a single-source package of voice, video and data services, individually or
on a bundled basis, which is not yet generally available from any incumbent
telephone, cable or other service provider. In addition, services provided over
RCN's advanced fiber optic networks are generally priced at competitive rates as
compared to the incumbent service providers.
Providing 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.
Recent Developments
On February 20, 1998, RCN acquired Erols and on February 27, 1998, RCN
acquired Ultranet. With these acquisitions, RCN became a leading ISP in the
Boston to Washington, D.C. corridor, serving approximately 325,000 Internet
customers. See "Business--The Acquisitions of Ultranet and Erols" and
"Business--RCN Services--Connections."
Erols is a leading regional ISP with approximately 293,000 residential and
business subscribers as of December 31, 1997 in targeted markets, including New
York City, Philadelphia, Washington, D.C. and Boston. RCN expects to contribute
to Starpower the subscribers acquired in the acquisition of Erols located in the
Washington, D.C. area in which Starpower operates. The joint venture partners of
Starpower are currently negotiating the terms of such contribution. On February
20, 1998, approximately 61% of all of Erols' subscribers were located in the
relevant Washington, D.C. area. Erols currently operates 57 physical points of
presence ("POPs") throughout its geographic markets, and also currently utilizes
32 "Virtual POPs," which permit subscribers located adjacent to, but outside of
the local calling areas of, physical POPs to dial into the Erols network on a
local basis through arrangements with the relevant local exchange carrier
("LEC"). Erols offers a broad range of Internet-based services, including (i)
Global Trader(sm), Erols' turn-key e-commerce product for small businesses, (ii)
Internet security services, including security consulting and virtual private
networks, and (iii) Web hosting, design and development services. RCN acquired
Erols in exchange for consideration consisting of $29.2 million in cash and
1,730,648 shares of RCN Common Stock plus the assumption and repayment of
approximately $5.8 million of debt (including payment of accrued interest). See
"Business--The Acquisitions of Ultranet and Erols--Merger With Erols Internet,
Inc."
Ultranet is a leading ISP in the Boston area with more than 32,000
residential and business customers in New England. RCN contributed to its joint
venture with BECO the subscribers acquired in the acquisition of Ultranet
located in the Boston area in which the BECO joint venture operates as well as
1.36% (or all of Erols' subscribers located in the relevant Boston area) of the
subscribers acquired in the acquisition of Erols. On February 27, 1998,
approximately 27% of all of Ultranet's subscribers were located in the relevant
Boston area. Ultranet provides Internet service to over 500 schools, and is
presently building a network which will provide access throughout New
Hampshire's universities and colleges. Ultranet has a wide network of 42 POPs.
Services Ultranet offers to subscribers include (i) virtual hosting, which gives
customers a corporate presence on the Internet, (ii) firewall security, which
provides high quality control in monitoring access to documents and visitors to
the customer's websites, and (iii) UltraFax, which allows customers to send
faxes from their desktops. Ultranet also offers its customers access to its
network via an 800 number which allows access from every major city in the
world. RCN acquired Ultranet in exchange for consideration consisting of
approximately $7.9 million cash and 890,384 shares of RCN Common Stock. Ultranet
had total revenues of approximately $6.7 million for the year ended June 30,
1997. See "Business--The Acquisitions of Ultranet and Erols--Merger With
Ultranet Communications, Inc."
Key Strategic Relationships
RCN has agreements in place with MFS/WorldCom which provide the Company
with the right to use portions of MFS/WorldCom's fiber networks in Boston and
New York City and under which MFS/WorldCom has agreed to install segments of
RCN's network. The Company is also developing alliances with utility companies
in its target markets, including joint ventures with BECO in Boston and with
Pepco Communications, an indirect subsidiary of PEPCO, in the Washington, D.C.
metropolitan area. The BECO joint venture provides RCN with access to and use of
certain existing BECO facilities and assets, including 126 fiber miles of BECO's
existing fiber backbone, and the ability to use BECO's real estate, poles,
easements and other interests for the construction and operation of the network.
The venture is 51% owned by RCN and is managed by RCN and is accounted for on a
consolidated basis. RCN and BECO have committed to provide additional equity
capital contributions to the joint venture on a 51% and 49% basis, respectively.
Starpower, the joint venture with Pepco Communications, provides RCN with access
to and use of certain existing facilities in the Washington, D.C. market
pursuant to a Fiber Use Agreement and other agreements. Starpower is owned 50%
by RCN and 50% by Pepco Communications and is accounted for under the equity
method of accounting. The parties have committed to make equity capital
contributions to the joint venture on a 50% and 50% basis; the venture is
managed by a committee on which RCN and Pepco Communications will have equal
representation. Utilities have a number of attributes which make them
particularly attractive as partners for the Company, including (i) contiguous
and broad geographic coverage with extensive conduits and rights-of-way, (ii)
significant access to capital, (iii) a reputation for reliability and customer
service and (iv) existing customer relationships (BECO and PEPCO served
approximately 660,000 and 687,000 customers, respectively, as of December 31,
1997). Through these joint ventures, RCN's joint venture partners have provided
or will provide access to extensive fiber optic facilities, as well as
commitments to make significant equity capital contributions throughout the term
of the respective joint venture agreements. The Company anticipates that its
joint venture partners will each contribute approximately $150 million in
capital contributions to the joint ventures in the period from September 30,
1997 through 2000 in order to fund capital expenditures at the joint venture
company level. RCN expects to contribute to Starpower the subscribers acquired
in the acquisition of Erols located in the Washington, D.C. area in which
Starpower operates. The joint venture partners of Starpower are currently
negotiating the terms of such contribution. On February 20, 1998, approximately
61% of all of Erols' subscribers were located in the relevant Washington, D.C.
area. RCN anticipates that Pepco Communications will make a contribution equal
to the value of such subscribers. RCN contributed to its joint venture with BECO
the subscribers acquired in the acquisition of Ultranet located in the Boston
area in which the BECO joint venture operates as well as 1.36% (or all of Erols'
subscribers located in the relevant Boston area) of the subscribers acquired in
the acquisition of Erols. On February 27, 1998, approximately 27% of all of
Ultranet's subscribers were located in the relevant Boston area. BECO has made a
corresponding contribution to the joint venture in the form of a note in the
principal amount of 49/51 of the agreed value of the subscribers contributed by
RCN.
Network Development and Financing Plan
In developing its advanced fiber optic networks, the Company undertakes a
subscriber-driven capital expenditure strategy whereby it (i) closely monitors
development of its subscriber base in order to tailor network development in
each target market, and (ii) seeks to establish a customer base in advance of or
concurrently with its network deployment. As part of this development plan, RCN
pre-markets its services by offering resale telephone (and, in New York City,
wireless video) services in areas targeted for expansion of advanced fiber optic
network facilities. Depending upon factors such as subscriber density, proximity
to the advanced fiber optic network and development costs and the degree of
success achieved in its initial markets, the Company will determine whether
extending its advanced fiber optic network to additional high density target
markets can be achieved on an attractive economic basis.
The Company expects that it will require a substantial amount of capital to
fund the network development and operations in the Boston to Washington, D.C.
corridor, including funding the development of its advanced fiber optic
networks, upgrading its hybrid fiber/coaxial plant and funding operating losses
and debt service requirements. The Company currently estimates that its capital
requirements for the period from January 1, 1998 through 1999 will be
approximately $785 million, which includes capital expenditures (including
connection costs which will only be incurred as the Company obtains
revenue-generating customer connections) of approximately $300 million in 1998
and approximately $485 million through 1999. These capital expenditures will be
used principally to fund the buildout of the Company's fiber optic network in
high density areas in the Boston, New York and Washington, D.C. markets and to
upgrade its hybrid fiber/coaxial cable systems. In addition to its own capital
requirements, the Company's joint venture partners are each expected to
contribute approximately $150 million in capital to the joint ventures through
2000 in connection with development of the Boston and Washington, D.C. markets.
Immediately following the consummation of the acquisition of Erols (the
"Acquisition") and the placement of the Old Notes on February 6, 1998, (the
"Offering"), the Company had approximately $993 million of cash and cash
equivalents and approximately $62 million of restricted cash. Such amounts are
expected to provide sufficient liquidity to meet the Company's capital
requirements through mid-2000.
The Company will continue to require additional capital for planned
increases in network coverage and other capital expenditures, working capital,
debt service requirements and anticipated further operating losses. Sources of
funding for the Company's further financing requirements may include vendor
financing, public offerings or private placements of equity and/or debt
securities, and bank loans. There can be no assurance that additional financing
will be available to the Company or, if available, that it can be obtained on a
timely basis and on acceptable terms. See "Risk Factors--Further Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Distribution
Prior to September 30, 1997, the Company was operated as a wholly-owned
subsidiary of C-TEC. On February 12, 1997, the C-TEC Board of Directors approved
a plan to restructure C-TEC, and, among other things, create a separate company
consisting of the businesses and operations that now comprise RCN (the "RCN
Businesses") and the associated assets and liabilities of such businesses and
operations, and to distribute to its stockholders all of its interest in the RCN
Businesses (the "Distribution") and all of its interests in Cable Michigan, Inc.
("Cable Michigan"), a Pennsylvania corporation that operates cable television
systems in the State of Michigan (the "Cable Michigan Distribution"). On
September 30, 1997 (the "Distribution Date"), each holder of record 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")
received (i) two shares (when adjusted for the Stock Dividend) of RCN Common
Stock for every one share of C-TEC Common Equity held as of September 19, 1997
(the "Record Date") and one share of Cable Michigan Common Stock for every four
shares of C-TEC Common Equity held as of the Record Date. Following the
Distribution and the Cable Michigan Distribution, C-TEC changed its name to
Commonwealth Telephone Enterprises Inc. The Company, Commonwealth Telephone and
Cable Michigan have entered into certain agreements providing for the
Distribution and the Cable Michigan Distribution, and governing various ongoing
relationships between the three companies, including a distribution agreement
and a tax sharing agreement. See "Description of the Distribution and Related
Agreements."
The following chart depicts the Company's principal subsidiaries and joint
ventures:
[CHART]
The Company's principal executive offices are located at 105 Carnegie
Center, Princeton, New Jersey, and its telephone number is (609) 734-3700.
The Exchange Offer
Securities Offered.............. Up to 567,000,000 principal amount at
maturity of 9.80% Senior Discount Notes due
2008, Series B. The terms of the New Notes
and the Old Notes are identical in all
material respects, except that the offer of
the New Notes will have been registered under
the Securities Act and, therefore, the New
Notes will not be subject to certain transfer
restrictions, registration rights and related
liquidated damage provisions applicable to
the Old Notes.
The Exchange Offer.............. RCN is offering, upon the terms and subject
to the conditions of the Exchange Offer, to
exchange $1,000 principal amount of New Notes
for each $1,000 principal amount of Old
Notes. See "The Exchange Offer" for a
description of the procedures for tendering
Old Notes. The Exchange Offer is intended to
satisfy obligations of the Company under the
Registration Rights Agreement, dated February
6, 1998, between RCN and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Salomon
Brothers Inc and NationsBanc Montgomery
Securities Inc. (collectively, the "Initial
Purchasers").
Tenders, Expiration Date;
Withdrawal...................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on __________, 1998, or
such later date and time to which it is
extended. The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any
time prior to the Expiration Date. Any Old
Notes not accepted for exchange for any
reason will be returned without expense to
the tendering holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
Certain Federal Income
Tax Considerations.............. The exchange of Old Notes for New Notes
pursuant to the Exchange Offer will not
result in any income, gain or loss to the
holders or the Company for federal income tax
purposes. See "Certain U.S. Federal Income
Tax Considerations."
Use of Proceeds................. There will be no proceeds to the Company from
the issuance of the New Notes pursuant to the
Exchange Offer.
Exchange Agent.................. The Chase Manhattan Bank is serving as
Exchange Agent in connection with the
Exchange Offer.
Consequences of Exchanging Old Notes
Pursuant to the Exchange Offer
Based upon interpretations contained in letters issued to third parties by
the staff of the commission, the company believes that, generally, any holder of
Old Notes (other than a broker-dealer, as set forth below, and any holder who is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who exchanges its Old Notes for New Notes pursuant to the
Exchange Offer may offer such New Notes for resale, resell such New Notes, or
otherwise transfer such New Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided such New Notes
are acquired in the ordinary course of the holder's business and such holder has
no arrangement or understanding with any person to participate in a distribution
of such New Notes. Each holder wishing to accept the Exchange Offer must
represent to the Company in the Letter of Transmittal that such conditions have
been met. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." To
comply with the securities laws of certain jurisdictions, it may be necessary to
qualify for sale or register the New Notes prior to offering or selling such New
Notes. The Company does not currently intend to take any action to register or
qualify the New Notes for resale in any such jurisdictions. If a holder of Old
Notes does not exchange such Old Notes for New Notes pursuant to the Exchange
Offer, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Any holder who tenders in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of New Notes could not rely on the position of the staff of the
Commission enunciated in Exxon Capital Holdings Corporation (available May 13,
1988) or similar no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liability under the Securities Act for which the
holder is not indemnified by the Company. See "The Exchange Offer--Consequences
of Failure to Exchange."
SUMMARY DESCRIPTION OF THE NEW NOTES
Securities Offered............. $567,000,000 aggregate principal amount at
maturity of 9.80% of Senior Discount Notes
due 2008, Series B. The New Notes will be
issued at a discount to their aggregate
principal amount at maturity. The yield to
maturity of the Notes will be 9.80% (computed
on a semi-annual bond equivalent basis),
calculated from February 6, 1998. See
"Certain U.S. Federal Income Tax
Considerations."
Maturity Date.................. February 15, 2008.
Ranking........................ The Notes will be senior unsecured
obligations of RCN. The Notes will rank
senior in right of payment to all
subordinated indebtedness of RCN and will
rank pari passu in right of payment with all
existing and future indebtedness of RCN that
is not by its terms subordinated in right and
priority to the Notes. In addition, claims of
holders of the Notes will be structurally
subordinated to claims of holders of
indebtedness of RCN's subsidiaries. As of
September 30, 1997, the aggregate amount of
indebtedness outstanding under the Credit
Agreement to which holders of Notes would
have been structurally subordinated was
approximately $110 million. In addition,
subsequent to September 30, 1997, RCN issued
$225 million aggregate principal amount
outstanding of 10% Senior Notes due 2007 and
approximately $601 million aggregate
principal amount at maturity of 111/8% Senior
Discount Notes due 2007 for gross proceeds of
approximately $350 million (together, the
"1997 Notes Offering"). RCN and its
subsidiaries are expected to incur
substantial additional indebtedness.
Interest....................... Cash interest will not accrue on the Notes
prior to February 15, 2003. Thereafter, cash
interest on the Notes will accrue at a rate
of 9.80% per annum and will be payable semi-
annually in arrears on each February 15 and
August 15 of each year, commencing August 15,
2003.
Original Issue Discount........ For federal income tax purposes, the Notes
will be treated as having been issued with
"original issue discount" equal to the
difference between the issue price of the
Notes and the sum of all cash payments
(whether denominated as principal or
interest) to be made thereon. Each holder of
a Note must include as gross income for
federal income tax purposes a portion of such
original issue discount for each day during
each taxable year in which a Note is held
even though no cash interest payments will be
received prior to August 15, 2003. See
"Certain U.S. Federal Income Tax
Considerations."
Optional Redemption............ The Notes will be redeemable at the option of
RCN, in whole or in part, at any time on or
after February 15, 2003 at the redemption
prices set forth under "Description of the
New Notes--Redemption," plus accrued and
unpaid interest, if any, thereon to the date
of redemption. In addition, prior to February
15, 2001, RCN may use the net proceeds of one
or more Public Equity Offerings (as defined)
of RCN yielding gross cash proceeds of at
least $30 million to redeem up to an
aggregate of 35% of the principal amount at
maturity of the Notes originally issued (on a
pro rata basis) at a redemption price equal
to 109.80% of the Accreted Value at the
redemption date of the Notes so redeemed.
Change of Control.............. In the event of a Change of Control, RCN will
be required to make an offer to purchase all
outstanding Notes at a purchase price equal
to 101% of the Accreted Value thereof plus
accrued and unpaid interest, if any, thereon
to the date of purchase. See "Description of
the New Notes--Certain Covenants--Change of
Control" for a discussion of such covenant.
Asset Sale Offer............... In addition, RCN will, subject to certain
conditions, be obligated to make an offer to
purchase Notes with the Net Cash Proceeds of
certain Asset Sales at a price of 100% of the
Accreted Value thereof plus accrued and
unpaid interest, if any, to the date of
purchase. See "Description of the New
Notes--Certain Covenants--Disposition of
Proceeds of Asset Sales."
Certain Covenants.............. The indenture under which the Notes will be
issued (the "Indenture") will contain certain
covenants, including (i) limitations on
additional indebtedness, (ii) limitations on
restricted payments, (iii) limitations on
liens securing certain indebtedness, (iv)
limitations on certain guarantees, (v)
limitations on dividend and other payment
restrictions affecting Restricted
Subsidiaries or Restricted Affiliates (as
defined), (vi) limitations on transactions
with affiliates, (vii) limitations on
issuances and sales of Preferred Stock by
Restricted Subsidiaries and Restricted
Affiliates (as defined), (viii) limitations
on the disposition of proceeds of asset sales
and (ix) limitations on designations of
Unrestricted Subsidiaries (as defined) and
Restricted Affiliates. In addition, the
Indenture limits the ability of RCN to
consolidate, merge or sell all or
substantially all of its assets. These
covenants are subject to important exceptions
and qualifications. See "Description of the
New Notes--Certain Covenants."
Absence of a Public
Market for the Notes........... The Notes are new securities for which there
is currently no established trading market.
Although the initial purchasers of the Old
Notes have informed RCN that they currently
intend to make a market in the Notes, they
are not obligated to do so and any such
market making may be discontinued at any time
without notice. Accordingly, there can be no
assurance as to the development or liquidity
of any market for the Notes. RCN does not
intend to apply for listing of the Notes on
any securities exchange or for quotation
through NASDAQ.
Use of Proceeds................ There will be no proceeds to the Company from
the issuance of New Notes.
Risk Factors
Holders of Old Notes should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under "Risk Factors," beginning on page 15, for a discussion
of certain risks involved with an investment in the New Notes before accepting
the Exchange Offer.
Summary Historical Consolidated Financial Data
Prior to September 30, 1997, the Company operated 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, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 are
derived from the Company's unaudited historical consolidated financial
statements not included in this Prospectus. The selected historical consolidated
financial data of the Company for the years ended December 31, 1997, 1996 and
1995 and as of December 31, 1997 and 1996 are derived from and should be read in
conjunction with the Company's audited historical consolidated financial
statements (the "Financial Statements") and the Company's unaudited pro forma
consolidated financial statements included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Consolidated Financial Statements" and the
Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
(dollars in thousands)
1993 1994 1995(1) 1996 1997
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales ....................................... $ 49,504 $ 59,500 $ 91,997 $104,910 $127,297
Costs and expenses, excluding depreciation
and amortization ......................... 30,821 49,747 75,003 79,107 134,967
Nonrecurring charges(2) ..................... -- -- -- -- 10,000
Depreciation and amortization ............... 9,922 9,803 22,336 38,881 53,205
----------- ------------- ----------- ----------- -----------
Operating (loss) income ..................... 8,761 (50) (5,342) (13,078) (70,875)
Interest income ............................. 17,882 21,547 29,001 25,602 22,824
Interest expense ............................ (17,127) (16,669) (16,517) (16,046) (25,602)
Other income (expense), net ................. 1,195 1,343 (304) (546) 131
(Benefit) provision for income taxes ........ 167 2,340 1,119 979 (20,849)
Equity in loss of unconsolidated entities(3) -- -- (3,461) (2,282) (3,804)
Minority interest in (income) loss of
consolidated entities(4) ................. (85) (95) (144) 1,340 7,296
Cumulative effect of changes in accounting
principles(5) ............................ 1,628 (83) -- -- --
Extraordinary charge--debt prepayment
penalty, net of tax of $1,728(6) ......... -- -- -- -- (3,210)
----------- ------------- ----------- ----------- -----------
Net income (loss) ........................... $ 12,087 $ 3,653 $ 2,114 $ (5,989) $(52,391)
=========== ============= =========== =========== ===========
Balance Sheet Data (at end of period):
Total assets ................................ $291,634 $568,586(7) $649,610 $628,085 $1,150,992
Long-term debt .............................. 181,500 154,000 135,250 131,250 686,103
Shareholders' equity ........................ 74,329 372,847(7) 394,069 390,765 356,584
</TABLE>
- -------------------
(1) Certain of the Company's businesses were acquired by C-TEC and transferred
to the Company in connection with the Distribution. In May 1995, a
subsidiary of C-TEC acquired Twin County Trans Video, Inc. ("Twin County")
and accordingly Twin County is fully consolidated in the Company's
financial statements since the date of acquisition. See Note 4 to the
Consolidated Financial Statements of the Company.
(2) Nonrecurring charges of $10,000 represent costs incurred with respect to
the termination of a marketing services agreement related to the Company's
wireless video services.
(3) Equity in loss of unconsolidated entities primarily consists of the
Company's proportionate share of income (losses) and amortization of excess
cost over net assets of Megacable, S.A. de C.V. ("Megacable"). The Company
purchased its 40% equity interest in Megacable in January 1995 and accounts
for its investment by the equity method of accounting.
(4) In 1997, the minority interest in (income) loss of consolidated entities
consists of minority losses of the RCN-BECOCOM joint venture of $6,562,
minority losses of Freedom New York, L.L.C. ("Freedom") through March 1997
of $966 and minority income earned by a cable television partnership of
$(232). The minority interest in (income) loss of consolidated entities
primarily consists of the approximately 20% minority interest in the loss
of Freedom in 1996. Prior to 1996 the minority interest represents minority
income earned by a cable television partnership.
(5) The cumulative effect of changes in accounting principles reflects the
adoption of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" in 1993 and the accounting for benefits under Statement
of Financial Accounting Standards No. 112-- "Employers' Accounting for
Postemployment Benefits" in 1994.
(6) Extraordinary charge represents the fee, net of taxes, paid in connection
with the early prepayment of Senior Secured Notes of C-TEC Cable Systems,
Inc. The Senior Secured Notes were prepaid in connection with the Company's
acquisition of a new $125,000 credit agreement comprised of a five year
revolving credit facility in the amount of $25,000 and a $100,000 term
credit facility which is to be repaid over six years in quarterly
installments from September 30, 1997 through June 30, 2005.
(7) During 1994, C-TEC transferred to the Company an equity contribution of
$298,759 primarily representing net proceeds from a C-TEC common stock
rights offering.
Summary Pro Forma Financial Data
The following unaudited summary pro forma financial data include
adjustments to the historical statements of operations of the Company for the
years ended December 31, 1997 and 1996 as if the Distribution, borrowings of
$110 million under the Credit Agreement, the 1997 Notes Offering, the
Acquisition and the issuance of the Notes had occurred on the first day of the
respective periods. Such adjustments result primarily from changes in the
capital structure of the Company and accounting for the Acquisition. See
"Unaudited Pro Forma Consolidated Financial Statements" and the notes thereto.
The following unaudited pro forma financial data for the respective periods 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, borrowings of $110 million under the Credit Agreement, the 1997
Notes Offering, the Acquisition and the issuance of the Notes had 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.
Year Ended Year Ended
December 31, December 31,
1996 1997
--------------- --------------
(dollars in thousands)
Statement of Operations Data:
Sales........................................ $114,305 $ 141,273
Costs and expenses, excluding
depreciation and amortization.............. 95,675 154,032
Nonrecurring charges......................... -- 10,000
Depreciation and amortization................ 64,087 69,171
--------- ---------
Operating (loss)............................. (45,457) (91,930)
Interest income.............................. 10,484 14,138
Interest expense............................. (107,575) (106,037)
Other (expense) income, net.................. (546) 82
--------- ---------
(Loss) before income taxes................... (143,094) (183,747)
(Benefit) for income taxes................... (48,422) (62,507)
--------- ---------
Income (loss) before equity in
unconsolidated entities and
minority interest.......................... (94,672) (121,240)
Equity in loss of unconsolidated entities.... (11,717) (17,948)
--------- ---------
(Loss) before extraordinary charge and
minority interest in loss of
consolidated entities..................... $(106,389) $ (139,188)
Other Data: ========= =========
EBITDA before nonrecurring charges (1)....... $ 18,630 $ (12,759)
Capital expenditures......................... $ 48,722 $ 90,392
Connections.................................. 357,347 593,646
Employees.................................... 1,050 1,150
December 31, 1997
--------------------------------
Pro Forma
Pro-Forma(2) As Adjusted(3)
--------------- --------------
(dollars in thousands)
Balance Sheet Data:
Cash, temporary cash investments and
short term investments........................ $603,617 $ 948,204
Cash restricted for debt service................ 62,804 62,804
Total assets.................................... 1,256,528 1,607,115
Total long-term debt............................ 687,955 1,038,542
Shareholders' equity............................ 407,384 407,384
(footnotes on following page)
(footnotes from previous page)
- -------------------
(1) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period
and should not be considered as an alternative to cash flows from
operating, investing or financing activities as determined in accordance
with U.S. GAAP. EBITDA is not a measurement under U.S. GAAP and may not be
comparable with other similarly titled measures of other companies.
(2) Reflects the historical balance sheet data as adjusted for the Acquisition.
(3) Adjusted to give effect to the Offering and the application of the proceeds
thereof.
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Old Notes should carefully review the following factors before accepting the
Exchange Offer.
This Prospectus contains certain forward-looking statements regarding the
Company's operations, economic performance and financial condition, including,
in particular, statements made as to plans to develop networks and upgrade
facilities, the market opportunity presented by markets targeted by the Company,
the Company's intention to connect certain wireless video and resale telephone
customers to its advanced fiber optic networks, the development of the Company's
businesses, the markets for the Company's services and products, the Company's
anticipated capital expenditures, the Company's anticipated sources of capital
and effects of regulatory reform and competitive and technological developments.
Such forward-looking statements are subject to known and unknown risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this
Section and elsewhere in this Prospectus. Such risks include, but are not
limited to, the Company's ability to successfully market its services to current
and new customers, connect existing customers to its advanced fiber optic
networks, 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
The Company has only recently begun operating a voice, video and data
services business and this business has only a limited operating history upon
which investors may base an evaluation of its performance. In connection with
entering this business, the Company has incurred operating and net losses and
negative cash flows to build its networks and pursue its business plans and
expects to continue to do so for the foreseeable future as its expands its
network and customer base. The extent to which it continues to experience
negative cash flow in the future will be affected by a variety of factors,
including the pace of its entry into new markets, the time and expense required
for building out its planned network, its success in marketing its services, the
intensity of the competition experienced by the Company and the availability of
additional capital to pursue its business plans. The Company had operating
losses after depreciation and amortization and nonrecurring charges of
$70,875,000, $13,078,000 and $5,342,000 for the years ended December 31, 1997,
1996 and 1995. On a pro forma basis, the Company had operating losses after
depreciation and amortization and nonrecurring charges of $91,930,000 and
$45,457,000 for the years ended December 31, 1997 and 1996. There can be no
assurance that the Company 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."
Further Capital Requirements
The Company expects that it will require a substantial amount of capital to
fund the development and operations of business in the Boston to Washington,
D.C. corridor, including to fund its advanced fiber optic networks, the upgrade
of hybrid fiber/coaxial plant, the funding of operating losses and debt service
requirements. The Company currently estimates that its capital requirements for
the period from January 1, 1998 through 1999 will be approximately $785 million,
which includes capital expenditures (including connection costs which will only
be incurred as the Company obtains revenue generating customer connections) of
approximately $300 million in 1998 and approximately $485 million through 1999.
These capital expenditures will be used principally to fund the buildout of the
Company's fiber optic network in high density areas in the Boston, New York and
Washington, D.C. markets and represent only the Company's proportionate share of
the funding requirements of the Boston and Washington, D.C. joint ventures. The
Company is obligated to fund its portion of any capital contributions required
by the joint ventures' annual budget or capital contribution schedule. See
"--Dependence on Strategic Relationships; Terms of Joint Venture Arrangements."
The Company expects that its joint venture partners will each contribute
approximately $150 million in capital to the joint ventures in the period from
September 30, 1997 through 2000 in order to fund capital expenditures at the
joint venture company level. RCN expects to contribute to Starpower, the joint
venture with Pepco Communications, the subscribers acquired in the acquisition
of Erols located in the Washington, D.C. area in which Starpower operates. The
joint venture partners of Starpower are currently negotiating the terms of such
contribution. On February 20, 1998, approximately 61% of all of Erols'
subscribers were located in the relevant Washington, D.C. area. RCN anticipates
that Pepco Communications will make a contribution equal to the value of such
subscribers. Failure by its joint venture partner(s) to make anticipated capital
contributions could have a material adverse effect on the Company.
The Company believes that, following the consummation of the Offering, it
has sufficient liquidity to meet its capital requirements through mid-2000. The
actual timing and amount of capital required for the rollout of the Company's
network and to fund operating losses may vary materially from the Company's
estimates and additional funds will be required in the event of significant
departures from the current business plan, unforeseen delays, cost overruns,
engineering design changes and other technological risks or to meet other
unanticipated expenses. The Company will continue to require additional capital
for planned increases in network coverage and other capital expenditures,
working capital, debt service requirements and anticipated further operating
losses. Sources of funding for the Company's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on a timely basis and on acceptable terms. Failure to obtain
such financing could result in the delay or curtailment of the Company's
development and expansion plans and expenditures. Any of these events could
impair the Company's ability to meet its debt service requirements and could
have a material adverse effect on its business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Substantial Indebtedness; Effect of Financial Leverage
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. As of December 31, 1997, on a pro forma
basis, the Company had an aggregate of approximately $1,039 million of
indebtedness outstanding, representing 71.8% of total capitalization, and the
ability to borrow up to an additional $22 million under the Credit Agreement. As
a result of the substantial indebtedness of the Company following the Offering,
the Company's fixed charges are expected to exceed its earnings for the
foreseeable future and there can be no assurance that the Company's operating
cash flow will be sufficient to pay interest on the Notes following February 15,
2003. In addition, the Company will require, and the Indenture permits the
Company to incur, substantial additional indebtedness, particularly in
connection with the buildout of the Company's networks and the introduction of
its telecommunications services to new markets. The leveraged nature of the
Company could limit its ability to effect future financings or may otherwise
restrict the Company's business activities.
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 as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
Holding Company Structure; Structural Subordination
RCN is a holding company with limited assets that conducts substantially
all of its operations through subsidiaries and joint ventures. The Notes will be
solely obligations of RCN and no other entity has any obligation, contingent or
otherwise, to make payments in respect of the Notes. Accordingly, RCN will be
dependent on dividends and other distributions from its subsidiaries and joint
ventures to generate the funds necessary to meet its obligations, including the
payment of principal and interest on the Notes. The ability of the Company's
subsidiaries and joint ventures to pay dividends to RCN will be subject to,
among other things, the terms of any debt instruments and applicable law. In
addition, the terms of the Company's joint ventures require the mutual consent
of the Company and its joint venture partner to distribute or advance funds to
the Company. Claims of holders of the Notes will be effectively subordinated to
the indebtedness and other liabilities and commitments of RCN's subsidiaries and
joint ventures and the interest of RCN in its joint ventures will be limited to
the extent of its direct or indirect equity interest in such entities.
Consequently, in the event of an insolvency, liquidation, reorganization,
dissolution or other winding up of the Company's subsidiaries and joint
ventures, the ability of RCN's creditors, including holders of the Notes, will
be subject to the prior claims of those entities' creditors, including trade
creditors, and any prior or equal claim of any joint venture partner. Any
distributions in respect of RCN's equity interests in non-wholly owned
subsidiaries or in joint ventures may be expected to be made on a pro rata basis
to all equity holders. The Company expects that a majority of its cash flow in
the advanced fiber optic network business will ultimately derive from its joint
venture investments. The Indenture permits substantial indebtedness to be
incurred by subsidiaries and joint ventures of RCN and does not, except under
limited circumstances, require a guarantee by subsidiaries of RCN. In addition,
the Indenture permits the Company's subsidiaries and joint ventures to become
parties to debt instruments that limit such entities' ability to pay dividends
or make distributions to RCN.
Ability to Manage Growth; Risks Related to Acquisitions
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.
Although the Company's acquisitions of Erols and Ultranet were consummated
in February, 1998, the process of integrating the business of the ISPs into the
Company may take a significant period of time, may place a significant strain on
the Company's resources, and could subject the Company to additional expenses
during the integration process. In addition, RCN expects that it will need to
upgrade the systems and controls of the companies being acquired. As a result,
there can be no assurance that the Company will be able to successfully
integrate these ISPs successfully or in a timely manner. See "--Risks Relating
to Provision of Internet Services."
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; Terms of Joint Venture Arrangements
The Company has entered into a number of strategic alliances and
relationships in order to provide it with early entry into the market for
telecommunications services. As the Company's network is further developed, it
will be dependent on these arrangements to provide the full range of its
telecommunication service offerings. The key strategic relationships include (1)
RCN's arrangements with MFS/WorldCom to, among other things, lease portions of
MFS/WorldCom's fiber optic network in New York City and Boston, (2) RCN's joint
venture with BECO under which the Company has access to BECO's extensive fiber
optic network in Greater Boston and (3) RCN's joint venture with Pepco
Communications, an indirect subsidiary of PEPCO, to develop an advanced fiber
optic network in the Washington, D.C. market. See "Business--Strategic
Relationships." The Company also has in place arrangements to act as a reseller
of Bell Atlantic local telephone services and arrangements to lease Bell
Atlantic unbundled local loop and T-1 facilities (including Bell Atlantic
services previously provided by NYNEX). Any disruption of these relationships or
arrangements could have a material adverse effect on the Company. The Company
has also executed comprehensive telephone service co-carrier interconnection
agreements with Bell Atlantic and Sprint, covering, along with the District of
Columbia, ten states in the Northeast and New England-Middle Atlantic corridor
areas, which the Company has targeted as its initial geographic markets. The
Company may be required to negotiate new interconnection agreements from time to
time and 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.
The agreements governing the Company's joint ventures with BECO and Pepco
Communications contain material provisions for the management, governance and
ownership of the Greater Boston and Washington, D. C. businesses, respectively.
The Boston Joint Venture Agreement (as defined under "Business--Strategic
Relationships") provides, among other things, that (1) certain fundamental
business actions, such as material capital expenditures, debt incurrences and
distributions to the Company and BECO, require the joint approval of RCN and
BECO; (2) neither RCN nor BECO may transfer their interests in the joint venture
for a period of three years without the other's consent and, thereafter, may
only do so while observing certain rights of first offer and tag-along rights;
(3) upon a change of control (as defined) of RCN Telecom Services of
Massachusetts ("RCN Massachusetts") or BECOCOM, Inc. ("BECOCOM"), the other
party has the right to acquire all of the equity interest in the joint venture
for fair market value; (4) following certain deadlock events (defined generally
as an inability of RCN and BECO to agree upon certain fundamental business
actions requiring mutual consent), either RCN or BECO may offer to buy the
other's interest in the joint venture or sell its own interest in the joint
venture, which gives the offeree the right to elect to buy or sell its interest;
and (5) in the event of a default by the Company in meeting a capital call, BECO
may dilute the Company's interest in the joint venture. The Amended and Restated
Operating Agreement (the "Starpower Operating Agreement") for Starpower
provides, among other things, that (1) so long as each partner maintains a 50%
interest in the joint venture, all business actions require the approval of the
operating committee; (2) subject to certain exceptions, neither RCN nor Pepco
Communications may sell any interest in Starpower within the first four years
after the execution of the Starpower Operating Agreement nor may they thereafter
sell any interest in Starpower without satisfying certain conditions; (3) upon a
change of control of RCN Washington or Pepco Communications, which the other
party has reason to believe will have a material adverse effect on Starpower,
the other party may offer to buy out the entity experiencing the change of
control or to sell its own interest in the joint venture, which gives the
offeree the right to elect to buy or sell its interest or accept the change of
control; (4) after three years following the execution of the agreement, upon
certain deadlock events (defined generally as an inability of the operating
committee to agree upon any business actions), either RCN Washington or Pepco
Communications may offer to buy the other's interest in the joint venture or
sell its own interest in the joint venture, which gives the offeree the
obligation to elect to buy or sell its interest; and (5) failure to make
scheduled capital contributions or to vote in favor of certain additional
capital contributions may result in dilution of equity interests. Accordingly,
certain matters beyond the control of the Company, such as a change of control
of RCN or an inability to agree on certain proposed actions, could result in it
being forced to sell its interest in the relevant joint venture or buy out the
interest of the other joint venturer. There can be no assurance that these
provisions will not have a material adverse effect upon the Company's liquidity
or future prospects or that, if necessary, the Company will be able to raise the
necessary funds to acquire the balance of the interests in the joint venture on
a timely basis and thereby maintain its interest in the venture in question. See
"Business--Strategic Relationships." In addition, although certain covenants
contained in the indentures applicable to the 1997 Notes (the "1997 Notes
Indentures") and the Indenture are applicable to the joint venture companies,
neither the joint venture companies nor the Company's joint venture partners are
parties to the 1997 Notes Indentures or the Indenture and accordingly are not
bound to comply with the terms of the 1997 Notes Indentures or the Indenture. A
disagreement with its joint venture partners over certain business actions,
including actions related to compliance with the 1997 Notes Indentures or the
Indenture, could give rise to a deadlock event.
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
LECs, and alternative service providers including competitive local exchange
carriers ("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 Bell Atlantic in New York City and Boston), which
currently dominate their local telephone markets. RCN competes with the
incumbent LECs in its markets for local exchange services on the basis of
product offerings (including the ability to offer bundled voice and video
services), reliability, state-of-the-art technology and superior customer
service, as well as price. The incumbent LECs have begun to expand the amount of
fiber facilities in their networks and to prepare to re-enter into the long
distance telephone services market and, in addition, have long-standing
relationships with their customers. The Company expects that the increased
competition made possible by regulatory reform will result in certain pricing
and margin pressures in the telecommunications services business.
The Telecommunications Act of 1996 (the "1996 Act") permits the incumbent
LECs and others to provide a wide variety of video services directly to
subscribers in competition with RCN. Various LECs currently are providing video
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire facilities
and the use of wireless transmission facilities. The Company cannot predict the
likelihood of success of video service ventures by LECs or the impact on the
Company of such competitive ventures.
Certain of RCN's video programming service businesses compete with
incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes with Time Warner Cable, Cablevision
Systems and Comcast. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric Cable TV,
which also holds a franchise for the relevant service area.
RCN also faces, and expects to continue to face, competition from other
potential competitors in certain of the markets in which RCN offers its
services. Other CLECs, such as Teleport Communications Group, compete for local
telephone services, although they have to date focused primarily on the market
for commercial customers. In addition, potential competitors capable of offering
private line and special access services also include other smaller long
distance carriers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end-users, including Winstar, Dualstar and New Vision. Cellularvision, a
provider of local multipoint distribution service ("LMDS"), offers wireless
Internet and video programming services in New York City and has announced plans
to offer telephone service in the future.
The market for Internet access services is extremely competitive and highly
fragmented. No significant barriers to entry exist, and accordingly competition
in this market is expected to intensify. The Company competes (or in the future
may compete) directly or indirectly with (i) national and regional ISPs; (ii)
established online services; (iii) computer software and technology companies;
(iv) national telecommunications companies; (v) LECs; (vi) cable operators; and
(vii) nonprofit or educational ISPs, and some of these present or potential
future competitors have or can be expected to have substantially greater market
presence and financial, technical, marketing and other resources than the
Company. Certain of the Company's online competitors, including America Online,
Inc. ("America Online"), the Microsoft Network and Prodigy, have introduced
unlimited access to the Internet and their proprietary content at flat rates,
and certain of the LECs have also introduced competitive flat-rate pricing for
unlimited access (without a set-up fee for at least some period of time). Bell
Atlantic has recently filed with the Federal Communications Commission (the
"FCC") a petition for an exemption from a regulation prohibiting it from
building a high-speed network. Bell Atlantic's petition requests that such
network, which would serve as an Internet backbone, not be subject to pricing
and other regulatory restriction. The network would span the states from Maine
to Virginia. There can be no assurance that competition will not lead to pricing
pressures in the Internet business. For additional information on the
competitive environment in which the Company operates, see
"Business--Competition."
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.
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.
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
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 Regional Bell Operating Companies
("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. Numerous parties appealed certain aspects of these regulations,
and the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the
Telecommunications Act that were ordered by certain state public utility
commissions ("PUCs") to be premature; vacated significant portions of the FCC's
nationwide pricing rules; and confined the use of combined unbundled network
elements to instances where the requesting carrier itself would do the
combining. On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the cost of
obtaining the use of combinations of an incumbent LEC's unbundled network
elements. On January 26, 1998, the Supreme Court granted a writ of certiorari
under which it will review the July 18 Eighth Circuit decision; it is expected
(but not yet certain) that the Court will hear arguments on this case in the
fall of 1998. The Eighth Circuit decisions create uncertainty about the rules
governing pricing and terms and conditions of interconnection agreements, and
could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements. Prior to the
Eighth Circuit decisions, the Company had entered into interconnection
agreements with Bell Atlantic, covering all of its target market area, that are
generally consistent with the FCC guidelines, and those agreements remain in
effect notwithstanding the reversal of the FCC rules. There can be no assurance,
however, that the Company will be able to obtain or enforce future
interconnection agreements, or obtain renewal of existing agreements, on terms
acceptable to the Company.
Certain RBOCs have also raised constitutional challenges to restrictions in
the 1996 Act preventing BOCs from entering the long distance market in their
home region. On December 31, 1997, the U.S. District Court for the Northern
District of Texas issued a decision (the "SBC Decision") finding that Sections
271 to 275 of the Telecommunications Act of 1996 are unconstitutional. SBC
Communications, Inc., et al. v. Federal Communications Commission, et al., Civil
Action No. 7:97-CV-163-X. These sections of the 1996 Act impose restrictions on
the lines of business in which the RBOCs may engage, including establishing the
conditions they must satisfy before they may provide in-region interLATA
telecommunications services. The District Court has stayed the SBC Decision
pending appeal. If the stay is lifted, the RBOCs (including Bell Atlantic, which
was permitted to intervene in the case) would be able to provide interLATA
services immediately without satisfying the statutory conditions. Although the
Company believes the factual assumptions and legal reasoning in the SBC Decision
are erroneous and therefore the decision will likely be reversed on appeal,
there can be no assurance of this outcome. If the SBC Decision were upheld on
appeal it may have an unfavorable effect on the Company's business for at least
two reasons. First, RBOCs currently have an incentive to foster competition
within their service areas so that they can qualify to offer interLATA services.
The SBC Decision removes this incentive by allowing RBOCs to offer interLATA
service without regard to their progress in opening their local markets to
competition. However, the SBC Decision would not affect other provisions of the
Act which create legal obligations for all incumbent LECs to offer
interconnection and network access, and therefore will not impair the Company's
ability to compete in local exchange markets. Second, the Company is legally
able to offer its customers both long distance and local exchange services,
which the RBOCs currently may not do. This ability to offer "one-stop shopping"
gives the Company a marketing advantage that it would no longer enjoy if the SBC
Decision were upheld on appeal. The Company cannot predict either the outcome of
these or future challenges to the 1996 Act, any related appeal of regulation or
court decision, or the eventual effect on its business or the industry in
general.
The 1996 Act also makes far-reaching changes in the regulation of the video
programming transmission services offered by RCN, including changes to the
regulations applicable to video operators, the elimination of restrictions on
telephone company entry into the video business, and the establishment of a new
"open video systems" ("OVS") regulatory structure for telephone companies and
others to offer such services. Under the 1996 Act, local telephone companies,
including both incumbent LECs such as Bell Atlantic, and CLECs such as RCN, may
provide service as traditional cable television operators subject to municipal
cable television franchises, or they may opt to provide their programming over
non-franchised open video systems subject to certain conditions, including, but
not limited to, making available a portion of their channel capacity for use by
unaffiliated program distributors and satisfying certain other requirements,
including providing capacity for public, educational and government channels,
and payment of a gross receipts fee equivalent to the franchise fee paid by the
incumbent cable television operator. RCN is one of the first CLECs to provide
television programming over an advanced fiber optic network pursuant to the OVS
regulations implemented by the FCC under the 1996 Act. As discussed below, RCN
is currently providing OVS service in the City of Boston and the City of New
York, and has entered into an OVS agreement to allow it to provide OVS services
in a number of communities surrounding Boston. Starpower is negotiating similar
agreements in Washington and surrounding communities.
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, 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. 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 has entered into similar OVS agreements or is in the process of
negotiating agreements with certain other Boston-area municipalities, either to
offer OVS services or franchised cable television services. It executed an
agreement with the City of New York on December 29, 1997, and has initiated OVS
service in the Borough of Manhattan pursuant to that agreement.
In areas where it offers video programming services as an OVS operator, RCN
is 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, the incumbent cable television
provider in certain communities in the Boston area, has made a similar filing at
the FCC with respect to its request for capacity on the Boston OVS network. RCN
will continue to oppose these requests made to the FCC, but to the extent that
the FCC were to grant any such request(s), 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. One of the
incumbent cable television companies in New York City has filed a complaint with
the New York Public Service Commission challenging the former (pre-OVS)
operations of RCN and WorldCom under the VDT framework, which remains pending
before that Commission.
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 temporary authorizations 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 at issue in an FCC proceeding in which an
initial decision (the "Initial Decision") was released on March 6, 1998. In the
Initial Decision, the Administrative Law Judge found Bartholdi Cable unqualified
with respect to 15 such licenses. The Initial Decision will become effective 50
days after its release unless Bartholdi Cable, as expected, files exceptions to
the Initial Decision within 30 days of its release or the FCC elects to review
the case on its own motion. Because of the uncertainty as to Bartholdi Cable's
right in the future to offer transmission services to RCN, the Company 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 and, in light of the increased uncertainties resulting from the
Initial Decision in the FCC proceeding involving certain of Bartholdi Cable's
licenses, the Company expects now actively to pursue its license applications.
While the Company expects to receive authorizations to transmit over these
microwave paths, there can be no assurance that RCN will be able to offer
wireless video services pursuant to its own FCC licenses or that the FCC's
investigation will be resolved favorably. The failure to obtain such license or
resolve such proceedings would materially adversely affect the Company's
wireless video operations in New York City.
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 in order to convert its wireless video subscribers to an advanced
fiber optic network.
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."
On September 8, 1997, the Company was notified by the FCC that it has ruled that
certain of the Company's upper levels of service for its New Jersey systems are
regulated levels of service and that the Company's rates for such levels of
service have exceeded the allowable rates under the FCC rate regulation rules
which have been effective since September 1993. The Company had treated these
levels of service as unregulated. The Company intends to contest this decision.
The Company does not believe that the ultimate resolution of this matter will
have a material impact on its results of operations or financial condition. With
the passage of the 1996 Act 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
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. Approximately 39 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 data services business, including Internet access, is largely
unregulated at this time (apart from Federal, state, and local laws and
regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers of
data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue to
be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data services
to the extent they use local exchange telephone network facilities for access to
their customers, similar proposals may well be considered by the FCC or Congress
in the future. See "--Potential Liabilities Associated with Internet
Businesses."
The foregoing does not purport to describe all present and proposed
federal, state, and local regulations and legislation affecting the telephone
and video programming industries. Other existing federal regulations, copyright
licensing, and, in many jurisdictions, state and local franchise requirements,
are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in
which communications companies operate. The ultimate outcome of these
proceedings, and the ultimate impact of the 1996 Act or any final regulations
adopted pursuant to the new law on RCN or its businesses cannot be determined at
this time. For additional information on the regulatory environment in which the
Company operates, see "Business--Regulation."
Need to Obtain and Maintain Permits, Building Access Agreements and
Rights-of-Way
In order to develop its networks, the Company must obtain local franchises
and other permits, as well as building access agreements and rights to utilize
underground conduit and pole space and other rights-of-way and fiber capacity
from entities such as incumbent LECs and other utilities, railroads, long
distance companies, state highway authorities, local governments and transit
authorities. There can be no assurance that the Company will be able to maintain
its existing franchises, permits and rights or to obtain and maintain the other
franchises, permits, building access agreements and rights needed to implement
its business plan on acceptable terms. Although the Company does not believe
that any of the existing arrangements will be canceled or will not be renewed as
needed in the near future, cancellation or non-renewal of certain of such
arrangements could materially adversely affect the Company's business in the
affected area. In addition, the failure to enter into and maintain any such
required arrangements for a particular network, including a network which is
already under development, may affect the Company's ability to acquire or
develop that network.
Ability to Procure Programming Services
The Company's video programming services are dependent upon management's
ability to procure programming that is attractive to its customers at reasonable
commercial rates. The Company is dependent upon third parties for the
development and delivery of programming services. These programming suppliers
charge the Company for the right to distribute the channels to the Company's
customers. The costs to the Company for programming services is determined
through negotiations with these programming suppliers. Management believes that
the availability of sufficient programming on a timely basis will be important
to the Company's future success. There can be no assurance that the Company will
have access to programming services or that management can secure rights to such
programming on commercially acceptable terms.
Liabilities for Unearned Revenues
Erols offers one-, two- and three-year subscriptions for Internet access,
which generally are paid for in advance. Such subscriptions are subject to
cancellation with a full refund for the first 30 days and to cancellation with a
pro-rated refund thereafter. Such revenues will be recognized over the term of
each such subscription, resulting in material short-and long-term liabilities
for unearned revenues. As of December 31, 1996, Erols had short- and long-term
liabilities for unearned revenues of approximately $12.9 million and $3.4
million, respectively and, as of December 31, 1997, of approximately $25.6
million and $8.9 million, respectively. Cancellation by a significant number of
the subscribers under such contracts could require cash payment of material
sums.
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.
Risks Relating to Provision of Internet Services
Dependence on the Internet; Uncertain Acceptance of the Internet as a
Medium of Commerce and Communication. The Company's Internet business will
depend in part upon the continuing development and expansion of the Internet and
the market for Internet access. Important issues concerning business and
personal use of the Internet (including security, reliability, cost, ease of
use, access and quality of service) remain unresolved and may significantly
affect the growth of Internet use. Acceptance of the Internet for commerce and
communications generally requires that potential users accept a new way of
conducting business and exchanging information, industry participants continue
to provide new and compelling content and applications, and the Internet provide
a reliable and secure computer platform. A diminution in the growth of demand
for Internet services or an absolute decrease in such demand could have a
material adverse effect on the Company's Internet business.
Evolving Industry Standards. New industry standards have the potential to
replace or provide lower-cost alternatives to existing services. The adoption of
such new industry standards could render the Company's existing services
obsolete and unmarketable or require reduction in the fees charged therefor. For
example, Erols' services currently rely on the widespread commercial use of
Transmission Control Protocol/Internet Protocol ("TCP/IP"). Alternative open and
proprietary protocol standards that compete with TCP/IP, including proprietary
protocols developed by International Business Machines Corporation ("IBM") and
Novell, Inc. have been or are being developed.
ISPs participate in the Internet through contractual "peering arrangements"
with Internet companies. These contractual arrangements are not subject to
regulation and could be subject to revision in terms, conditions or costs over
time.
Constraints on Capacity and Supply of Equipment. The Company's ability to
provide Internet service will depend in part on its ability to provide
sufficient capacity, both at the level of particular POPs (affecting only
subscribers attempting to use that POP) and in connection with system-wide
services (such as e-mail and news services, which can effect all subscribers).
In addition, the Company will be dependent in part on the availability of
equipment such as modems, servers and other equipment. Any shortage of such
equipment or capacity of servers could result in a strain on incoming access
lines during peak times, causing busy signals and/or delays for subscribers.
Reliance on Network Infrastructure; Risk of System Failure; Security Risks.
Internet network infrastructure is vulnerable to computer viruses and other
similar disruptive problems caused by its users, other Internet users or other
third parties. Computer viruses and other problems could lead to interruptions
of, delays in, or cessation of service, by the Company, as well as corruption of
the Company's or its subscribers' computer systems. In addition, there can be no
assurance that subscribers or others will not assert claims of liability against
the Company as a result of events such as computer viruses, other inappropriate
uses or security breaches.
Proprietary Rights; Risk of Infringement. Erols relies on a combination of
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect its proprietary technology. However, there can be no
assurance that Erols' technology will not be misappropriated or that equivalent
or superior technologies will not be developed. In addition, there can be no
assurance that third parties will not assert that the Erols' services or its
users' content infringe their proprietary rights.
The Company has obtained authorization, typically in the form of a license,
to distribute third-party software incorporated in the Erols access software
product for Windows 3.1, Windows 95, Windows NT and Macintosh platforms. The
Company plans to maintain or negotiate renewals of existing software licenses
and authorizations. The Company may want or need to license other applications
in the future.
Potential Liabilities Associated with Internet Businesses
Prior to the enactment of the Communications Decency Act of 1996 (the
"CDA"), which is Title V of the 1996 Act, a federal district court held that an
online service provider could be found liable for defamation, on the ground that
the service provider exercised active editorial control over postings to its
service. The CDA contains a provision which, one court has held, shields ISPs
from such liability for material posted to the Internet by their subscribers or
other third parties. Other courts have held that online service providers and
ISPs may, under certain circumstances, be subject to damages for copying or
distributing copyrighted materials.
As enacted, the CDA imposed fines on any entity that (i) by means of a
telecommunications device, knowingly sends indecent or obscene material to a
minor; (ii) by means of an interactive computer service, sends or displays
indecent material to a minor; or (iii) permits any telecommunications facility
under such entity's control to be used for the foregoing purposes. That
provision, as applied to indecent materials, has been declared unconstitutional
by the United States Supreme Court. While the Clinton Administration has
announced that it will not seek passage of similar legislation to replace this
provision, action by Congress in this area remains possible. At present, the
Company intends to exercise editorial control over Internet postings to the
extent of blocking Web sites and Usenet News groups when the Company becomes
aware that such sites or groups offer child pornography.
As the law in this area develops, the potential that liability might be
imposed on the Company for information carried on and disseminated through its
network could require the Company to implement measures to comply with
applicable law and reduce its exposure to such liability, which could require
the expenditure of substantial resources or the discontinuation or modification
of certain service offerings.
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 has implemented an Employee Stock Ownership Plan
("ESOP") and makes available competitive employee benefit programs providing
benefits substantially comparable to benefits provided immediately prior to the
Distribution. There can be no assurance that the Company will retain or, as
necessary, attract qualified management personnel.
Conflicts of Interest
As a result of the Distribution, there exist relationships that may lead to
conflicts of interest. Level 3 Telecom Holdings, Inc. ("Kiewit Telecom"),
formerly Kiewit Telecom Holdings, Inc., effectively controls the Company,
Commonwealth Telephone and Cable Michigan. In addition, the majority of the
Company's named executive officers are also directors and/or executive officers
of Commonwealth Telephone or Cable Michigan. See "Management." In particular,
David C. McCourt, Chairman and Chief Executive Officer of the Company, has
served as a director and Chairman and Chief Executive Officer of Cable Michigan
since the Distribution and will remain as a director and Chairman and Chief
Executive Officer of Commonwealth Telephone. Mr. McCourt expects to devote
approximately 70% of his time to managing the affairs of the Company. In
addition, Michael J. Mahoney, who has been President and Chief Operating
Officer, as well as a director, of the Company since the Distribution, is also a
director of Commonwealth Telephone. Mr. Mahoney expects to devote approximately
85-90% of his time to managing the affairs of the Company. The Company's other
named executive officers expect to devote the following approximate portions of
their time to managing the affairs of the Company: Mr. Godfrey (80%); Mr.
Haverkate (75%) and Mr. Adams (100%). The success of the Company may be affected
by the degree of involvement of its officers and directors in the Company's
business and the abilities of the Company's officers, directors and employees in
managing both the Company and the operations of Cable Michigan and/or
Commonwealth Telephone. Potential conflicts of interest will be dealt with on a
case-by-case basis taking into consideration relevant factors including the
requirements of NASDAQ and prevailing corporate practices.
In connection with the Distribution, Commonwealth Telephone has agreed to
provide or cause to be provided to the Company and to Cable Michigan certain
specified services for a transitional period after the Distribution. The fees
for such services will be an allocated portion (based on relative usage) of the
cost incurred by Commonwealth Telephone to provide such services to the Company,
Cable Michigan and Commonwealth Telephone. Based on this allocation arrangement,
the fee for such services to the Company would have been approximately $753,000
for 1996. See "Description of the Distribution and Related Agreements--
Transitional Services and Arrangements." The aforementioned arrangements are not
the result of arm's length negotiation between unrelated parties as the Company
and Commonwealth Telephone have certain common officers and directors. Although
the transitional service arrangements in such agreements are designed to reflect
arrangements that would have been agreed upon by parties negotiating at arm's
length, there can be no assurance that the Company would not be able to obtain
better terms from unrelated third parties. Additional or modified agreements,
arrangements and transactions may be entered into between the Company and either
or both of Commonwealth Telephone and Cable Michigan, which will be negotiated
at arm's length.
Absence of Public Market for the Notes; Transfer Restrictions
The New Notes are being offered to holders of Old Notes. The New Notes are
new securities for which there currently is no established trading market.
Although the Initial Purchasers have informed the Company that they currently
intend to make a market in the Notes, they are not obligated to do so, and any
such market-making may be discontinued at any time without notice. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Notes. The Company does not intend to apply for listing of the Notes on any
securities exchange or for quotation through NASDAQ. If a trading market
develops for the New Notes, future trading prices of such securities will depend
on many factors, including prevailing interest rates, the Company's results of
operations and financial condition and the market for similar securities.
USE OF PROCEEDS
There will be no proceeds to the Company from the issuance of the New Notes
pursuant to the Exchange Offer. In consideration for issuing the New Notes in
exchange for the Old Notes as described in this Prospectus, the Company will
receive Old Notes in like principal amount. The Old Notes surrendered in
exchange for the New Notes will be retired and canceled. Accordingly, the
issuance of the New Notes will not result in any change in the indebtedness of
the Company. The net proceeds to the company from the sale of the Old Notes was
approximately $345 million after deducting the Initial Purchasers' discount and
estimated expenses payable by the Company. The net proceeds will be used to fund
and support the expansion and interconnection of existing networks and services
and the development and operation of new advanced fiber optic networks.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an unaudited historical basis, (ii) on an unaudited
pro forma basis, giving effect to the Acquisition as if it had been consummated
on December 31, 1997, and (iii) on an unaudited pro forma as adjusted basis,
giving effect to the consummation of the Offering. The capitalization table
below should be read in conjunction with the historical Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Unaudited Pro Forma Consolidated Financial Statements." The
unaudited pro forma capitalization presented below is provided for informational
purposes only and should not be construed as indicative of the Company's
capitalization or financial condition had the transactions reflected thereby
been consummated on the date assumed, and 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.
December 31, 1997
---------------------------------------
Pro Forma
Historical Pro Forma As Adjusted
---------- --------- -----------
(dollars in thousands)
Cash, temporary cash investments
and short-term investments ........ $638,513 $603,617 $948,204
========== ========== ==========
Cash restricted for debt service ..... $61,911 $62,804 $62,804
========== ========== ==========
Credit Agreement(1) .................. $103,000 $103,000 $103,000
10% Senior Notes ..................... 225,000 225,000 225,000
11-1/8% Senior Discount Notes ......... 358,103 358,103 358,103(2)
Notes offered hereby ................. -- -- 350,587(2)
Capital lease obligations............. -- 1,852 1,852
---------- ---------- ----------
Total long-term debt ................. 686,103 687,955 1,038,542
---------- ---------- ----------
Shareholders' equity ................. 356,584 407,384 407,384
---------- ---------- ----------
Total capitalization .............. $1,042,687 $1,095,339 $1,445,926
========== ========== ==========
- -------------------
(1) As of July 1, 1997, three of RCN's direct and indirect subsidiaries entered
into a credit agreement providing for an aggregate of $125,000 in
availability, comprised of a $25,000 revolving credit facility and a
$100,000 eight year term credit facility. As of December 31, 1997, $103,000
had been borrowed thereunder. See "Description of Certain Indebtedness."
(2) These notes are recorded at their initial issue price and original issue
discount will be recorded as a liability as it accrues in the future.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Prior to September 30, 1997, the Company was 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 years ended
December 31, 1997 and 1996 and as adjusted for the Distribution, the issuance of
the 1997 Notes, the Acquisition and the issuance of the Notes offered hereby,
and the related transactions and events described in the notes thereto, as if
such transactions and events had been consummated on the first day of the
respective periods. The following Unaudited Pro Forma Consolidated Balance Sheet
sets forth the historical balance sheet of the Company as of December 31, 1997,
and as adjusted for the transactions and events described in the notes thereto
as if such transactions and events had been consummated on December 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 Prospectus 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 Adjustments Liberty/Freedom
RCN for for for Liberty/ Acquisitions
Historical Distribution Distribution Freedom Adjustments
------------ ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Sales ................. $ 104,910 $ 104,910 $5,206(1)
Cost and expenses,
excluding
depreciation
and amortization .... 79,107 79,107 7,463(1)
Depreciation and
amortization ......... 38,881 38,881 5,644(2) $5,000(3)
------- --------- ------- ------ ------
Operating (loss) ...... (13,078) (13,078) (7,901) (5,000)
Interest income ....... 25,602 $(15,127)(4) 10,475 5(5)
Interest expense ...... (16,046) (7,461)(6) (8,380) (737)(5)
15,127 (8)
Other (expense),
net ................. (546) (546)
(Loss) before ------- --------- ------- ------ ------
income taxes ........ (4,068) (7,461) (11,529) (8,633) (5,000)
(Benefit)
provision
for income taxes .... 979 (2,611)(9) (1,632) (2,420)(10) (1,400)(10)
------- --------- ------- ------ ------
(Loss) before
minority
interest and
equity in
unconsolidated
entities ............ (5,047) (4,850) (9,897) (6,213) (3,600)
Equity in (loss)
of unconsolidated
entities ............ (2,282) (2,282)
------- --------- ------- ------ ------
(Loss) before
extraordinary
charge and
minority interest
in loss of
consolidated
entities ........... $ (7,329) $(4,850) $ (12,179) $(6,213) $(3,600)
========= ======= ========= ======= =======
Unaudited pro forma
(loss) before
extraordinary
charge and
minority interest
per common share .... $ (.13) $ (.22)
Weighted average number
of common shares and
common stock equiva-
lents outstanding ... 54,918,394 54,918,394
<CAPTION>
Adjustments
for Issuance Acquisition Adjustments
of the 1997 Erols Adjustments for Issuance
Notes Historical(11) for Erols of the Notes Pro Forma
------------- ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sales ................. $10,949 $(6,760)(12) $ 114,305
Cost and expenses,
excluding
depreciation
and amortization .... 23,797 (14,692)(12) 95,675
Depreciation and
amortization ......... 2,014 12,548(13) 64,087
-------- ------ --------- -------- ------
Operating (loss) ...... (14,862) (4,616) (45,457)
Interest income ....... 10 (6) 10,484
Interest expense ...... $(63,438)(7) (161) 99 $(34,958)(15) (107,575)
Other (expense),
net ................. (1,628) 1,628 (546)
-------- ------ --------- -------- ------
(Loss) before
income taxes ........ (63,438) (16,641) (2,895) (34,958) (143,094)
(Benefit)
provision
for income taxes .... (22,203)(7) (8,532)(14) (12,235)(15) (48,422)
-------- ------ --------- -------- ------
(Loss) before
minority
interest and
equity in
unconsolidated
entities ............ (41,235) (16,641) 5,637 (22,723) (94,672)
Equity in (loss)
of unconsolidated
entities ............ (9,435)(12) (11,717)
-------- ------ --------- -------- ------
(Loss) before
extraordinary
charge and
minority interest
in loss of
consolidated
entities ........... $(41,235) $(16,641) $(3,798) $(22,723) $(106,389)
======== ======== ======= ======== =========
Unaudited pro forma
(loss) before
extraordinary
charge and
minority interest
per common share .... $ (1.88)
Weighted average number
of common shares and
common stock equiva-
lents outstanding ... 1,730,648(21) 56,649,042
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1997
($in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments Pro Forma Liberty/Freedom
RCN for for Acquisitions
Historical Distribution Distribution Adjustments
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Sales ........................... $ 127,297 $ 127,297
Cost and expenses, excluding
depreciation and
amortization ................. 134,967 134,967
Nonrecurring charges ............ 10,000 10,000
Depreciation and
amortization ................. 53,205 53,205 $ 1,250(3)
------- ------------ ------- ------
Operating (loss) ................ (70,875) (70,875) (1,250)
Interest income ................. 22,824 $ (8,686)(4) 14,138
Interest expense ................ (25,602) (5,654)(6) (20,796)
Other (expense) income, net ..... 131 10,460(8) 131
------- ------------ ------- ------
(Loss) before income taxes ...... (73,522) (3,880) (77,402) (1,250)
(Benefit) for income taxes ...... (20,849) (1,358)(9) (22,207) (437)(10)
------- ------------ ------- ------
(Loss) before equity in
unconsolidated entities
and minority interest ........ (52,673) (2,522) (55,195) (813)
Equity in (loss) of
unconsolidated entities ...... (3,804) (3,804)
------- ------------ ------- ------
Income (loss) before
extraordinary charge and
minority interest in loss
of consolidated entities ..... $ (56,477) $ (2,522) $ (58,999) $ (813)
============ ============ ============ ============
Unaudited pro forma (loss) before
extraordinary charge and
minority interest per
common share ................. $ (1.03) $ (1.07)
Weighted average number of
common shares and
common stock equivalents
outstanding .................. 54,965,716 54,965,716
<CAPTION>
Adjustments
for Issuance Acquisition Adjustments
of the 1997 Erols Adjustments for Issuance
Notes Historical(11) for Erols of the Notes Pro Forma
------------- ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sales ........................... $ 36,528 $ (22,552)(12) $ 141,273
Cost and expenses, excluding
depreciation and
amortization .................
Nonrecurring charges ............ 49,829 (30,764)(12) 154,032
Depreciation and
amortization ................. 6,360 8,356(13) 69,171
------------ ------------ ------------ ------------ ------------
Operating (loss) ................ (19,661) (144) (91,930)
Interest income ................. 14,138
Interest expense ................ $ (50,221)(7) (162) 100 $ (34,958)(15) (106,037)
Other (expense) income, net ..... (49) 82
------------ ------------ ------------ ------------ ------------
(Loss) before income taxes ...... (50,221) (19,872) (44) (34,958) (183,747)
(Benefit) for income taxes ...... (17,577)(7) (10,051)(14) (12,235)(15) (62,507)
------------ ------------ ------------ ------------ ------------
(Loss) before equity in
unconsolidated entities
and minority interest ........ (32,644) (19,872) 10,007 (22,723) (121,240)
Equity in (loss) of
unconsolidated entities ...... (14,144)(12) (17,948)
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary charge and
minority interest in loss
of consolidated entities ..... $ (32,644) $ (19,872) $ (4,137) $ (22,723) $ (139,188)
============ ============ ============ ============ ============
Unaduited pro forma (loss) before
extraordinary charge and
minority interest per
common share ................. $ (2.46)
Weighted average number of
common shares and
common stock equivalents
outstanding .................. 1,730,648(21) 56,696,364
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
($in thousands)
<TABLE>
<CAPTION>
Adjustments
Erols for Adjustments
RCN Historical Acquisition for Issuance of
Historical (11) of Erols the Notes Pro Forma
---------- ---------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and temporary cash
investments .............. $222,910 $104 $(35,000)(16) $344,587(20) $532,601
Short term investments ...... 415,603 415,603
Accounts receivable from
related parties .......... 9,829 9,829
Accounts receivable, net of
reserve for doubtful
accounts ................. 17,815 544 18,359
Unbilled revenues ........... 1,695 1,695
Material and supply
inventory, at average cost . 2,745 2,745
Prepayments and other ....... 5,314 390 5,704
Investments restricted for
debt service ............. 22,500 150 22,650
Deferred income taxes ....... 4,821 4,821
---------- ------- --------- -------- ----------
Total current assets ........... 703,232 1,188 (35,000) 344,587 1,014,007
---------- ------- --------- -------- ----------
Property, plant and equipment .. 307,759 26,232 333,991
Accumulated depreciation ....... 107,419 8,391 (8,391)(17) 107,419
---------- ------- --------- -------- ----------
Net property, plant and
equipment ................ 200,340 17,841 8,391 226,572
Investments .................... 70,424 58,951(18) 129,375
Investments restricted for debt
service ..................... 39,411 743 40,154
Intangible assets, net ......... 96,547 53,026(17) 149,573
Deferred charges and other
assets ...................... 41,038 396 6,000(20) $47,434
---------- ------- --------- -------- ----------
Total Assets ................... $1,150,992 $20,168 $85,368 $350,587 $1,607,115
========== ======= ========= ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
($in thousands)
<TABLE>
<CAPTION>
Adjustments
Erols for Adjustments
RCN Historical Acquisition for Issuance of
Historical (11) of Erols the Notes Pro Forma
---------- ---------- ----------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable to related
parties ..................... $ 3,748 $ 3,748
Accounts payable ............... 24,835 $8,651 33,486
Advance billings and customer
deposits .................... 7,318 25,583 $(15,795)(18) 17,106
Accrued interest ............... 5,549 5,549
Accrued contract settlements ... 3,126 3,126
Accrued cable programming
expense ..................... 3,498 3,498
Accrued expenses and other ..... 21,631 1,470 (100)(16) 23,001
Current maturities of debt ..... 2,167 (700)(16) 1,467
---------- -------- -------- -------- ----------
Total current liabilities ......... 69,705 37,871 (16,595) 90,981
---------- -------- -------- -------- ----------
Long-term debt .................... 686,103 6,852 (5,000)(16) $350,587(20) 1,038,542
Deferred income taxes ............. 19,612 28,000(17) 47,612
Other deferred credits ............ 2,596 9,107 (5,499)(18) 6,204
Minority interest ................. 16,392 16,392
Commitments and contingencies
Common shareholders' equity ....... 356,584 (33,662) 84,462(19) 407,384
---------- -------- -------- -------- ----------
Total liabilities and shareholders'
equity ......................... $1,150,992 $20,168 $85,368 $350,587 $1,607,115
========== ======== ======== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
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 for the periods shown. The Pro Forma
adjustments, as described below, are keyed to the corresponding amounts shown in
the relevant statement. All amounts regarding shares and per share data of RCN
Common Stock have been adjusted to reflect the Stock Dividend.
(1) Adjustment to reflect revenues of $1,330 and expenses of $2,598 of
Liberty Cable Television, Inc. ("Liberty Cable") and affiliates for the period
January 1996 to March 1996 and revenue of $3,876 and expenses of $4,865 of
Freedom for the period March 1996 to August 1996 to present information as if
the acquisition of Freedom had occurred at the beginning of 1996. See Note 4 to
the Consolidated Financial Statements.
(2) Adjustment to reflect depreciation and amortization of Liberty Cable
and Freedom for the period as if the acquisition of Freedom had occurred at the
beginning of 1996 and to reflect the increase in depreciation and amortization
applicable as a result of the allocation of the purchase price paid on the basis
of the fair value of assets acquired and liabilities assumed.
(3) Adjustment to reflect the additional depreciation and amortization of
$5,000 in 1996 and $1,250 in 1997 resulting from the acquisition of the minority
interest of Freedom in March 1997 and to present the information as if the
acquisition of the minority interest of Freedom had occurred at the beginning of
1996.
(4) Adjustment to eliminate interest income of $8,686 for the year ended
December 31, 1997 and $15,127 for the year ended December 31, 1996, net of
income taxes of $(3,040) for the year ended December 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 was repaid and the remaining balance was
treated as capital contributions from the Company to the borrower.
(5) Adjustment to reflect interest expense and income of Liberty Cable and
Freedom as if the acquisition of Freedom occurred at the beginning of 1996.
(6) Adjustment to reflect interest expense and amortization of debt
issuance costs of $5,654 for the year ended December 31, 1997 and $7,461 for the
year ended December 31, 1996, net of income taxes of $(1,979) for the year ended
December 31, 1997 and $(2,611) for the year ended December 31, 1996, on new
third party debt of $110,000 which was incurred.
(7) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the 1997 Notes aggregating $50,221 for
the year ended December 31, 1997 and $63,438 for the year ended December 31,
1996, net of income taxes of $17,577 for the year ended December 31, 1997 and
$22,203 for the year ended December 31, 1996.
(8) Adjustment to eliminate interest expense and amortization of debt
issuance costs of $10,460 for the year ended December 31, 1997 and $15,127 for
the year ended December 31, 1996 and related income taxes of $3,661 for the year
ended December 31, 1997 and $5,294 for the year ended December 31, 1996 on
existing outstanding third party debt that was repaid and on outstanding
intercompany notes payable owned by the Company which were treated as capital
contributions to the Company from the borrower.
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Income tax effects for the distribution adjustments are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1997
------------ -----------
Benefit (provision)
<S> <C> <C>
Elimination of interest expense and amortization of debt issuance costs on existing
outstanding third party debt (see Note 8)......................................... $5,294 $3,661
Incurrence of interest expense and amortization of debt issuance costs on new
third party debt (see Note 6)..................................................... (2,611) (1,979)
Elimination of interest income on outstanding intercompany notes (see Note 4)........ (5,294) (3,040)
------- -------
Total............................................................................. $(2,611) $(1,358)
</TABLE>
(10) Adjustments to income taxes for the acquisition are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Losses of Liberty Cable and Freedom for period January 1996 to August 1996........... $(1,757) $--
Additional depreciation and amortization (see Note 2)................................ (663) --
Additional depreciation and amortization of acquisition in 1997 of 19.9%
minority interest in March 1997 (see Note 3)...................................... (1,400) (437)
------- -----
Total............................................................................. $(3,820) $(437)
======= =====
</TABLE>
(11) In February 1998, the Company completed the acquisition of Erols,
Washington, D.C.'s largest Internet service provider, for $29,200 in cash and
1,730,648 newly issued shares of RCN common stock plus the assumption and
repayment of $5,800 of debt (including payment of accrued interest).
Additionally, the Company is converting approximately 998,719 stock options for
Erols common stock into options to purchase 699,104 shares of RCN Common Stock
at an average exercise price of $3.424 per share. The Company accounted for this
transaction under the purchase method of accounting and accordingly, the
financial statements of Erols are not consolidated with the Company's historical
financial statements as of and for the years ended December 31, 1997 and 1996.
The financial information of Erols was provided by Erols.
(12) Such adjustments include a pro forma allocation of historical
operating results of Erols to the joint venture with PEPCO (see Note 18) based
upon the relationship of the number of subscribers expected to be contributed to
the joint venture to the total number of subscribers acquired in the merger. The
Company's share of such operating results, including the depreciation and
amortization effects of the allocation of a portion of the total purchase price
to the joint venture, representing the assumed value of the subscribers to be
contributed to the joint venture, are included in the adjustment for "equity in
the loss of unconsolidated entities."
(13) Such adjustment reflects the increase in depreciation and amortization
for the effect of the fair value adjustment of the net assets of Erols acquired.
See Note 17. Amortization of such excess over a five year period has been
assumed, although a shorter life may result based on the study discussed in Note
17. Also, as discussed in Note 17, a portion of the excess may be allocated to
certain in-process research and development projects. To the extent amounts are
allocated to certain in-process research and development projects, pro forma
amortization expense would be ratably reduced.
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Adjustment to reflect the tax effect of the pro forma adjustments,
including the tax effect of the historical results of operations of Erols.
(15) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the Notes aggregating $34,958 and
$34,958 for the years ended December 31, 1997 and 1996, respectively, net of
income taxes of $12,235 and $12,235 for the years ended December 31, 1997 and
1996, respectively.
(16) Adjustment to reflect $29,200 cash portion of the consideration for
the merger and $5,800 of debt (including accrued interest) of Erols outstanding
at December 31, 1997 which the Company repaid at closing.
(17) The Company allocated the purchase price for Erols (see Note 11) on
the basis of the fair market value of the assets acquired and liabilities
assumed. The Company expects to undertake a study to determine such fair market
values, including in-process research and development. Such fair market values
may differ from the allocations assumed in the pro forma financial statements.
The impact on deferred tax balances was included in the above-referenced fair
value adjustments. Erols' historical property, plant and equipment has been
adjusted to its estimated fair value based upon its depreciated cost. The
remaining excess of consideration over the historical book value of Erols net
assets acquired has been preliminarily allocated to subscriber base, goodwill
and other intangible assets. Additionally, to the extent that a portion of the
purchase price is allocated to in-process research and development, a charge,
which may be material, would be recognized in the period in which the RCN/Erols
merger occurred and ratably reduce the amounts preliminarily allocated to
subscriber base, goodwill and other intangible assets.
(18) A subsidiary of the Company is a party to a joint venture with a
subsidiary of PEPCO, to provide the greater Washington, D.C. area residents and
businesses local and long-distance telephone, cable television, and Internet
services as a package from a single source. As a result of this joint venture,
the Company expects to contribute to the joint venture the subscribers acquired
in the merger with Erols which are located in the relevant joint venture market.
The joint venture partners of Starpower are currently negotiating the terms of
such contribution. The value of such contribution for accounting purposes is
estimated to be approximately $58,951. The joint venture is accounted for under
the equity method of accounting. As a result, the Company's contribution is
reflected as an increase in "Investments." Additionally, the Company will
allocate the liability for the unearned revenue related to the subscribers
contributed to Starpower.
(19) Adjustment to reflect the elimination of Erols' deficit and the
issuance of 1,730,648 shares of RCN stock as a portion of the consideration for
the merger. See Note 11.
(20) Adjustment to reflect the issuance in February 1998 of $350,587 of
9.80% Senior Discount Notes due 2008. The debt issuance costs of $6,000 are
included in "deferred charges and other assets" and are amortized over the term
of the Notes.
(21) Represents adjustment for shares to be issued in connection with the
acquisition of Erols. See Note 11.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Prior to September 30, 1997, the Company and the RCN Businesses were
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 year ended
December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 are
derived from the Company's unaudited historical consolidated financial
statements not included in this Prospectus. The selected historical consolidated
financial data of the Company for the years ended December 31, 1997, 1996 and
1995 and as of December 31, 1997 and 1996 are derived from and should be read in
conjunction with the Company's audited historical consolidated financial
statements included elsewhere in this Prospectus. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Unaudited Pro
Forma Consolidated Financial Statements" and the Financial Statements.
START HERE!!!
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales ............................................ $49,504 $59,500 $91,997 $104,910 $127,297
Costs and expenses, excluding depreciation and
amortization .................................. 30,821 49,747 75,003 79,107 134,967
Nonrecurring charges(1) .......................... -- -- -- -- 10,000
Depreciation and amortization .................... 9,922 9,803 22,336 38,881 53,205
------- ------- ------- ------- -------
Operating (loss) ................................. 8,761 (50) (5,342) (13,078) (70,875)
Interest income .................................. 17,882 21,547 29,001 25,602 22,824
Interest expense ................................. (17,127) (16,669) (16,517) (16,046) (25,602)
Other income (expense), net ...................... 1,195 1,343 (304) (546) 131
(Benefit) provision for income taxes ............. 167 2,340 1,119 979 (20,849)
Equity in loss of unconsolidated entities ........ -- -- (3,461) (2,282) (3,804)
Minority interest in (income) loss of consolidated
entities ...................................... (85) (95) (144) 1,340 7,296
Extraordinary charge--debt prepayment penalty, net
of tax of $1,728 .............................. -- -- -- -- (3,210)
Cumulative effect of changes in accounting
principles .................................... 1,628 (83) -- -- --
------- ------- ------- ------- -------
Net (loss) income ................................ $12,087 $3,653 $2,114 $(5,989) $(52,391)
======= ======= ======= ======= =======
Ratio of earnings to fixed charges(2) ............ 10.11x 1.36x 1.41x 0.75x --
Balance Sheet Data (at end of period):
Total assets ..................................... $291,634 $568,586 $649,610 $628,085 $1,150,992
Long-term debt ................................... 181,500 154,000 135,250 131,250 686,103
Shareholders' equity ............................. 74,329 372,847 394,069 390,765 356,584
</TABLE>
- -------------------
(1) Nonrecurring charges of $10,000 represent costs incurred with respect to
the termination of a marketing services agreement related to the Company's
wireless video services.
(2) The deficiency of earnings to fixed charges is based on income from
continuing operations and has been computed on a total enterprise basis.
Earnings represent income before income taxes, and fixed charges. Fixed
charges consist of interest expense and debt amortization costs. For the
year ended December 31, 1997, the Company's earnings were insufficient to
cover fixed charges by $73.5 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Certain statements contained in this annual report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. Such forward-looking statements include, in
particular, statements made as to plans to develop networks and upgrade
facilities, the market opportunity presented by markets targeted by the Company,
the Company's intention to connect certain wireless video resale telephone and
Internet service customers to its advanced fiber optic networks, the development
of the Company's businesses, the markets for the Company's services and
products, the Company's anticipated capital expenditures, the Company's
anticipated sources of capital and effects of regulatory reform and competitive
and technological developments. No assurance can be given that the future
results covered by the forward looking statements will be achieved. Such
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
General
The Company is developing 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 individually or in bundled service 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 advanced fiber optic network facilities in
New York City and Boston. 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"). The Company has historically
managed its business along these lines and the discussion which follows
addresses those lines accordingly.
Financial results related to advanced fiber optic networks and from
provision of Internet services are currently included in the "Advanced Fiber,
Wireless Video and Other Operating" segment data. The Company may present
separate segment information with respect to the advanced fiber optic networks
and Internet business in future periods in connection with the Company's
adoption of Statement of Financial Accounting Standards No. 131 -- "Disclosure
about Segments of an Enterprise and Related Information." The Company expects
that the operating and net losses and negative cash flows from its advanced
fiber optic network 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.
The negative operating cash flow from the Company's advanced fiber optic
network business has resulted primarily from expenditures associated with the
development of the Company's operational infrastructure and marketing expenses.
The Company expects it will continue to experience negative operating cash flow
while it continues to invest in its networks and until such time as revenue
growth is sufficient to fund operating expenses. The Company expects to achieve
positive operating margins over time by (i) increasing the number of customers
it serves, (ii) increasing the number of connections per customer by cross
marketing its services and promoting bundled service options and therefore
increasing the revenue per customer, (iii) lowering the costs associated with
new subscriber additions and (iv) reducing the cost of providing services by
capturing economies of scale. The Company expects its operating revenues will
increase in 1998 through internal growth of its current advanced fiber optic
networks; however, the Company also expects negative operating cash flow will
increase for some period of time as the Company initiates network development in
Washington, D.C. and expands its current networks. When the Company makes its
initial investment in a new market, the operating losses typically increase as
the network and sales force are expanded to facilitate growth. The Company's
ability to generate positive cash flow in the future will depend on the extent
of capital expenditures in current and additional markets, the ability of the
joint ventures to generate revenues and cash flow, competition in the Company's
markets and any potential adverse regulatory developments. The Company will be
dependent on various financing sources to fund its growth as well as continued
losses from operations. There can be no assurance that such funding will be
available, or available on terms acceptable to the Company. See "--Liquidity and
Capital Resources."
The terms of the Company's joint ventures require the mutual consent of the
Company and its joint venture partner to distribute or advance funds to the
Company. The Company's debt agreements allow subsidiaries and joint ventures to
incur indebtedness for network buildout costs, which indebtedness may contain
limitations on the subsidiaries' and the joint venture's ability to pay
dividends and distributions to the Company. Although the joint ventures have not
had a significant impact on the Company's cash flows in the periods presented,
cash flows available to the Company in future periods will be affected by the
extent to which operations are conducted through joint ventures. Due to the
degree of control that the Company has in the joint ventures, RCN accounts for
the BECO joint venture on a consolidated basis and Starpower under the equity
method of accounting.
Prior to September 30, 1997, the Company was operated as part of C-TEC. On
September 30, 1997, C-TEC distributed 100% of the outstanding shares of common
stock of its wholly owned subsidiaries, RCN and Cable Michigan to holders of
record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close
of business on September 19, 1997 in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN and Cable Michigan (the
"Distribution Agreement"). RCN consists primarily of C-TEC's bundled residential
voice, video and Internet access operations in the Boston to Washington, D.C.
corridor, its existing New York, New Jersey and Pennsylvania cable television
operations, a portion of its long distance operations and its international
investment in Megacable. C-TEC , RCN and Cable Michigan have entered into
certain agreements providing for the Distribution, and governing various ongoing
relationships between the three companies, including a distribution agreement
and a tax-sharing agreement. 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.
Certain of the Company's businesses were acquired by C-TEC and transferred
to the Company in connection with the Distribution. On August 30, 1996, a
subsidiary of C-TEC acquired an 80.1% interest in Freedom and all related rights
and liabilities from Kiewit Telecom. Freedom held the wireless cable television
business of Liberty Cable. The Company acquired the remaining minority interest
in Freedom in March 1997. The acquisition was accounted for as a purchase and is
reflected in the Company's consolidated financial statements since September
1996. On May 15, 1995, C-TEC Cable Systems, Inc., a wholly owned subsidiary of
C-TEC ("RCN Cable"), acquired 40% of the outstanding common stock of Twin
County. The remaining shares were subject to an escrow agreement, pending
completion of the merger, and were required to be voted under the direction of
the Company. As of May 15, 1995, the Company also assumed management of Twin
County. As a result, the Company had control of Twin County and accordingly has
fully consolidated Twin County 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. Goodwill relating to this
acquisition 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, the second largest cable television provider in Mexico. The Company
accounts for its investment by the equity method of accounting and is amortizing
the original excess cost over the underlying equity in the net assets on a
straight-line basis over 15 years.
Results of Operations
Selected segment data was as follows for the years ended December 31, 1997,
1996 and 1995:
Year ended December 31,
------------------------------------------
1997 1996 1995
--------- --------- ----------
(in thousands)
Sales
Hybrid Fiber/Coaxial................ $92,000 $84,096 $66,404
Advanced Fiber, Wireless Video
and Other Operating................ 35,111 20,768 25,528
Corporate........................... 86 46 65
--------- --------- ---------
Total............................ $127,297 $104,910 $91,997
========= ========= =========
Operating Income Before Depreciation and Amortization and Nonrecurring Charge:
Year ended December 31,
------------------------------------------
1997 1996 1995
--------- --------- ----------
(in thousands)
Sales
Hybrid Fiber/Coaxial................ $39,767 $40,094 $28,458
Advanced Fiber, Wireless Video
and Other Operating................ (39,882) (11,711) (8,416)
Corporate........................... (7,555) (2,580) (3,048)
--------- --------- ---------
Total............................ (7,670) $25,803 $16,994
========= ========= =========
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
For the year ended December 31, 1997, operating income before depreciation
and amortization and nonrecurring charge was ($7,670) as compared to $25,803 for
the year ended December 31, 1996. Sales increased 21.3% to $127,297 for the year
ended December 31, 1997 from $104,910 for the same period in 1996.
Sales. Sales are primarily comprised of subscription fees for basic,
premium and pay per view cable television services; local telephone service fees
consisting primarily of monthly line charges, local toll and special features;
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 year ended December 31, 1997, sales were $127,297, an increase of
$22,387 due to higher Hybrid Fiber/Coaxial sales of $8,004 and higher Advanced
Fiber, Wireless Video and Other Operating sales of $14,343. The increase in
Hybrid Fiber/Coaxial sales principally results from higher basic service revenue
resulting from approximately 4,850 additional average monthly subscribers over
1996, the effects of a rate increase in the first quarter of 1997 and cash
incentives related to the launch of certain new channels. Advanced Fiber,
Wireless Video and Other Operating sales increased primarily due to the
acquisition of Freedom in August 1996 (the "Freedom Acquisition"), which
resulted in higher basic and premium video revenue. Additionally, higher voice
revenue of approximately $3,200 resulted from higher advanced fiber optic voice
connections and higher resold voice connections. The increase in Advanced Fiber,
Wireless Video and Other Operating sales also includes increases of
approximately $3,300 related to the long distance business.
Costs and Expenses Excluding Depreciation and Amortization and Nonrecurring
Charges. Costs and expenses, excluding depreciation and amortization and
nonrecurring charges, 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 year
ended December 31, 1997, costs and expenses, excluding depreciation,
amortization, and nonrecurring charges, were $134,967, an increase of $55,860 or
70.6% as compared to 1996. The increase is primarily attributable to higher
Advanced Fiber, Wireless Video and Other Operating costs and expenses, excluding
depreciation and amortization, of approximately $42,500, resulting principally
from the Freedom Acquisition in August 1996 and expansion of the business in the
Boston and New York City markets. The most significant increases occurred in
personnel and related costs, due to increased headcount primarily in operations,
marketing and customer service to support the expansion of the business,
origination and programming cost associated with an increase in video
connections, and advertising expenses of approximately $9,000 associated with a
high visibility campaign. The long distance business contributed approximately
$6,100 of the remaining increase in Advanced Fiber, Wireless Video and Other
Operating costs and expenses, excluding depreciation and amortization. Hybrid
Fiber/Coaxial costs and expenses, excluding depreciation and amortization,
increased approximately $8,300 primarily due to higher basic programming costs
resulting from higher rates, additional channels and subscriber increases.
Additionally, in connection with the Distribution (see Note 1 to the
Consolidated Financial Statements), 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 no longer accrued benefits under the
defined benefit pension plan, but became 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 to a separate plan
for employees who no longer accrue benefits after December 31, 1996 (the
"curtailed plan"). The underlying liabilities were also allocated. The
allocation of assets and liabilities resulted in a curtailment/settlement gain
attributable to Hybrid Fiber/Coaxial cable operations of approximately $1,500.
Such gain did not recur in 1997. The remaining increase in costs and expenses,
excluding depreciation and amortization, of approximately $5,000 is primarily
due to costs associated with the spin-off of the Company from C-TEC.
Depreciation and Amortization. Depreciation and amortization is comprised
principally of depreciation relating to the Company's Hybrid Fiber/Coaxial
facilities, advanced fiber and wireless video network and amortization of
subscriber lists, building access rights and goodwill. Depreciation and
amortization increased $14,324, or 36.8% to $53,205 for the year ended December
31, 1997 as compared to $38,881 for 1996. The increase is principally due to the
additional depreciation and amortization resulting from the Freedom Acquisition
and depreciation related to the Company's advanced fiber optic networks in New
York City and Boston.
In future periods, depreciation and amortization are expected to exceed
amounts recorded in 1997 due to depreciation with respect to the Company's
advanced fiber optic networks in New York City and Boston and due to
depreciation and amortization with respect to the Company's acquisitions in
February 1998 of Erols and Ultranet. See Note 19 to the Consolidated Financial
Statements.
Nonrecurring Charges. Nonrecurring charges of $10,000 represent costs
incurred with respect to the termination of a marketing services agreement held
by Freedom.
Interest Income. For the year ended December 31, 1997, interest income was
$22,824, a decrease of $2,778, or 10.9% primarily due to lower average cash
balances and lower average notes receivable with related parties. Average cash
balances decreased principally as a result of the Freedom Acquisition in August
1996 (as well as the acquisition in March 1997 of the remaining 19.9% ownership
interest in Freedom) and capital expenditures, partially offset by the proceeds
of the Company's high yield debt offering in October 1997. See Note 10 to the
Consolidated Financial Statements.
Interest Expense. For the year ended December 31, 1997, interest expense
was $25,602, an increase of $9,556, or 59.6% primarily due to interest expense
on the Company's $225,000 of 10% Senior Notes and $601,045 aggregate principal
amount at maturity of 11 1/8% Senior Discount Notes placed in October 1997. See
Note 10 to the Consolidated Financial Statements. This was partially offset by
lower interest expense resulting from the required principal payment of $18,750
on 9.65% Senior Secured Notes in December 1996. Additionally, the Company paid
$922 to Kiewit Telecom in 1996 in connection with the Company's August 1996
acquisition of Kiewit Telecom's 80.1% interest in Freedom. This portion of the
consideration represents an amount to compensate Kiewit Telecom for forgone
interest on the amount which it had invested in Freedom.
Income Tax. Benefit for income taxes increased $21,828 primarily due to the
increase of $65,020 in loss before taxes. For an analysis of the change in
income taxes, see the reconciliation of the effective income tax rate in Note 11
to the Consolidated Financial Statements.
Minority Interest. Minority interest in the loss of consolidated entities
increased $5,956 primarily as a result of the minority share of the losses of
the BECO joint venture (see Note 7 to the Consolidated Financial Statements),
which began operations in June 1997. Additionally, the minority share of the
losses of Freedom from January 1 through March 21, at which time the Company
acquired the remaining 19.9% ownership interest, was $966.
Equity in Loss of Unconsolidated Entities. The Company's equity in the
(loss) of unconsolidated entities was ($3,804) in 1997 and ($2,282) in 1996, 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 utilized the peso as the local and functional
currency. Such adjustments have historically been included as a separate
component of shareholders' equity. Effective January 1, 1997, since the three
year cumulative rate of inflation at December 31, 1996 exceeded 100% , Mexico is
being treated for accounting purposes under Statement of Financial Accounting
Standards No. 52 -- "Foreign Currency Translation" as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The remeasurement
of the Mexican peso into U.S. dollars creates translation adjustments which are
included in net 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. The Company
does not hedge its foreign currency exchange risk and it is not possible to
determine what effect future currency fluctuations will have on the Company's
operating results. Exchange gains (losses) of ($12), $247, and ($932) in 1997,
1996, and 1995, respectively, including translation losses in 1997, are included
in the respective statements of operations through the Company's proportionate
share of losses of Megacable.
In 1997, Megacable had sales of $30,441, operating income before
depreciation and amortization of $10,504 and net income of $6,653. In 1996,
Megacable had sales of $23,225, operating income before depreciation and
amortization of $10,183 and net income of $10,226. Year end subscriber counts
were 211,627 at December 31, 1997 as compared to 178,664 at December 31, 1996.
In 1997 and 1996, the Company's share of the income of Megacable was $2,411 and
$4,090, respectively, which includes the exchange gains (losses) as discussed
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 1997 and
1996, amortization of the Company's excess purchase price over the net assets of
Megacable when acquired was $6,280 in each year.
Extraordinary Charge. In September 1997, the Company prepaid Senior Secured
Notes with the proceeds of new credit facilities. See Note 10 to the
Consolidated Financial Statements. The early extinguishment of the 9.65% Senior
Secured Notes resulted in an extraordinary charge of $3,210, net of taxes.
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 Fiber/Coaxial sales partially offset by lower Advanced Fiber,
Wireless Video and Other Operating sales, principally long distance. Hybrid
Fiber/Coaxial sales increased $17,692, or 26.6%, primarily due to the
acquisition of the Pennsylvania cable system (formerly Twin County Trans Video,
Inc.) in May 1995, which resulted in $13,530 of the increase in Hybrid
Fiber/Coaxial sales in 1996. The Pennsylvania cable system serves approximately
74,000 subscribers in the Greater Lehigh Valley area of Pennsylvania. The 14.0%
increase in sales in 1996 was lower than the increase of 54.6% in 1995,
principally due to the consolidation of the Pennsylvania cable system for seven
months (from acquisition in May 1995). Since the Pennsylvania cable system was
consolidated for seven months in 1995, consolidation for a full year in 1996
reflects only an incremental five months revenue as compared to an incremental
seven months revenue in 1995. Additionally, long distance revenues decreased
approximately 30% from 1995 to 1996, principally as a result of termination of
AT&T Tariff 12 production in 1996, as compared to increases of 77% from 1994 to
1995, which resulted from the resale of AT&T Tariff 12 long distance services
and increases in long distance switched business and 800 services sales in 1995.
The remaining increase in Hybrid Fiber/Coaxial sales is due to higher basic
service revenues resulting from an increase in average subscribers of 4,995 or
5.3% and the full year impact, in 1996, of the 9.6% rate increase in April 1995
and the impact of 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 13 to the Consolidated 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 the 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 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. 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 in the 1997 discussion. 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.
Liquidity and Capital Resources
The Company expects that it will require a substantial amount of capital to
fund the network development and operations in the Boston to Washington, D.C.
corridor, including funding the development of its advanced fiber optic
networks, upgrading its Hybrid Fiber/Coaxial plant, funding operating losses and
debt service requirements. The Company currently estimates that its capital
requirements for the period from January 1, 1998 through 1999 will be
approximately $785,000, which includes capital expenditures (including
connection costs which will only be incurred as the Company obtains
revenue-generating customer connections) of approximately $300,000 in 1998 and
approximately $485,000 in 1999. These capital expenditures will be used
principally to fund the buildout of the Company's fiber optic network in high
density areas in the Boston, New York and Washington, D.C. markets and to
upgrade its Hybrid Fiber/Coaxial cable systems. To build out these areas on an
efficient basis, the Company undertakes a subscriber-driven capital expenditure
strategy whereby it (i) closely monitors development of its subscriber base in
order to tailor network development in each target market, and (ii) seeks to
establish a customer base in advance of or concurrently with its network
deployment. For example, the Company offers resale telephone services on an
interim basis to customers located near its advanced fiber optic networks.
Depending upon factors such as subscriber density, proximity to the advanced
fiber optic network and development costs and the degree of success achieved in
its initial markets, the Company will determine whether extending its advanced
fiber optic network to additional high density target markets can be achieved on
an attractive economic basis. In addition to its own capital requirements, the
Company's joint venture partners are each expected to contribute approximately
$150,000 in capital to the joint ventures in connection with development of the
Boston and Washington, D.C. markets through 2000.
In October 1997, the Company raised $575,000 in gross proceeds from an
offering of two tranches of debt securities. The offering was comprised of
$225,000 principal amount of 10% Senior Notes and $601,000 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,045 of restricted cash to be used to fund the Escrow Account to pay
interest on the 10% Senior Notes for three years. In February 1998, the Company
raised $350,587 in gross proceeds from an offering of $567,000 principal amount
at maturity of 9.8% Senior Discount Notes, due in 2008. The Company expects to
have sufficient liquidity to meet its capital requirements through mid-2000. The
Company will continue to require additional capital for planned increases in
network coverage and other capital expenditures, working capital, debt service
requirements, and anticipated further operating losses. The actual timing and
amount of capital required to roll out the Company's network and to fund
operating losses may vary materially from the Company's estimates and additional
funds will be required in the event of significant departures from the current
business plan, unforeseen delays, cost overruns, engineering design changes and
other technological risks or other unanticipated expenses. Due to its subscriber
driven investment strategy, should the Company encounter a successful rollout in
its initial markets, the Company may accelerate the expansion and extend the
reach of its network. Conversely, should the Company be less successful than
anticipated, the operating losses associated with the installed network may be
higher than anticipated. The Company presently intends to judge the success of
its initial rollout in deciding whether to undertake additional capital
expenditures to rollout the network to additional areas. Since the Company
anticipates that, if it is successful, it will continue to extend its network
coverage into additional areas within the Boston-Washington, D.C. corridor, it
expects to continue to experience losses and negative cash flow on an aggregate
basis for an extended period of time.
The Company's current joint venture agreements reduce the amount of
expenditures required by RCN to develop the network due both to access to the
joint venture partners' existing facilities and to the anticipated joint venture
partners' equity contributions. However, the joint venture arrangements will
also reduce the potential cash flows to be realized from operation of the
networks in the markets in which the joint ventures operate and restrict the
Company's access to cash flow generated by the joint ventures (which will be
paid in the form of dividends). The Company may enter into additional joint
ventures in the future as the Company begins to develop new markets.
Sources of funding for the Company's further financing requirements may
include vendor financing, public offering or private placements of equity and/or
debt securities, and bank loans. There can be no assurance that additional
financing will be available to the Company or, if available, that it can be
obtained on a timely basis and on acceptable terms. Failure to obtain such
financing could result in the delay or curtailment of the Company's development
and expansion plans and expenditures. Any of these events could impair the
Company's ability to meet its debt service requirements and could have a
material adverse effect on its business.
RCN Cable and certain of its subsidiaries have in place secured credit
facilitates comprised of a five-year revolving credit facility in the amount of
$25,000 (the "Revolving Credit Facility") and an eight- year term credit
facility in the amount of $100,000 (the "Term Credit Facility"), both of which
facilities are governed by a single credit agreement dated as of July 1, 1997
(the "Credit Agreement"). As of December 31,1997, $100,000 of the Term Credit
Facility was outstanding. 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. As of December 31,
1997, $3,000 principal was outstanding under the Revolving Credit Facility.
Revolving loans may be repaid and reborrowed from time to time.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At December 31, 1997, after giving effect to
the 1998 Notes Offering, the Company had an aggregate of approximately
$1,036,000 of indebtedness outstanding, and the ability to borrow up to an
additional $22,000 under the Credit Agreement. As a result of the substantial
indebtedness of the Company, the Company's fixed charges are expected to exceed
its earnings for the foreseeable future. In addition, the Company will require
substantial additional indebtedness particularly in connection with the buildout
of the Company's networks and the introduction of its telecommunications
services to new markets. The leveraged nature of the Company could limit its
ability to effect future financing or may otherwise restrict the Company's
business activities.
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 as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
For the year ended December 31, 1997, the Company's net cash provided by
operating activities was $1,661, comprised primarily of a net loss of ($52,391)
adjusted by non-cash depreciation and amortization of $53,205, other non-cash
items totaling ($611) , working capital changes of $377 and changes in other
deferred expenses of $1,081. Net cash used in investing activities of $475,860
consisted primarily of purchases of short-term investments of $445,137,
additions to property, plant and equipment of $79,042 and acquisitions of
$30,490 (primarily acquisition of the minority interest of Freedom) partially
offset by sales and maturities of short-term investments of $76,923. Net cash
provided by financing activities of $635,266 consisted primarily of issuance of
long-term debt of $688,000, change in affiliate notes of $97,624 and transfers
from C-TEC of $89,324 partially offset by redemption of long-term debt of
$141,250, transfers to C-TEC of $23,474, payments made for debt financing costs
of $19,743 and an increase related to cash restricted for debt service of
$61,250.
For the year ended December 31, 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.
Impact of the Year 2000 Issue
The Company has certain financial, administrative and operational systems
which are subject to Year 2000 exposures. The Company has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion. The Company's plan is proceeding
on target. The plan includes ensuring that those systems for which the Company
is dependent on external vendors, such as certain billing systems, will be Year
2000 compliant by the end of 1999 based on the status of external vendors'
remediation efforts. For those internal systems that require corrective action,
the Company has contracted with its information systems services provider to
rewrite the relevant programming code. Finally, the Company is well along on a
conversion of its suite of financial systems to a state-of-the-art Oracle
system. Such system is expected to ensure Year 2000 compliance in financial
applications, enable the Company to process and report its financial
transactions more efficiently and provide a greater level of detailed
information to facilitate management's analysis which is critical to its
business decisions.
The Company is employing a team approach across its MIS, financial and
operational groups in addressing the above issues, as well as utilizing the
assistance of external consultants in the case of the Oracle implementation.
Such team approach facilitates a consistent progress along plans without
disruption of other areas of the business.
There is no assurance that the Company's plans will continue to progress as
intended. The Company estimates that its cost of Year 2000 remediation will not
be material.
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1998; provided, however, that if the Company,
in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time
and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $567,000,000 aggregate principal amount
at maturity of the Old Notes was outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about the date set forth on the
cover page to all holders of Old Notes at the addresses set forth in the
security register with respect to Old Notes maintained by the Trustee (as
defined in "Description of the New Notes"). The Company's obligations to accept
Old Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "Certain Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance of any Old Notes, by giving oral or written notice of
such extension to the Exchange Agent and notice of such extension to the holders
as described below. During any such extension, all Old Notes previously tendered
will remain subject to the Exchange Offer and may be accepted for exchange by
the Company. Any Old Notes not accepted for exchange for any reason will be
returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release or
other public announcement no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations of
the Commission thereunder.
Procedures for Tendering Old Notes
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to The Chase Manhattan Bank (the
"Exchange Agent") at one of the addresses set forth below under "Exchange Agent"
on or prior to the Expiration Date. In addition, (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date, (ii) certificates for such Old Notes must be
received by the Exchange Agent along with the Letter of Transmittal or (iii) the
holder must comply with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than
the person signing the Letter of Transmittal, the Old Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right in its
sole discretion to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer as to any particular Old Notes either
before or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with the tenders of
Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. Neither the Company, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of its authority to so act
must be submitted.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, (ii) neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, (iii) if the holder is not a
broker-dealer, or is a broker-dealer but will not receive New Notes for its own
account in exchange for Old Notes, neither the holder nor any such other person
is engaged in or intends to participate in the distribution of such New Notes
and (iv) neither the holder nor any such other person is an "affiliate", as
defined under Rule 405 of the Securities Act, of the Company. If the exchange
offeree is a broker-dealer holding Old Notes acquired for its own account as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of New Notes received in exchange for such Old Notes.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, a properly completed and duly executed Letter of Transmittal
and all other required documents. If any tendered Old Notes are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if
certificates representing Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
Interest on the New Notes
The Notes (including the New Notes) were issued at a substantial discount
from their principal amount. Commencing February 15, 2003, cash interest on the
Notes will accrue at the rate of 9.80% per annum and will be payable in cash
semi-annually on each February 15 and August 15, commencing on August 15, 2003.
Prior to August 15, 2003, there will be no periodic payment of interest. No
interest will have accrued on the Old Discount Notes on the date of the exchange
for the New Notes and therefore no interest will be paid thereon to the holders.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Notes by causing the Book-Entry Transfer
Facility to transfer such Notes into the Exchange Agent's account in accordance
with the Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. However, the exchange for the Notes so tendered will
only be made after timely confirmation of such book-entry transfer of Notes into
the Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as such term is defined in the next sentence) and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from a participant tendering Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
Guaranteed Delivery Procedures
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates of all physically tendered Old Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
Withdrawal Rights
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any note of withdrawal must specify the name and number of the account at
the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
Certain Conditions to the Exchange Offer
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, such acceptance or issuance would violate applicable
law or any interpretation of the staff of the Commission.
The foregoing condition is for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise the foregoing rights shall not be deemed a waiver of any such right
and each such right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA").
Exchange Agent
The Chase Manhattan Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent, addressed as follows:
Deliver To:
The Chase Manhattan Bank, Exchange Agent
By Mail or By Hand:
55 Water Street
Room 234
North Building
New York, New York 10041
Attention: Carlos Esteves
By Facsimile:
(212) 638-7375
(212) 344-9367
Confirm by Telephone:
Carlos Esteves: (212) 638-0828
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
Fees and Expenses
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates. No additional compensation
will be paid to any such officers and employees who engage in soliciting
tenders. The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$250,000.
Transfer Taxes
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
intend to register the Old Notes under the Securities Act. The Company believes
that, based upon interpretations contained in letters issued to third parties by
the staff of the Commission, New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by each holder thereof (other than a broker-dealer, as set forth
below, and any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that such New Notes are acquired in the ordinary course of such holder's
business and such holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes. If any holder has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdiction or an exemption from registration or qualification is
available and is complied with. The Company does not currently intend to take
any action to register or qualify the New Notes for resale in any such
jurisdictions.
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. The region, one of the most densely populated in the United States,
represents approximately 4% of the geography of the U.S., but accounts for over
26% of the telecommunications market based upon the number of telephone access
lines. The Company believes that of the estimated 22 million homes in the Boston
to Washington, D.C. corridor, approximately 9 million homes are located in
high-density urban and suburban residential areas that will support development
of an advanced fiber optic network on an attractive economic basis. RCN believes
that its capability to deliver multiple services (telephone, video programming
and Internet access) to any given customer on its networks will provide it with
competitive advantages over other competitors. RCN's strategy is to become the
leading single-source provider of voice, video and data services to residential
customers in each of its markets by offering individual or bundled service
options, superior customer service and competitive prices.
RCN's initial advanced fiber optic networks have been established in New
York City and, through a joint venture with BECO, in Boston and surrounding
communities. RCN has also entered into a joint venture named Starpower with
Pepco Communications, an indirect wholly owned subsidiary of PEPCO, to develop
an advanced fiber network in the Washington, D.C. area. On February 20, 1998,
RCN acquired Washington, D.C.'s largest ISP, Erols, and on February 27, 1998,
RCN acquired Boston's largest ISP, Ultranet. RCN also benefits from a strategic
relationship with MFS/WorldCom in New York City and Boston and from its
interconnection and resale agreements with incumbent telephone service providers
including Bell Atlantic. RCN believes that these joint ventures and
relationships provide it with a number of important advantages including access
to rights of way and use of existing fiber optic facilities, the ability to
enter its target markets quickly and efficiently and a reduction in the up-front
capital investment required to develop its networks. In addition, the Company's
joint venture partners provide access to additional assets, equity capital and
established customer bases. The Company also benefits from its relationship with
its largest shareholder, 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.
As of December 31, 1997, the Company had approximately 267,600 connections
which were delivered through a variety of owned and leased facilities including
hybrid fiber/coaxial cable systems, a wireless video system and advanced fiber
optic networks. In addition, the Company gained approximately 325,000 Internet
service customers as a result of the recent completion of the acquisitions of
Ultranet and Erols. Without giving effect to such acquisitions, RCN had pro
forma revenues and EBITDA before nonrecurring charges of $127.3 million and
$(7.7) million, respectively, for the year ended December 31, 1997 and $110.1
million and $23.5 million, respectively, for the year ended December 31, 1996.
The Company is deploying advanced fiber optic networks specifically designed to
provide high speed, high capacity telecommunications services for all new
network facilities. RCN also intends to upgrade certain of its hybrid
fiber/coaxial cable systems to enable them to provide the same range of voice,
video and data services, including bundled service options. See "--The Delivery
Platforms." Since it formally commenced operation of its advanced fiber optic
networks in New York City and Boston in September 1996, RCN has built or
acquired, through its joint venture with BECO and long term lease arrangements,
approximately 400 route miles of fiber optic cable and added approximately
15,100 customer connections to its advanced fiber optic networks. In addition,
during the same period the Company added approximately 29,700 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
December 31, 1997, RCN had approximately 82,700 total connections attributable
to customers in the New York City and Boston markets (of which approximately
42,600 were wireless video service and other connections and approximately
24,900 were resold telephone connections) and had approximately 184,900 were
connections attributable to its hybrid fiber/coaxial cable systems in the states
of New York (outside New York City), New Jersey and Pennsylvania, all within 75
miles of New York City. Because it delivers multiple services, RCN reports the
total number of its various service connections (for local telephone, video
programming and Internet access) rather than the number of customers. See "--RCN
Services--Connections."
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. In addition, the Company's management team and board of directors
benefit from experience gained in connection with the management of C-TEC, which
prior to September 30, 1997 owned and operated RCN. See "Description of the
Distribution and Related Agreements--Background." C-TEC 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.
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
in 1996 were approximately $210 billion (comprised of $183 billion in
telecommunications revenues and $27 billion in cable television revenues).
Approximately 50% of such revenue is estimated to be attributable to residential
users. RCN believes that density is a critical factor in the effective economic
deployment of its networks, and that the Boston to Washington, D.C. corridor is
a particularly attractive market for developing advanced fiber optic facilities
due to population density, favorable demographics and the aging infrastructure
of the incumbent service providers' network facilities in this region. The
Company applies a subscriber-driven investment strategy focusing on subscriber
density, proximity to the Company's advanced fiber optic networks and network
development costs, in order to determine if the number of potential connections
in a target area will permit network development on an attractive economic
basis.
Business Strategy
The Company believes that 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, the need for more advanced, higher capacity
networks to meet growing consumer demands for new communications products and
services and the superior technology of the Company's networks. In order to
achieve its goal of becoming the leading provider of telecommunications, video
and data services to residential customers in its target markets, RCN is
pursuing the following key strategies:
Developing Advanced Fiber Optic Networks. RCN's advanced fiber optic
networks are specifically designed to provide a single source for high speed,
high capacity voice, video programming and data services. RCN believes that its
high capacity advanced fiber optic networks provide RCN with certain competitive
advantages such as increased capacity (including the ability to offer bundled
voice, video and data services) and generally superior signal quality and
network reliability relative to the typical networks of the incumbent service
providers. By using advanced fiber optic networks capable of delivering multiple
services, RCN is able to address a larger number of potential subscriber
connections in its target markets than incumbent service providers which
typically provide only single or limited services.
Focusing on Residential Customers in High-Density Markets. RCN seeks to be
the first operator of an advanced fiber optic network providing voice, video and
data services to residential customers in each of its target markets. 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 and in striving
to connect residential customers directly to its advanced fiber optic networks.
RCN also believes that residential customers will be attracted to lower prices,
broader service offerings, enhanced levels of customer care and consumer choice.
Although the Company's primary focus is on residential customers, RCN also
serves certain commercial accounts which are located on or in close proximity to
its networks.
Implementing Subscriber-Driven Investment Strategy. RCN attempts to
efficiently deploy its capital by tying facility development to the procurement
of customer connections. In order to promote its presence in its markets and to
develop a subscriber base for its advanced fiber optic networks, the Company may
provide telephone services to customers located near its advanced fiber networks
by first reselling services, and then by establishing leased facilities (such as
unbundled local loops), in advance of constructing or extending its networks.
RCN also provides wireless video services to approximately 38,000 customers in
New York City with a view to extending the advanced fiber optic network to
service many of these existing customers. In addition, RCN intends to extend its
network to cover the primary areas currently served by Erols and Ultranet.
Utilizing Strategic Alliances and Existing Facilities to Speed and Reduce
Cost of Entry. By utilizing strategic alliances, RCN is able to enter the market
quickly and efficiently and to reduce the up-front capital investment required
to develop its networks. Through alliances with companies such as BECO, Pepco
Communications and MFS/WorldCom, which provide or are expected to provide RCN
with extensive fiber optic networks or other assets, by utilizing certain
components of its own existing cable television infrastructure, and through the
strategic acquisitions of Ultranet and Erols, RCN has been able to expedite and
reduce the cost of market entry and business development and has created the
opportunity to leverage existing customer relationships.
Offering Bundled Voice, Video and Data Services. RCN believes that, as a
full service voice, video and data programming provider, it will be able to
offer a single-source package of voice, video and data services, individually or
on a bundled basis, which is not yet generally available from any incumbent
telephone, cable or other service provider. In addition, services provided over
RCN's advanced fiber optic networks are generally priced at competitive rates as
compared to the incumbent service providers.
Providing 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.
Recent Developments
On February 20, 1998, RCN acquired Erols and on February 27, 1998, RCN
acquired Ultranet. With these acquisitions, RCN became a leading ISP in the
Boston to Washington, D.C. corridor, serving approximately 325,000 Internet
service customers. See "Business--The Acquisitions of Ultranet and Erols" and
"Business--RCN Services--Connections."
Erols is a leading regional ISP with approximately 293,000 residential and
business subscribers as of December 31, 1997 in targeted markets, including New
York City, Philadelphia, Washington, D.C. and Boston. RCN expects to contribute
to Starpower the subscribers acquired in the acquisition of Erols located in the
Washington, D.C. area in which Starpower operates. The joint venture partners of
Starpower are currently negotiating the terms of such contribution. On February
20, 1998, approximately 61% of all of Erols' subscribers were located in the
relevant Washington, D.C. area. Erols currently operates 57 POPs throughout its
geographic markets, and also currently utilizes 42 "Virtual POPs," which permit
subscribers located adjacent to, but outside of the local calling areas of,
physical POPs to dial into the Erols network on a local basis through
arrangements with the relevant LEC. Erols offers a broad range of Internet-based
services, including (i) Global Trader(sm), Erols' turn-key e-commerce product
for small businesses, (ii) Internet security services, including security
consulting and virtual private networks, and (iii) Web hosting, design and
development services. RCN acquired Erols in exchange for consideration
consisting of $29.2 million in cash and 1,730,648 shares of RCN Common Stock
plus the assumption and repayment of approximately $5.8 million of debt
(including payment of accrued interest). See "Business--The Acquisitions of
Ultranet and Erols--Merger With Erols Internet, Inc."
Ultranet is a leading ISP in the Boston area with more than 32,000
residential and business customers in New England. RCN contributed to its joint
venture with BECO the subscribers acquired in the acquisition of Ultranet
located in the Boston area in which the BECO joint venture operates as well as
1.36% (or all of Erols' subscribers located in the relevant Boston area) of the
subscribers acquired in the acquisition of Erols. On February 27, 1998,
approximately 27% of all of Ultranet's subscribers were located in the relevant
Boston area. Ultranet provides Internet service to over 500 schools, and is
presently building a network which will provide access throughout New
Hampshire's universities and colleges. Ultranet has a wide network of 42 POPs.
Services Ultranet offers to subscribers include (i) virtual hosting, which gives
customers a corporate presence on the Internet, (ii) firewall security, which
provides high quality control in monitoring access to documents and visitors to
the customer's websites, and (iii) UltraFax, which allows customers to send
faxes from their desktops. Ultranet also offers its customers access to its
network via an 800 number which allows access from every major city in the
world. RCN acquired Ultranet in exchange for consideration consisting of
approximately $7.9 million in cash and 890,384 shares of RCN Common Stock.
Ultranet had total revenues of approximately $6.7 million for the year ended
June 30, 1997. See "Business--The Acquisitions of Ultranet and Erols--Merger
With Ultranet Communications, Inc."
Industry Overview--Market 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 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 RBOCs and certain
other LECs were permitted to retain their monopolies in the provision of local
exchange services, but were required to connect their local subscribers to the
long distance services of AT&T and other IXCs. Under this regime, two distinct
industry segments developed; competitive IXCs, which offered subscribers long
distance telephone services between judicially defined local access and
transport areas ("LATAs"), and monopoly LECs, which offered subscribers local
and toll services within judicially defined LATAs, including connection (or
"access") to IXCs for interLATA long distance services. As a result, the
long-distance business became intensely competitive, with low barriers to entry
and many service providers competing in a commodity-type market, while providers
of local exchange services continued to face relatively little competition.
Deregulation of Local Telephone Services. After the structural and
technical network changes were put in place following the Divestiture to give
IXCs other than AT&T "equal access" to the local exchange facilities of the
monopoly incumbent LECs, and with robust long distance competition began to
provide consumers with diverse services and lower rates, regulatory policy
gradually began to examine whether the competitive benefits which were being
experienced in the long distance marketplace as a result of Divestiture should
be expanded to local exchange services. While a small number of states and the
FCC had already adopted rules and regulations which opened certain limited and
discrete segments of the local exchange market to competition from CAPs and
CLECs offering primarily dedicated high-speed private line and some local
switching services to large business users, the passage of the 1996 Act in
February 1996 codified the pro-competitive policies on a national level and
required both the FCC and the state regulatory commissions to adopt dramatic and
sweeping changes in their rules and regulations in furtherance of those
policies. The 1996 Act required regulators to remove market entry barriers and
to enable companies like RCN to become full service providers of local telephone
service by, among other things, mandating that the incumbent LECs provide
interconnection and competitively priced network facilities to competitors. In
addition, the 1996 Act permits RBOCs 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.
Because of the lack of any meaningful competition in 1992, Congress passed
legislation 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. Among other
things, the 1996 Act required 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 reentering 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.
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 Pro Forma
-------------------------------------------------------- ----------
12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 12/31/97
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Connections(1)
Advanced Fiber Optic Networks
Voice...................................... -- -- 370 1,909 3,214 3,214
Video...................................... -- -- 1,060 4,870 11,784 11,784
Internet................................... -- -- 81 326 150 150
------- ------- ------- ------- ------- -------
Subtotal................................ -- -- 1,511 7,105 15,148 15,148
Resold Voice............................... 1,875 2,315 4,672 10,953 24,900 24,900
Wireless Video & Other(2).................. 40,162 43,616 46,668 46,053 42,681 42,681
Pro forma Internet(3)...................... N/A N/A N/A N/A N/A 325,979
------- ------- ------- ------- ------- -------
Total RCN Telecom....................... 42,037 45,931 52,851 64,111 82,729 408,708
------- ------- ------- ------- ------- -------
Hybrid Fiber/Coaxial Cable
Operations(4)........................... 179,932 180,169 181,790 183,145 184,938 184,938
------- ------- ------- ------- ------- -------
Total connections....................... 221,969 226,100 234,641 247,256 267,667 593,646
======= ======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Because RCN delivers multiple services, the Company accounts for its
customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections", purchased.
Consequently, a single customer purchasing local telephone, video
programming and Internet access constitutes three connections.
(2) Includes approximately 38,000 wireless connections. RCN classifies
connections provided over advanced fiber optic networks within the "Other"
category until the relevant network is capable of providing voice, video
and data services, including local telephone service through an RCN switch.
"Other" also includes, among other things, wireline video connections
serving the University of Delaware (4,474 connections at December 31,
1997).
(3) Reflects Internet connections acquired in connection with the Erols and
Ultranet acquisitions. RCN expects to contribute to Starpower, the joint
venture with Pepco Communications, the subscribers acquired in the
acquisition of Erols located in the Washington, D.C. area in which
Starpower operates. The joint venture partners of Starpower are currently
negotiating the terms of such contribution. RCN contributed to its joint
venture with BECO the subscribers acquired in the acquisition of Ultranet
located in the Boston area in which the BECO joint venture operates as well
as 1.36% of the subscribers acquired in the acquisition of Erols. Starpower
is accounted for under the equity method of accounting and the BECO joint
venture is accounted for on a consolidated basis. See "--The Acquisitions
of Ultranet and Erols."
(4) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.
Set forth below is a brief description of RCN's services:
Voice. RCN offers full-featured local exchange telephone service, including
standard dial tone access, enhanced 911 access, operator services and directory
assistance in competition with the incumbent local exchange providers and CLECs.
In addition, RCN offers a wide range of value-added services, including call
forwarding, call waiting, conference calling, speed dial, calling card,
800-numbers and voice mail. RCN also provides Centrex service and associated
features. RCN's local telephone rates are generally competitive with the rates
charged by the incumbent providers. At December 31, 1997 RCN had approximately
3,200 telephone service connections on its advanced fiber optic networks and
approximately 24,900 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. As of December 31, 1997 RCN Commercial had approximately 13,595
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,
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 December 31, 1997 RCN had approximately 11,800 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 38,000
connections attributable to the wireless video system and approximately 184,900
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. DirecTV allows RCN to
deliver an additional 175 channels of programming including exclusive sports
programming.
Internet Access and Data Transmission. RCN's StarPass 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. Following the recent
Erols and Ultranet acquisitions, RCN believes it is the largest regional
provider of Internet services in the Northeast.
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 (and larger margins) from originating and terminating access
fees 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 City. Through a
construction cooperation agreement with MFS/WorldCom under which MFS/WorldCom
has agreed to install segments of RCN's network, 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, through its affiliates, has entered into Fiber
Agreements (the "Fiber Agreements"), each dated May 8, 1997, with MFS/WorldCom,
which owns or has the right to use certain fiber optic network facilities (the
"Fiber Optic Facilities") in the Boston, Massachusetts and Borough of Manhattan,
New York, New York markets (the "Service Areas"). Pursuant to the Fiber
Agreements, MFS/WorldCom (i) will construct and provide extensions connecting
the Fiber Optic Facilities to buildings designated by RCN (the "Extensions") and
(ii) has granted to RCN the right to use certain dedicated fibers in the Fiber
Optic Facilities and the Extensions, except that RCN may not use such facilities
to deliver telephone services to commercial customers in the Service Areas. In
return, RCN has reimbursed MFS/WorldCom for the costs MFS/WorldCom incurred to
install, construct and acquire the Fiber Optic Facilities constructed prior to
March 31, 1997. RCN has further agreed to pay all of the costs MFS/WorldCom
incurs to (i) install, construct and acquire the Fiber Optic Facilities
constructed between March 31, 1997 and May 8, 1998 and the Extensions, and (ii)
maintain, and support RCN's use of, the Fiber Optic Facilities and the
Extensions. Unless earlier terminated upon the occurrence of certain events set
forth therein, including a change of control of RCN, the Fiber Agreements
terminate by their terms on January 1, 2007, provided that (i) at such time the
parties may agree to extend the Fiber Agreements for up to 10 years or enter
into other alternative arrangements, and (ii) under certain circumstances,
MFS/WorldCom is required to transfer the Extensions to RCN.
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
Massachusetts 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, through RCN Massachusetts, owns 51% of the equity interest in RCN-BECOCOM
and BECO, through a subsidiary, owns the remaining 49% interest. This joint
venture with BECO is reflected on RCN's financial statements on a consolidated
basis.
The closing of the transactions contemplated by the Boston Joint Venture
Agreement occurred on June 17, 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 "BECO 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 BECO 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. The annual budget will be prepared by RCN and is subject to
review by each member of RCN-BECOCOM. RCN will manage the business of
RCN-BECOCOM; however, certain extra ordinary actions require the consent of both
parties. In addition, if a deadlock arises relating to a merger, reorganization,
issuances of equity, liquidation or bankruptcy, amendments to the organizational
documents or an expansion of operations of RCN-BECOCOM beyond those contemplated
by the BECO Operating Agreement, the disputing party will either sell its
interest or purchase the other party's interest in the joint venture. In the
event of a deadlock relating to other fundamental business actions or relating
to the annual budget, the matter will be submitted to arbitration. Neither RCN
nor BECO may transfer its interest in RCN-BECOCOM until June 17, 2000 without
the other's written consent. After such date, each party has the right to
purchase the interest proposed to be sold by the other party. If a party
proposes to sell more than 33% of its interest, the other party has "tag-along"
rights to sell a proportionate share of its interest. In the event a member's
interest becomes less than 25%, the other members have the option to purchase
such interest at fair market value. Upon a change in control of either RCN
Massachusetts or BECOCOM, 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 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 had the right at the time of the
Distribution, and has the right 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. Although BECO
exercised its conversion right, BECO remains 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 in whole or in part from time to time. BECO has notified RCN that it has
elected to exercise its option to the full extent permitted by the Exchange
Agreement with respect to 1997. RCN and BECO are presently in discussions with
respect to the calculation of the agreed upon value for the exercise of such
option. 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. In the event BECO
is unable to convert any portion of its interest as a result of such
limitations, BECO has the right to require RCN to purchase such portion. 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.
Starpower Joint Venture
On August 1, 1997, RCN Telecom Services Inc., a subsidiary of RCN, and
Potomac Capital Investment Corporation ("PCI"), a wholly owned subsidiary of
PEPCO, entered into a letter of intent (the "Letter of Intent") to form a joint
venture which will own and operate a communications network to provide voice,
video, data and other communications services to residential and commercial
customers in the greater Washington, D.C., Virginia and Maryland area (the
"Washington, D.C. Market"). Starpower, an unregulated limited liability company
with a perpetual term, was formed on October 28, 1997 by RCN Telecom Services of
Washington, D.C., Inc. ("RCN Washington") and Pepco Communications. Starpower
was formed to construct, own, lease, operate and market a network for the
selling of voice, video, data and other telecommunications services (the
"Relevant Business") to all potential commercial and residential customers in
the Washington, D.C. Market. RCN, through RCN Washington, owns 50% of the equity
interest in Starpower and PCI, through Pepco Communications, owns the remaining
50% interest. Starpower is accounted for under the equity method of accounting.
The closing (the "Starpower Closing") of the Starpower joint venture
occurred on December 19, 1997. At the closing, RCN Washington transferred to
Starpower all its right, title and interest in and to (i) all customer accounts
of RCN Long Distance in the Washington, D.C. Market, (ii) its business plan in
the Washington, D.C. Market and experience with respect to the Relevant
Business, (iii) all building access agreements covering any property located in
the Washington, D.C. Market, (iv) the Support Services Agreement (as described
below) and (v) the benefit of certain agreements pursuant to the Assignment of
Benefits Agreement (as described below). The documents signed at the Starpower
Closing were the Amended and Restated Operating Agreement of Starpower dated as
of December 18, 1997 by and between Pepco Communications and RCN Washington
("Starpower Operating Agreement"), Fiber Use Agreement dated as of December 18,
1997 between PEPCO and Starpower ("Fiber Use Agreement"), Agency Agreement dated
as of December 18, 1997 by and between RCN Washington, RCN Telecom Services of
Maryland, Inc., RCN Telecom Services of Virginia, Inc. and Starpower ("Agency
Agreement"), Non-competition Agreement dated as of December 18, 1997 by and
among RCN Telecom Services, Inc., PCI and Starpower ("Non-competition
Agreement"), Assignment of Benefits Agreement dated as of December 18, 1997 by
and between RCN Washington and Starpower ("Assignment of Benefits Agreement"),
Support Services Agreement dated as of December 18, 1997 by and between RCN
Operating Services, Inc. and Starpower ("Support Services Agreement"), Guarantee
dated as of December 18, 1997 by PCI on behalf of Pepco Communications in favor
of Starpower, Guarantee dated as of December 18, 1997 by RCN on behalf of RCN
Washington and other RCN obligors in favor of Starpower and Contribution
Agreement dated as of December 18, 1997 by and between RCN Washington. and
Starpower ("Contribution Agreement"). RCN Washington and Pepco Communications
also each paid $12.5 million in cash in January 1998 as their initial capital
contributions.
Pursuant to the Starpower Operating Agreement, RCN Washington and Pepco
Communications are each required to make additional capital contributions in
accordance with a schedule set forth in such agreement on a 50%/50% basis.
Failure of either RCN Washington or Pepco Communications to make a scheduled
capital contribution or to vote in favor of certain additional capital
contributions may result in the recalculation of equity interests. The business
and affairs of Starpower is to be managed by RCN Washington and Pepco
Communications. So long as RCN Washington and Pepco Communications maintain a
50%/50% equity interest in the joint venture, each of RCN Washington and Pepco
Communications will appoint three members to the operating committee, the
approval of which is required for any business action. Certain fundamental
business actions, such as mergers, acquisitions, sales of substantially all of
the assets, liquidation and amendments to the certificate of organization or any
agreement signed at the Starpower Closing, require the unanimous approval of the
operating committee regardless of whether the parties continue to maintain a
50%/50% ownership interest. Failure to reach agreement may trigger a deadlock
event. In the event a deadlock arises within the first three years of the joint
venture, the proposed action shall be deemed rejected. If the deadlock arises
thereafter, the disputing party may give a notice to the other party offering to
sell its membership or to purchase all membership interests from the other
party; the offeree has the obligation to elect to buy or sell its interest.
Subject to certain exceptions, neither RCN Washington nor Pepco Communications
may sell any interest in Starpower for four years. Thereafter, RCN Washington or
Pepco Communications may sell any of its membership interests with the written
consent of the other subject to a right of first offer by the other party. RCN
Washington shall be restricted from transferring its interest if Pepco
Communications can demonstrate that such assignment would have a material
adverse impact on Starpower's business. Upon a change of control of RCN
Washington or Pepco Communications, which the other party has reason to believe
will have a material adverse effect on Starpower, the other party may offer to
sell its membership interests or to acquire such party's membership interests or
accept the change of control. The offeree has the right to elect to buy or sell
its interest. If a party proposes to sell its interest to a third party, the
other party has "tag-along" rights to sell a proportionate share of its
interest. Both RCN Washington and Pepco Communications may transfer their
membership interests to certain affiliates.
Under the Fiber Use Agreement, PEPCO agreed, for certain agreed upon fees,
(i) to provide construction services to develop a network and (ii) to grant
Starpower an indefeasible right of use of certain facilities and an irrevocable
right to install, maintain, use and operate its strand fiber connections to
leased facilities. Starpower has the right, at the end of the term, to purchase
not less than the whole network at the fair market value less the amount
previously paid by Starpower with respect to such facilities. The initial term
is ten years and the agreement may be renewed four times.
Under the Support Services Agreement, a subsidiary of RCN will provide
support services including customer service, billing, marketing, and certain
administrative, accounting and technical support services, each of which shall
be provided at cost. The Support Services Agreement also contains certain
indemnity provisions.
Under the Non-competition Agreement, for so long as either RCN Washington
or Pepco Communications owns an interest in Starpower, neither party nor any of
their affiliates may compete with any Relevant Business in the Washington, D.C.
Market. Neither RCN Washington nor Pepco Communications shall attempt to
solicit, divert or accept business from the customers of Starpower for any
Relevant Business in the Washington, D.C. Market or solicit any individual who
is employed by Starpower.
Starpower agreed, in the Agency Agreement, to serve as RCN Washington's
exclusive agent for the provision of telephony services in the Washington, D.C.
Market until Starpower receives sufficient authorization for it to provide
telephony services in the Washington, D.C. Market. All revenues and customers
under this Agency Agreement belong to Starpower. Starpower must indemnify RCN
Washington for any tax liability resulting from its obligations under this
Agency Agreement. The Agency Agreement also contains certain other indemnity
provisions.
Pursuant to the Assignment of Benefits Agreement, RCN Washington assigned
the benefits of all of the agreements (the "Assigned Agreements") with suppliers
of programming and entertainment, voice, video and data services,
telecommunications equipment and other products and services useful in the
conduct of the Relevant Business in the Washington, D.C. Market to Starpower.
RCN Washington may not transfer or assign its interest in the Assigned
Agreements if doing so would have a material adverse effect on Starpower's
ability to conduct the Relevant Business in the Washington, D.C. Market. In
addition, RCN Washington may not amend, modify or assign the Assigned Agreements
without the prior written consent of Starpower and Starpower has the right to
terminate any agreement amended, modified or assigned without its consent. RCN
Washington has agreed to take all reasonable steps necessary to obtain consent
for Starpower to use programming agreements prior to the date Starpower begins
offering OVS services. The Assignment of Benefits Agreement expires on December
19, 1998 and Starpower has certain renewal rights. Starpower may terminate the
Assignment of Benefits Agreement on 60 days notice.
RCN has agreed to unconditionally guarantee the due and punctual
performance and discharge all of its affiliates' material covenants, warranties,
undertakings and other obligations under the agreements signed at the Starpower
Closing. PCI has agreed to unconditionally guarantee the due and punctual
performance and discharge by Pepco Communications of all its material covenants,
warranties, undertakings and other obligations under the Starpower Operating
Agreement.
The Acquisition of Ultranet and Erols
Merger with Erols Internet, Inc.
On January 21, 1998, RCN entered into the Agreement and Plan of Merger (the
"Erols Merger Agreement") among RCN, Erols, Erol Onaran, Gold & Appel Transfer,
S.A., a British Virgin Islands corporation ("Gold & Appel"), and ENET Holding,
Inc., a Delaware corporation and a wholly owned subsidiary of RCN ("ENET"), to
acquire all of the outstanding shares of common stock of Erols. On February 20,
1998, Erols merged with and into ENET (the "Erols Merger"), with ENET as the
surviving corporation. The total consideration paid by RCN in the Erols Merger
consisted of $29.2 million in cash and 1,730,648 shares of RCN Common Stock plus
the assumption and repayment of approximately $5.8 million of debt (including
payment of accrued interest).
At the effective time of the Erols Merger, 998,719 outstanding options to
purchase shares of Erols common stock issued to persons who were employees of
Erols at such effective time, with an average exercise price of $2.40 per share
of Erols common stock, were canceled and RCN issued in exchange therefor options
to purchase 699,104 shares of RCN Common Stock having an average exercise price
of $3.424 per share.
The Erols Merger Agreement contains customary representations, warranties,
and covenants by each party, which representations and warranties will survive
until March 31, 1999, except for certain specified representations and
warranties which will survive indefinitely or until the expiration of the
applicable statute of limitations. Pursuant to the Erols Merger Agreement, each
party has agreed to provide indemnification from damages arising out of any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by such party pursuant to the Erols Merger Agreement. In addition,
Erol Onaran has agreed to provide indemnification from damages arising out of
any misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Erols on or before the Effective Time, subject to certain
thresholds and limitations, and arising from certain matters set forth in the
Erols Merger Agreement.
Pursuant to the Erols Merger Agreement, at the Effective Time both an
escrow agreement (the "Erols Escrow Agreement") and a registration rights
agreement (the "Erols Registration Rights Agreement") were executed and
delivered. Under the terms of the Erols Escrow Agreement, RCN delivered to the
Erols Escrow Agent an aggregate of approximately $5.84 million in cash and
93,210 shares of RCN Common Stock to be held, invested and distributed by the
Erols Escrow Agent pursuant to the Erols Escrow Agreement. Under the terms of
the Erols Registration Rights Agreement, Erol Onaran and Gold & Appel each
received customary demand and piggy-back registration rights, subject to certain
limitations as set forth in the Erols Registration Rights Agreement.
Merger With Ultranet Communications, Inc.
On January 21, 1998, RCN, UNET Holdings, Inc. and Ultranet entered into an
Agreement and Plan of Merger (the "Ultranet Merger Agreement"). The total
consideration for the acquisition consisted of approximately $7.9 million in
cash and 890,384 shares of RCN Common Stock.
At the Effective Time, 63,500 outstanding options to purchase shares of
Ultranet common stock issued to persons who were employees of Ultranet at such
effective time, with an average exercise price of $3.363 per share, were
canceled and RCN issued in exchange therefor options to purchase 117,052 shares
of RCN Common Stock having an average exercise price of $1.8245 per share. In
the event an option holder is terminated without cause, such option holder's
options will vest and will be exercisable for a period of six months following
termination. RCN is obligated to honor all obligations of Ultranet under
employment agreements as contemplated in the Ultranet Merger Agreement following
the acquisition.
RCN also agreed to indemnify Ultranet and its directors, officers and
stockholders from and against liabilities or expenses incurred (i) in connection
with the severance benefits under any severance arrangement applying to any
former employee of Ultranet employed by RCN after the Ultranet Merger is
consummated, (ii) relating to a former employee's employment and/or termination
by RCN after the Ultranet Merger is consummated and (iii) incurred by an
indemnified person with respect thereto.
Indemnification and Noncompetition Agreement
Certain stockholders holding at least 95% of the Ultranet common stock,
Series A Preferred Stock and Series B Preferred Stock executed an
Indemnification and Noncompetition Agreement (the "Indemnification Agreement")
which provides that certain representations and warranties included in the
Ultranet Merger Agreement will survive the consummation of the merger. Such
stockholders agree to indemnify RCN, severally and on a pro rata basis, and RCN
agrees to indemnify the stockholders against all losses incurred by any of them
arising out of any breach of any tax representation in the Ultranet Merger
Agreement insofar as such breach causes the merger not to qualify as a
reorganization or any material failure to perform any of its covenants or
agreements contained in the Ultranet Merger Agreement. The maximum amount of
indemnification by the stockholders on the one hand and by RCN on the other hand
is $7.5 million plus certain amounts up to $2.5 million with respect to breach
of tax representations.
The Indemnification Agreement provides that the stockholders will not
knowingly take any action which would cause the merger not to qualify as a
reorganization. Certain employees also agree not to engage in any activity which
would compete with Ultranet in the geographic region identified as the
"Boston-Washington" corridor for a period ending the earlier of five years after
the consummation of the merger or one year after his or her termination (or two
years in the case of termination for cause or voluntary termination).
Contribution of Erols' and Ultranet's Subscribers
RCN expects to contribute to Starpower, the joint venture with Pepco
Communications, the subscribers acquired in the acquisition of Erols located in
the Washington, D.C. area in which Starpower operates. The joint venture
partners of Starpower are currently negotiating the terms of such contribution.
On February 20, 1998, approximately 61% of all of Erols' subscribers were
located in the relevant Washington, D.C. area. RCN anticipates that Pepco
Communications will make a contribution equal to the value of such subscribers.
RCN contributed to its joint venture with BECO the subscribers acquired in
the acquisition of Ultranet located in the Boston area as well as 1.36% (or all
of Erols' subscribers located in the relevant Boston area) of the subscribers
acquired in the acquisition of Erols. On February 27, 1998, approximately 27% of
all of Ultranet's subscribers were located in the relevant Boston area. BECO has
made a corresponding contribution to the joint venture in the form of a note in
the principal amount of 49/51 of the agreed value of the subscribers contributed
by RCN.
The Delivery Platforms
Overview of Advanced Fiber Optic Networks
RCN's advanced fiber optic networks in Boston and New York City are, and
RCN expects that its future networks will be, designed to support voice, video
and data services via a switched, fiber-rich network architecture. The Company's
full service advanced fiber optic networks in Boston and New York City consist
of owned or leased fiber optic cables, local and long distance digital switches,
video headends, video and voice transmission and distribution equipment and
associated wiring and network termination equipment. The Company's local
telephone switching network (consisting of Lucent 5ESS-2000 switches) is
installed and fully operational in Boston and in New York City. 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.
This fiber backbone includes over 5,267 fiber miles in New York City and over
9,347 fiber miles in Boston. RCN owns two switches (one in Boston and one in New
York City) and two General Instrument video headends that are installed and in
service in both Boston and New York City. As of December 31, 1997 RCN had
connected 493 buildings (424 in NYC and 69 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, the Starpower joint venture with Pepco Communications, a subsidiary of
PEPCO, and RCN's arrangements to lease Bell Atlantic unbundled local loop and
T-1 facilities. See "Strategic Relationships" and "Voice Services Advanced Fiber
OpticNetworks." Any disruption of these arrangements and relationships could
have a material adverse effect on the Company.
Voice Services
Advanced Fiber Optic Networks. The Company's advanced fiber optic networks
in New York City and Boston utilize a voice network that supports both switched
and non-switched (private line) services. Individual buildings are connected to
the network backbone via fiber extensions that are generally terminated on SONET
equipment, which provide redundant and fail-safe interconnection between the
building and the RCN central office or switch location. In situations where
fiber extensions are not yet available, interim facility connections can be
provided by leasing special access facilities through a leasing arrangement with
MFS/WorldCom or the incumbent LEC. In this regard, RCN has in place arrangements
which allow it to lease certain facilities owned by the incumbent LECs
(unbundled local loops and T-1 facilities) to provide voice services. This
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 a minimum of 750 MHZ, which
is capable of supporting a minimum of 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
operations 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
at issue in an FCC proceeding in which an Initial Decision was released on March
6, 1998. In the Initial Decision, the Administrative Law Judge found Bartholdi
Cable unqualified with respect to 15 such licenses. The Initial Decision will
become effective 50 days after its release unless Bartholdi Cable, as expected,
files exceptions to the Initial Decision within 30 days of its release or the
FCC elects to review the case on its own motion. Because of the uncertainty as
to Bartholdi Cable's right in the future to offer transmission services to RCN,
the Company 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 and, in light of the increased
uncertainties resulting from the Initial Decision in the FCC proceeding
involving certain of Bartholdi Cable's licenses, the Company expcets now
actively to pursue its license applications. There can be no assurance that RCN
will be able to obtain its own FCC license.
Hybrid Fiber/Coaxial Cable Systems. RCN owns and operates hybrid
fiber/coaxial cable television networks in Pennsylvania, New Jersey and New York
State (outside of New York City), all within 75 miles of New York City. These
networks offer expanded bandwidth and a platform for two-way services, and have
an aggregate of 658 route miles of fiber optic cable, including separate high
capacity fiber optic rings with a minimum 84 fibers in Pennsylvania (covering
approximately 69 route miles) designed and constructed as competitive telephony
networks. The New York system includes 211 route miles of fiber optic cable
serving 98 nodes from one head-end. Approximately 70% of the New York system is
two-way active 750 MHZ plant with 84 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 62 channels of video programming. The Pennsylvania system
operates 2,649 miles of coaxial cable and over 234 route miles of fiber with 43
nodes from one headend, operating at 550 MHZ with 84 active channels. All of the
Company's hybrid fiber/coaxial cable systems are 100% one-way addressable.
These fiber-rich networks provide a basic fiber optic platform capable of
enhancement for supporting two-way services, such as high-speed Internet
services, in the future. RCN is presently expanding the fiber capacity of
certain of these fiber/coaxial cable television networks so that they will be
capable of delivering switched two-way services in the future. In August 1997,
RCN commenced offering resold local phone service, long distance and Internet
access to customers in the area served by its Hybrid Fiber/Coaxial Cable Systems
in Pennsylvania.
Data Services
RCN's 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 technology.
Erols provides high quality Internet access services to businesses by
utilizing high-speed access via ISDN, frame relay, fractional T-1, T-1 and T-3
circuits. Erols' network infrastructure currently supports modems with
dial-access speeds of up to 56 Kbps. Erols provides new dial-access subscribers
with its easy-to-install proprietary access software package, which incorporates
a telephone dialer, an e-mail platform, a Web browser (either Netscape
Communication Corporation's ("Netscape") Navigator (a registered trademark of
Netscape) or Microsoft Corp.'s Microsoft(R) Internet Explorer) and SurfWatchTM
software for parental control over Internet content access. This software
package permits simplified access to the Internet through a "point and click"
graphical user interface. After installation, the subscriber has a direct
connection to the Internet using Point-to-Point Protocol and access to all of
the Internet's resources, including e-mail, the World Wide Web, Usenet News
service and Internet Relay Chat. Access software automatically displays the
Erols World Wide Web site each time a subscriber logs on, providing Erols with
the opportunity to communicate with its subscribers at the start of each
session. Erols maintains "24 x 7" subscriber and technical support 365 days a
year.
Ultranet utilizes K56Flex protocol to support its POPs, a result of a major
mid-1997 upgrade in Ultranet transmission equipment. This advancement has
empowered users to gain access to two to four times more quickly to equipment
that is also more reliable. The new infrastructure takes advantage of Rockwell
technology that supports the K56Flex modems (speeds up to 56 Kbps) and ISDN
(speeds up to 128 Kbps). By connecting users to the Internet faster, downloading
time is decreased, and in turn, telephone costs and time online.
RCN intends to extend its network to cover most of the areas currently
served by Erols and Ultranet and ultimately to migrate most of those customers
to RCN's advanced fiber optic network, subject to certain regulatory approvals
and the approval of RCN's joint venture partners.
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 December 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Homes Passed................................ 118,216 119,761 282,836 283,940 290,612
Basic Subscribers........................... 87,660 92,140 176,131 179,932 184,938
Basic Penetration........................... 74.2% 76.9% 62.3%(1) 63.4% 63.6%
Average Monthly Revenue per Subscriber
For Last Month of the Period................ $40.98 $37.67 $36.73 (1) $39.99 $43.08
</TABLE>
- -------------------
(1) Decline in basic penetration levels and average monthly revenue per
subscriber in 1995 reflects the acquisition of the Pennsylvania cable
systems, which are in a market in which a competing franchisee also offers
service.
The service areas for these cable television networks enjoy favorable
customer demographics. The New York and New Jersey systems primarily serve
affluent bedroom communities in suburban New York City, with 28,411 and 76,127
connections at December 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.
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.
RCN has achieved interconnection through comprehensive telephone service
co-carrier interconnection agreements with Bell Atlantic and Sprint-New Jersey
covering their service areas in ten states and the District of Columbia in the
Northeast and New England-Middle Atlantic corridor areas. These agreements will
remain in effect regardless of the outcome of the proceedings regarding the
FCC's Section 251 regulations. RCN's interconnection agreements with Bell
Atlantic cover its service areas in the states of Massachusetts, New York,
Vermont, New Hampshire, Maine, Rhode Island, Delaware, Maryland, New Jersey,
Pennsylvania and Virginia and the District of Columbia. The agreement with
Sprint-New Jersey covers its service area in the State of New Jersey. All of
these agreements have been approved by the state regulatory commissions pursuant
to Section 252 of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996 (the "Communications Act"). RCN believes it has
more interconnection agreements with incumbent LECs than any other company
focused primarily on the residential telecommunications market.
The terms of RCN's interconnection agreements with the incumbent LECs
include the following provisions: (i) interconnection at any technically
feasible point within their networks, equal in quality to what the incumbent LEC
provides to itself or to affiliates, (ii) exchange of all local traffic at a
fully reciprocal and identical rate; (iii) receipt by RCN of access charges for
long distance calls made to and from its customers, including full "pass
through" to RCN of such compensation on number portability; (iv) interim number
portability arrangements to allow customers to keep their telephone numbers when
they switch carriers; (v) unbundled network elements, including local loop
transmission from the incumbent LEC's central offices to the customer's premises
distinct from local switching or other services; (vi) nondiscriminatory access
to 911 and emergency 911 services; directory assistance services to allow RCN's
customers to obtain telephone numbers; operator call completion services and
white pages directory listings for RCN's customers; and (vii) access to the
poles, ducts, conduits and rights-of-way owned or controlled by the incumbent
LEC at nondiscriminatory rates. The interconnection agreements generally have an
initial term of three years and are cancellable thereafter at 90 days' notice.
Resale Arrangements
Resale of Bell Atlantic Local Telephone Services
RCN provides local telephone service on a resale basis to customers not
connected to the advanced fiber optic facilities. As of December 31, 1997 RCN
had 24,900 customers for local telephone services provided through agreements to
act as a reseller of Bell Atlantic local telephone services. RCN offers its
resale customers competitive telephone rates and RCN's superior customer
service. Resale customers are billed by RCN and RCN personnel provision customer
service requests by coordinating with the incumbent LECs on the customers'
behalf.
RCN has entered into agreements to act as a reseller of Bell Atlantic local
telephone services, which enable RCN to grow its subscriber base by offering
telephone services in advance of connecting the customers to an advanced fiber
optic network. RCN's agreements with Bell Atlantic allow RCN to purchase at a
"wholesale" discount (the amount of which is determined by regulatory
commissions in each state) any telephone services that those companies offer to
their end users, such as local exchange services, vertical features including
Caller ID, Call Waiting, etc., and regional toll calls. The agreements provide
that RCN will be entitled to the most favorable terms and conditions, including
wholesale discounts, available to any telecommunications carrier reselling
similar services.
Long Distance Resale
RCN Commercial provides long distance telephone services, including private
line, operator and calling card services, to residential and business customers
throughout the United States. Such services are provided through an owned and
leased switching network utilizing leased interconnection facilities and long
distance resale. RCN provides on network origination and termination of long
distance telephone services throughout the Mid-Atlantic and New England states.
For call origination and completion throughout the rest of the country, RCN has
various resale agreements. Specifically, RCN has contracted with LCI for 800/888
origination, Frontier for off network origination of outbound calling and
various carriers for terminating calls.
DirecTV
In October 1996, RCN signed an agreement with DirecTV to deliver DirecTV's
high-power direct broadcast satellite service to MDUs in New York City. DirecTV
allows RCN to offer an additional 175 channels of programming including
exclusive sports programming.
Marketing
RCN Telecom Services
RCN focuses its marketing efforts on residential customers in high-density
areas, with an initial focus on residential customers located on or near RCN's
current or proposed advanced fiber optic networks. Through these advanced fiber
optic networks, RCN is able to offer a wide range of telecommunication services,
including bundled service options, and to offer its services at rates that are
competitive with the incumbent LECs and cable television operators and the major
IXCs. RCN believes that quality of service, superior technology and the ability
to offer bundled services, as well as price, will be more important to its
customers than brand-name recognition. Although RCN's initial marketing focus
has been on residential customers, it also will seek to provide communications
services to commercial customers located on its advanced fiber optic networks
wherever feasible, particularly with respect to small and medium size businesses
in Boston and in other areas outside of New York City, including new markets.
RCN will also market its advanced fiber-based services to institutional
accounts, such as hotels, universities and hospitals.
RCN has a team of direct sales personnel calling on targeted customers.
This team has salespeople dedicated to selling commercial accounts and
salespeople dedicated to selling to residential households. This is done with a
combination of lead follow-up and cold calling. Prospective commercial customers
are typically offered local and long distance voice services, with options for
video and data service as well. Prospective residential customers are solicited
as the fiber network is activated at the customer location and the complete
array of RCN services is offered, with the choice of a discounted bundled
package or individual service selections.
RCN markets its telephone services both as separate customer options for
local voice, long distance, video, and data access, and as a bundled discounted
package from a single service provider. RCN advertises its services and
availability through television, radio and newspapers, as well as on bus
shelters, subway stations, billboards, and other local outlets, and recently
launched a mass-media advertising campaign in New York City and Boston. Customer
response is generally channeled to 1-800-RING-RCN or www.rcn.com. Advertising is
supported via targeted direct mail and telemarketing. Customers are offered
special incentives to purchase more than one service from RCN. For example, as a
six-month introductory offer, New York City customers purchasing both video and
local voice service are currently eligible for a basic cable rate reductions.
RCN has employed specific teams dedicated to offering service to customers
in MDUs in high-density metropolitan areas. First, an access agreement team
makes presentations to owners/managers of MDUs seeking to obtain private access
agreements. This team also assists with presentations to municipal officials in
connection with applications for OVS license agreements and franchise
agreements. As of December 31, 1997 RCN had obtained 654 access agreements
covering over 125,987 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, 5% expire within the next three
years, 22% expire in 3-5 years and 73% expire thereafter. The access agreements
generally provide for non-exclusive access, but for exclusive marketing
assistance, whereby the building management promotes and assists in the
promotion of RCN's services on an exclusive basis. As an incentive, RCN may
negotiate a success-based marketing payment to the building owner. This payment
takes the form of either a percentage of revenue, or a reduced rate for
services. RCN has also employed bulk service agreements pursuant to which RCN
provides services (generally video services) at a flat subscription rate
covering all units in the residential building (typically, a condominium or
cooperative apartment building) or institution. RCN believes that bulk sales
contracts are a useful vehicle for early entry into a market, but expects the
majority of its future agreements to facilitate the purchase of services on an
individual basis.
Second, a sales team, led by a group of customer account managers, seeks to
solidify the relationships with the building owners/management, by coordinating
the installation process, organizing the initial marketing and promotion at each
building, and selling RCN services to each building resident. Usually, after an
announcement and informational package is distributed to each building resident,
a lobby demonstration and enrollment event takes place over several evenings.
Residents are offered free installation and convenient appointments. After the
initial sales and installation process is completed, the customer account
manager works with the building owner/manager to maximize ongoing penetration,
especially through the signup of new move-in residents.
RCN has opened two high-tech visitor centers in prominent locations in
Boston and New York City, where potential customers can sample RCN's services. A
network operations center including a graphic representation of the RCN network
is on view at each location.
Hybrid Fiber/Coaxial Cable Television
Sales and marketing to customers served by the Company's hybrid
fiber/coaxial cable systems is accomplished through a variety of means including
door-to-door sales, direct mail, telemarketing, incentive programs and print and
broadcast advertising. In addition to marketing efforts targeting new
subscribers, the Company conducts periodic campaigns to encourage existing
customers to purchase higher levels of service.
Customer Service and Billing
RCN has implemented a flexible, customer-service oriented approach which
RCN believes differentiates it from the mass-market strategy of the incumbent
providers. RCN provides customer service 24 hours a day, seven days a week from
established central call centers. The facilities utilize state of the art
technology which allows communication with subscribers, field technicians and
the Company's field offices. The largest of these facilities is located in
Dallas, Pennsylvania and handles the majority of the customer service calls. In
1997, approximately 90% of calls placed to the facility in Dallas, Pennsylvania
were answered in 30 seconds or less. Additionally, the facility in Dallas,
Pennsylvania initiates 540 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.
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 December 31, 1997 Commercial
had approximately 13,595 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, and one
MMDS cable system, 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 December 31, 1997 their wireline systems passed approximately
635,350 homes and served approximately 209,300 subscribers. Megacable had
revenues of $30.4 million and $23.2 million for the years ended December 31,
1997 and 1996, respectively. Recent financial results for Megacable expressed on
a U.S. GAAP basis and subscriber data are summarized below:
As of or for the Year Ended December 31,
----------------------------------------
1995 1996 1997
---------- --------- ----------
U.S. GAAP
Revenue .............................. $20,841 $23,244 $30,441
Net Income ........................... 5,802 10,221 6,653
RCN Equity in Earnings of Megacable(1) (3,061) (2,190) (3,869)
Accumulated Cash ..................... 25,886 29,617 25,660
Total Assets ......................... 62,035 67,826 76,323
Total Liabilities .................... 9,372 6,575 8,347
Net Worth ............................ 52,664 61,251 67,976
Other Data
EBITDA(2) ............................ 8,154 10,183 10,504
EBITDA Margin(2) ..................... 39% 44% 35%
Subscribers(3) ....................... 177,317 178,664 211,627
- ---------
(1) Represents RCN's portion of the Megacable net income and the amortization
of imputed goodwill.
(2) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period
and should not be considered as an alternative to cash flows from
operating, investing or financing activities as determined in accordance
with U.S. GAAP. EBITDA is not a measurement under U.S. GAAP and may not be
comparable with other similarly titled measures of other companies. EBITDA
is used by Megacable and the Company to assess the extent to which cash
flows are available for replacement and modernization of plant, to offer
new services to customers, to further improve the quality of service and to
fund new investment opportunities.
(3) Includes 2,325 MMDS subsidiaries in Juarez, Mexico.
Megacable is presently expanding the fiber capacity of certain of its
systems to provide high-speed data services and potentially voice services.
Specifically, Megacable has built out its systems in Veracruz, Jalapa, Tepic and
certain neighborhoods in Guadalajara using hybrid fiber/coaxial network
architecture, to provide a fiber optic cable "backbone" capable of providing
these services.
Additionally, Megacable presently holds a 99% interest in Megacable
Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license from the
Mexican government to allow it to build a fiber optic network in Mexico City,
Monterrey and Guadalajara. MCM intends to use this network to provide local
voice and high-speed data service in these cities, principally to commercial
customers in Mexico City.
Competition
Overview
RCN competes with a wide range of service providers for each of the
services that it provides. Virtually all markets for voice and video services
are extremely competitive, and RCN expects that competition will intensify in
the future. In each of the markets in which it offers voice and video
programming services, RCN faces significant competition often from larger,
better-financed incumbent local telephone carriers and cable companies, and RCN
often competes directly with incumbent providers which have historically
dominated their respective local telephone and cable television markets. These
incumbents presently have numerous advantages as a result of their historic
monopoly control of their respective markets. However, RCN believes that most
existing and potential competitors will, at least initially, provide narrower
service offerings over limited delivery platforms as compared to the wide range
of voice, video and data services that will be provided over RCN's fiber-based
networks, thereby providing RCN with an opportunity to achieve important market
penetration.
With respect to local telephone services, RCN competes with the incumbent
LECs, and alternative service providers including CLECs. Commercial mobile radio
services providers, including cellular carriers (such as Bell Atlantic Mobile
Services), personal communications services ("PCS") carriers (such as Sprint
Spectrum), and enhanced specialized mobile radio services ("ESMRS") providers
(such as NexTel), may also become a source of competitive local and long
distance telephone service. However, RCN believes these operators may primarily
use competitive access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the incumbent LECs with
whom they compete.
With respect to long distance telephone services, RCN faces, and expects to
continue to face, significant competition from the IXCs, including AT&T, Sprint
and MCI, which account for the majority of all long distance revenue. The major
long distance service providers benefit from established market share and from
established trade names brought about by nationwide advertising. RCN, however,
regards its long-distance service as a complementary service rather than a
principal source of revenue. Certain IXCs, including AT&T, MCI and Sprint, have
also announced their intention to offer local services in major U.S. markets
using their existing infrastructure in combination with resale of incumbent LEC
service, lease of unbundled local loops or other providers' services.
All of the Company's video services face competition from alternative
methods of receiving and distributing television signals and from other sources
of news, information and entertainment such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, interactive
online computer services and home video products, including videotape cassette
recorders. Among the alternative video distribution technologies are home
satellite dish earth stations ("HSDs") which enable individual households to
receive many of the satellite-delivered program services formerly available only
to cable subscribers. Furthermore, the 1992 Act contains provisions, which the
FCC has implemented with regulations, to enhance the ability of cable
competitors to purchase and make available to HSD owners certain
satellite-delivered cable programming at competitive costs. RCN faces additional
competition from private satellite master antenna television ("SMATV") systems
that serve condominiums, apartment and office complexes and private residential
developments. The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that provide,
or have the potential to provide, substantial competition to the Company's
various video distribution systems. These technologies include, among others,
DBS service whereby signals are transmitted by satellite to receiving facilities
located on customer premises. The Company expects that its video programming
services will face growing competition from current and new DBS service
providers. RCN also competes with wireless program distribution services such as
multi-channel multipoint distribution service ("MMDS") which use low-power
microwave frequencies to transmit video programming over-the-air to subscribers.
The Company is unable to predict whether wireless video services will have a
material impact on its operations.
Other new technologies, including Internet-based services, may become
competitive with services that RCN can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. Thus, it is not possible to
predict the effect that ongoing or future developments might have on the video
industry or on the operations of the Company.
RCN believes that among the existing competitors, the incumbent LECs,
incumbent cable providers and the CLECs provide the most direct competition to
RCN in the delivery of "last mile" connections for voice and video services.
Incumbent LECs
In each of its target markets for advanced fiber optic networks, RCN faces,
and expects to continue to face, significant competition from the incumbent LECs
(including Bell Atlantic in New York City and Boston), which currently dominate
their local telephone markets. RCN competes with the incumbent LECs in its
markets for local exchange services on the basis of product offerings (including
the ability to offer bundled voice and video services), reliability,
state-of-the-art technology and superior customer service, as well as price. RCN
believes that its advanced fiber optic networks provide superior technology for
delivering high-speed, high-capacity voice, video and data services as compared
to the primarily copper wire based networks of the incumbent LECs. However, the
incumbent LECs have begun to expand the amount of fiber facilities in their
networks and to prepare to re-enter the long distance telephone service market
and, in addition, have long-standing relationships with their customers.
In addition, under the 1996 Act, and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
introduction of such competition, however, also establishes the predicate for
the incumbent RBOCs, such as Bell Atlantic, to provide in-region interexchange
long distance services. The incumbent RBOCs are currently allowed to offer
"incidental" long distance service in-region and to offer out-of-region long
distance service. Once the incumbent RBOCs are allowed to offer in-region long
distance services, they will also be in a position to offer single source local
and long distance service similar to that offered by RCN and proposed by the
three largest IXCs (AT&T, MCI and Sprint). The Company expects that the
increased competition made possible by regulatory reform will result in certain
pricing and margin pressures in the telecommunications services business.
RCN has sought, and will continue to seek, to provide a full range of local
voice services in competition with incumbent LECs in its service areas. The
Company expects that competition for local telephone services will be based
primarily on quality, capacity and reliability of network facilities, customer
service, response to customer needs, service features and price, and will not be
based on any proprietary technology. As a result of the comparatively recent
installation of RCN's advanced fiber optic networks, its dual path architecture
and the state-of-the-art technology used in its networks, RCN may have capital
cost and service quality advantages over some currently available local networks
relied upon by the incumbent LECs, as well as the competitive advantage provided
by the ability to deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a wide
variety of video services directly to subscribers in competition with RCN.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. The Company cannot predict the likelihood of success of
video service ventures by LECs or the impact on the Company of such competitive
ventures.
Incumbent Cable Television Service Providers
Certain of RCN's video service businesses compete with incumbent wireline
cable companies in their respective service areas. In particular, RCN's advanced
fiber optic networks compete for cable subscribers with the major wireline cable
operators in New York City and Boston, primarily Time-Warner Cable in New York
City and Cablevision in Boston. RCN's wireless video service in New York City
competes primarily with Time-Warner Cable. RCN believes that the expanded
capacity and fiber-to-node architecture of its advanced fiber optic networks in
New York City and Boston make it better equipped to provide high-capacity
communications services than coaxial cable based networks utilizing "tree and
branch" architecture. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric, which also
holds a franchise for the relevant service area.
Since cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis, and the 1992 Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable systems, well-financed
businesses from outside the cable industry (such as the public utilities that
own certain of the poles on which cable is attached) may become competitors for
franchises or providers of competing services.
CLECs and Other Competitors
RCN also faces, and expects to continue to face, competition from other
potential competitors in certain of the markets in which RCN offers its
services. Other CLECs such as Teleport Communications Group, compete for local
telephone services, although they have to date focused primarily on the market
for commercial customers rather than residential 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.
Internet Services
The market for Internet access services is extremely competitive and highly
fragmented. No significant barriers to entry exist, and accordingly competition
in this market is expected to intensify. The Company competes (or in the future
may compete) directly or indirectly with (i) national and regional ISPs; (ii)
established online services; (iii) computer software and technology companies;
(iv) national telecommunications companies; (v) LECs; (vi) cable operators; and
(vii) nonprofit or educational ISPs, and some of these present or potential
future competitors have or can be expected to have substantially greater market
presence and financial, technical, marketing and other resources than the
Company. Certain of the Company's online competitors, including America Online,
the Microsoft Network and Prodigy, have introduced unlimited access to the
Internet and their proprietary content at flat rates, and certain of the LECs
have also introduced competitive flat-rate pricing for unlimited access (without
a set-up fee for at least some period of time). Bell Atlantic has recently filed
with the Federal Communications Commission (the "FCC") a petition for an
exemption from a regulation prohibiting it from building a high-speed network.
Bell Atlantic's petition requests that such network, which would serve as an
Internet backbone, not be subject to pricing and other regulatory restriction.
The network would span the states from Maine to Virginia. There can be no
assurance that competition will not lead to pricing pressures in the Internet
business. For additional information on the competitive environment in which the
Company operates, see "Business--Competition."
Other new technologies may become competitive with services that RCN can
offer. Cellularvision, a provider of 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 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. The 1996 Act was intended to promote competition and
decrease regulation of these segments of the industry. The law delegates to both
the FCC and 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 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
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 appealed certain aspects of these regulations, and
the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the
Telecommunications Act that were ordered by certain state PUCs to be premature;
vacated significant portions of the FCC's nationwide pricing rules; and confined
the use of combined unbundled network elements to instances where the requesting
carrier itself would do the combining. On October 14, 1997, the Eighth Circuit
issued a decision vacating additional FCC rules that will likely have the effect
of increasing the cost of obtaining the use of combinations of an ILEC's
unbundled network elements. On January 26, 1998, the Supreme Court granted a
writ of certiorari under which it will review the July 18 Eighth Circuit
decision; it is expected (but not yet certain) that the Court will hear
arguments on this case in the fall of 1998. The Eighth Circuit decisions create
uncertainty about the rules governing pricing and terms and conditions of
interconnection agreements, and could make negotiating and enforcing such
agreements more difficult and protracted and may require renegotiation of
existing agreements. Prior to the Eighth Circuit decisions, the Company had
entered into interconnection agreements with Bell Atlantic, covering all of its
target market area, that are generally consistent with the FCC guidelines, and
those agreements remain in effect notwithstanding the reversal of the FCC rules.
There can be no assurance, however, that the Company will be able to obtain or
enforce future interconnection agreements, or obtain renewal of existing
agreements, on terms acceptable to the Company.
Certain Bell Operating Companies ("BOCs") have also raised constitutional
challenges to restrictions in the 1996 Act preventing BOCs from entering the
long distance market in their home region. On December 31, 1997, the U.S.
District Court for the Northern District of Texas issued the SBC Decision
finding that Sections 271 to 275 of the 1996 Act are unconstitutional. SBC
Communications, Inc., et al. v. Federal Communications Commission, et al., Civil
Action No. 7:97-CV-163-X. These sections of the Act impose restrictions on the
lines of business in which the RBOCs may engage, including establishing the
conditions they must satisfy before they may provide in-region interLATA
telecommunications services. The District Court has stayed the SBC Decision
pending appeal. If the stay is lifted, the RBOCs (including Bell Atlantic, which
was permitted to intervene in the case) would be able to provide interLATA
services immediately without satisfying the statutory conditions. Although the
Company believes the factual assumptions and legal reasoning in the SBC Decision
are erroneous and therefore the decision will likely be reversed on appeal,
there can be no assurance of this outcome. If the SBC Decision were upheld on
appeal it may have an unfavorable effect on the Company's business for at least
two reasons. First, RBOCs currently have an incentive to foster competition
within their service areas so that they can qualify to offer interLATA services.
The SBC Decision removes this incentive by allowing RBOCs to offer interLATA
service without regard to their progress in opening their local markets to
competition. However, the SBC Decision would not affect other provisions of the
Act which create legal obligations for all ILECs to offer interconnection and
network access, and therefore will not impair the Company's ability to compete
in local exchange markets. Second, the Company is legally able to offer its
customers both long distance and local exchange services, which the RBOCs
currently may not do. This ability to offer "one-stop shopping" gives the
Company a marketing advantage that it would no longer enjoy if the SBC Decision
were upheld on appeal. The Company cannot predict either the outcome of these or
future challenges to the 1996 Act, any related appeal of regulation or court
decision, or the eventual effect on its business or the industry in general.
The 1996 Act also makes far-reaching changes in the regulation of the video
programming transmission services offered by RCN, including changes to the
regulations applicable to video operators, the elimination of restrictions on
telephone company entry into the video business, and the establishment of a new
OVS regulatory structure for telephone companies and others to offer such
services. Under the 1996 Act, local telephone companies, including both
incumbent LECs such as Bell Atlantic, and CLECs such as RCN, may provide service
as traditional cable television operators subject to municipal cable television
franchises, or they may opt to provide their programming over non-franchised
open video systems subject to certain conditions, including, but not limited to,
making available a portion of their channel capacity for use by unaffiliated
program distributors and satisfying certain other requirements, including
providing capacity for public, educational and government channels, and payment
of a gross receipts fee equivalent to the franchise fee paid by the incumbent
cable television operator. RCN is one of the first CLECs to provide television
programming over an advanced fiber optic network pursuant to the OVS regulations
implemented by the FCC under the 1996 Act. As discussed below, RCN is currently
providing OVS service in the City of Boston, in the City of New York and in a
number of communities surrounding Boston. Starpower is negotiating similar
agreements in Washington and surrounding communities.
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 a different state). 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 services in Boston, New York City, and the Lehigh
Valley are (and Starpower's similar services in the Washington area will be)
regulated by the public service commissions or comparable agencies of the
various states in which these services are offered. RCN subsidiaries have
received either permanent or interim authority to offer intrastate telephone
services, including local exchange service, in Massachusetts, New York,
Pennsylvania, Maryland, the District of Columbia, and Virginia (as well as in
some neighboring jurisdictions where the Company does not currently operate but
may expand in the future). Starpower has filed separately applications for
similar authority in Maryland, the District of Columbia, and Virginia.
Starpower's applications in Maryland and Virginia have been granted. RCN's
resale agreements with Bell Atlantic have been approved, pursuant to Section 252
of the Communications Act 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 authorized to offer intrastate long distance
services in Pennsylvania, 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's local operating subsidiaries and Starpower 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 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 48 states (all except
Alaska and Hawaii), 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,
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 area 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 has entered into similar OVS agreements or is in the process
of negotiating agreements with certain other Boston-area municipalities, either
to offer OVS services or franchised cable television services. RCN executed an
agreement with the City of New York on December 29, 1997, and has initiated OVS
service in the Borough of Manhattan pursuant to that agreement.
In areas where it offers video programming services as an OVS operator, RCN
is 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, the incumbent cable television provider in certain communities in the
Boston area, has made a similar filing at the FCC with respect to its request
for capacity on the Boston OVS network. RCN will continue to oppose these
requests, but to the extent that the FCC were to grant any such request(s), 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 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. One of the incumbent cable television companies
in New York City has filed a complaint with the New York Public Service
Commission challenging the former (pre-OVS) operations of RCN and WorldCom under
the VDT framework, which remains pending before that Commission.
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 temporary authorizations 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 at issue in an FCC proceeding in which an
Initial Decision was released on March 6, 1998. In the Initial Decision, the
Administrative Law Judge found Bartholdi Cable unqualified with respect to 15
such licenses. The Initial Decision will become effective 50 days after its
release unless Bartholdi Cable, as expected, files exceptions to the Initial
Decision within 30 days of its release or the FCC elects to review the case on
its own motion. Because of the uncertainty as to Bartholdi Cable's right in the
future to offer transmission services to RCN, the Company 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
and, in light of the increased uncertainties resulting from the Initial Decsion
in the FCC proceeding invoving certain of Bartholdi Cable's licenses, the
Company expects now actively to pursue its license applications. While the
Company expects to receive authorizations to transmit over these microwave
paths, there can be no assurance that RCN will be able to offer wireless video
services pursuant to its own FCC licenses or that the FCC's investigation will
be resolved favorably. The failure to obtain such license or resolve such
proceedings would materially adversely affect the Company's wireless video
operations in New York City.
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.
On September 8, 1997, the Company was notified by the FCC that it has ruled
that certain of the Company's upper levels of service for its New Jersey systems
are regulated levels of service and that the Company's rates for such levels of
service have exceeded the allowable rates under the FCC rate regulation rules
which have been effective since September 1993. The Company had treated these
levels of service as unregulated. The Company intends to contest this decision.
The Company does not believe that the ultimate resolution of this matter will
have a material impact on its results of operations or financial condition.
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. Approximately 39 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. The FCC has recently adopted 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 data services business, including Internet access, is largely
unregulated at this time (apart from Federal, state, and local laws and
regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers of
data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue to
be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data services
to the extent they use local exchange telephone network facilities for access to
their customers, similar proposals may well be considered by the FCC or Congress
in the future.
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 December 31, 1997 the Company had 1,150 full-time employees including
general office and administrative personnel. The Company considers relations
with its employees to be good.
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 "--The Delivery Platforms."
Legal Proceedings
On September 30, 1997, the Yee Family Trusts, as holders of Commonwealth
Telephone's Preferred Stock Series A and Preferred Stock Series B, filed an
action against the Company, Commonwealth Telephone and Cable Michigan in the
Superior Court of New Jersey, Chancery Division. The complaint alleges that
Commonwealth Telephone's distribution of the common stock of RCN and Cable
Michigan in connection with its restructuring (1) constituted a fraudulent
conveyance; (2) breached the terms of a contract between plaintiffs and
Commonwealth; (3) breached the covenant of good faith and fair dealing allegedly
owed plaintiffs; and (4) breached fiduciary duties allegedly owed plaintiffs. On
December 1, 1997, the complaint was amended to allege that Commonwealth
Telephone's distribution of the common stock of RCN and Cable Michigan was an
unlawful distribution in violation of 15 Pa.C.S. 1551(b)(2). The plaintiffs are
seeking to set aside the alleged fraudulent conveyance and unspecified monetary
damages alleged to be in excess of $52 million. The Company believes this
lawsuit is without merit and intends to contest this action vigorously. On
January 9, 1998, the defendants, including RCN, filed a Motion to Dismiss, or in
the Alternative, for Summary Judgment. Plaintiffs' response to this motion is
due on March 9, 1998 and defendants' reply is due on April 6, 1998. The New
Jersey court is scheduled to hear oral argument on the motion on or about April
17, 1998.
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 Board is divided into three classes of directors and consists
of 12 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 September
30, 1997, a class of directors will be elected for a three year term to replace
the class whose term has then expired.
The Company Board has established 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. Members are Messrs. McCourt (Chairman), Scott, Mahoney and Crowe.
The Company Board has established a compensation pension 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. Members are Messrs. Roth (Chairman), Yanney and Fasola.
The Company Board has also established 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. Members are Messrs. Fasola (Chairman), O'Neill, May and
Graham.
Executive Officers and Directors
The following table sets forth certain information as of February 28, 1998
concerning the directors and executive officers of RCN:
Name Age Position
---- --- --------
David C. McCourt........... 41 Director (Class III),
Chairman and Chief Executive Officer
Michael J. Mahoney......... 47 Director (Class I),
President and Chief Operating Officer
Bruce C. Godfrey........... 42 Director (Class II),
Executive Vice President and Chief Financial
Officer
Mark Haverkate............. 43 Executive Vice President, Business Development
Michael A. Adams........... 40 President, Technology and Network Development
Group, and Executive Vice President
Dennis J. Spina............ 53 Vice Chairman and President, Internet Services
James Q. Crowe............. 48 Director (Class III)
Alfred Fasola.............. 48 Director (Class II)
Stuart E. Graham........... 52 Director (Class I)
Richard R. Jaros........... 46 Director (Class II)
Thomas J. May.............. 50 Director (Class I)
Thomas P. O'Neill, III..... 53 Director (Class I)
Eugene Roth................ 62 Director (Class III)
Walter Scott, Jr........... 66 Director (Class III)
Michael B. Yanney.......... 64 Director (Class II)
Ralph S. Hromisin.......... 37 Vice President and Chief Accounting Officer
Kenneth R. Knudsen......... 51 Senior Vice President, Sales and Marketing
Salvatore M. Quadrino...... 50 Chief Administrative Officer
Paul E. Sigmund............ 33 Executive Vice President
Timothy J. Stoklosa........ 37 Senior Vice President and Treasurer
David C. McCourt, 41, has been the Chairman and Chief Executive Officer of
the Company as well as a Director since September 1997. Mr. McCourt has served
as a Director and Chairman and Chief Executive Officer of Cable Michigan since
September 30, 1997. In addition, he is a Director and Chairman and Chief
Executive Officer of Commonwealth Telephone, 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, Director of MFS
Communications Company, Inc. from July 1990 to December 1996, 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, a director of WorldCom, Inc. since December 1996 and
a Director of Kiewit Diversified Group, Inc. now Level 3 Communications, Inc.
("LCI") since August 1997.
Michael J. Mahoney, 47, has been the President and Chief Operating Officer,
as well as a Director, of the Company since September 1997. Mr. Mahoney is also
a Director of Commonwealth Telephone, a position he has held since May 1995. Mr.
Mahoney was President and Chief Operating Officer of C-TEC from February 1994 to
September 1997, President and Chief Operating Officer of Mercom from February
1994 to October 1997 and a Director of Mercom since January 1994. In addition,
he was Executive Vice President of Commonwealth Telephone's Cable Television
Group from June 1991 to February 1994, and Executive Vice President of Mercom
from December 1991 to February 1994.
Bruce C. Godfrey, 42, has been the Executive Vice President, Chief
Financial Officer, Corporate Secretary and a Director of the Company since
September 1997. Mr. Godfrey has also been a Director of Cable Michigan as well
as its Secretary since such date. Mr. Godfrey has been a Director of
Commonwealth Telephone since November 1996 and has been Executive Vice President
and Chief Financial Officer of Commonwealth Telephone since April 1994. He has
also been Executive Vice President and Chief Financial Officer of Mercom from
April 1994 to October 1997 and a Director of Mercom since May 1994 and Corporate
Secretary since October 1997. Mr. Godfrey was also Senior Vice President and
Principal of Daniels and Associates from January 1984 to April 1994.
Mark Haverkate, 43, has been the Executive Vice President, Business
Development of the Company since September, 1997. Mr. Haverkate has also been
President and Chief Operating Officer and a director of Cable Michigan since
such date. He was the President of RCN Development from June 1997 to September
1997 and Executive Vice President of Business Development at Commonwealth
Telephone from May 1997 to September 1997. Previously, he was President for
Business Operations at RCN Telecom Services, Inc. from November 1996 to June
1997, Executive Vice President of RCN Telecom Services, Inc. from August 1996 to
November 1996, Executive Vice President of Commonwealth Telephone's Cable
Television Group from July 1995 to August 1996, Executive Vice President of
Development for Commonwealth Telephone from February 1995 to July 1995,
Executive Vice President for Development at Mercom from November 1995 to
February 1996, Vice President of Development for Commonwealth Telephone from
December 1993 to February 1995, Vice President of Development at Mercom from
December 1993 to February 1995, Vice President of Commonwealth Telephone's Cable
Television Group from October 1989 to December 1993.
Michael A. Adams, 40, has been the President, Technology and Network
Development Group of the Company and Executive Vice President of the Company
since September, 1997. Mr. Adams held the corresponding position at Commonwealth
Telephone from November 1996 to September 1997. Prior to that date, Mr. Adams
held the following positions: Executive Vice President of Technology and
Strategic Development of Commonwealth Telephone 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 and Vice President of Engineering for RCN Telecom Services from
September 1992 to October 1993.
Dennis J. Spina, 53, has served as Director, Vice-Chairman and President of
Internet Services of the Company since February 1998. Previously, he served as
Chief Executive Officer of Erols from August 1996 to February 1998. From January
1996 until July 1996, he worked as an independent consultant in the service and
distribution industry. From November 1994 to December 1995, he served as
President and Chief Executive Officer of International Service systems, a
company engaged in the business of janitorial and energy management. From August
1990 to October 1994, he served as President and Chief Executive Officer of
Suburban Propane, Inc. ("Suburban Propane"), a division of Hanson PLC. He was
hired in a turnaround capacity and also served as President and Chief Executive
Officer of Petrolane, Inc. ("Petrolane"), a propane distribution company managed
by Suburban Propane, from August 1990 until its sale in July 1993. From 1973 to
1990, he worked at Federal Express Corporation, ultimately serving as Vice
President and Officer.
James Q. Crowe, 48, has been a Director of the Company since September
1997. Since August 1, 1997, Mr. Crowe has been the President and Chief Executive
Officer of LCI a wholly owned subsidiary of PKS. Mr. Crowe is also a Director of
Commonwealth Telephone, a position he has held since 1993. Mr. Crowe has served
as Chairman of the Board of Directors of MFS/WorldCom since 1988 and Chief
Executive Officer of MFS/WorldCom since November 1991 and was President of
MFS/WorldCom from January 1988 to June 1989 and April 1990 to January 1992. Mr.
Crowe is a Director of PKS, a construction and mining company, and CalEnergy
Company, Inc., ("CECI"), a geothermal energy producer, LCI since July 1997 and
Quest Communications International, Inc., a communications company. Mr. Crowe
was Chairman of the Board of Directors of WorldCom, Inc. from December 1996 to
June 1997.
Alfred Fasola, 48, has been a Director of the Company since September 1997.
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 and Circle Express from 1988 to 1989.
Stuart E. Graham, 52, has been a Director of the Company since September
1997. Mr. Graham is also a Director of Commonwealth Telephone, a position he has
held since 1990. Mr. Graham is President of Skanska. Previously he has been
Chief Executive Officer of several Skanska USA subsidiaries including Sordoni
Skanska, Slattery Skanska and Skanska E & C.
Richard R. Jaros, 46, has been a Director of the Company since September
1997. Mr. Jaros is a member of the Board of Directors of WorldCom, LCI,
CalEnergy Company and Commonwealth Telephone. From 1980 to 1992 and from 1994 to
1997, Mr. Jaros served as President of LCI and Executive Vice President and
Chief Financial Officer of PKS. He served as Chairman of CECO from 1993 to 1994
and as President from 1992 to 1993.
Thomas J. May, 50, has been a Director of the Company since September 1997.
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.
Thomas P. O'Neill, III, 53, has been a Director of the Company since
September 1997. 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.
Eugene Roth, 62, has been a Director of the Company since September 1997.
Mr. Roth is also a Director of Commonwealth Telephone, a position he has held
since 1989. Mr. Roth has been a Partner at Rosenn, Jenkins and Greenwald
(Attorneys) since 1964 and is also a Director of the Pennsylvania Regional Board
of Directors of First Union National Bank.
Walter Scott, Jr., 66, has been a Director of the Company since September
1997. Mr. Scott is also a Director of Commonwealth Telephone, a position he has
held since 1993. Mr. Scott has been Chairman of the Board of Directors and
President of PKS for over five years and is also a Director of Berkshire
Hathaway Inc., Burlington Resources, Inc., CECI, ConAgra, Inc., US Bancorp,
Valmont Industries, Inc., and Kiewit Telecom. Mr. Scott was a Director of
WorldCom, Inc. from December 1996 to July 1997.
Michael B. Yanney, 64, has been a Director of the Company since September
1997. 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, PKS Information
Systems, Inc. and LCI. Mr. Yanney was a Director of WorldCom, Inc. from December
1996 to July 1997 and C-TEC from August 1996 to September 1997.
Ralph S. Hromisin, 37, has been Vice President and Chief Accounting Officer
of the Company since September 1997. He has also been Vice President and Chief
Accounting Officer of Cable Michigan since September 1997 and of Commonwealth
Telephone since August 1994. Mr. Hromisin has been Vice President and Corporate
Controller for Mercom since October 1996, Director of Corporate Accounting for
Commonwealth Telephone from March 1992 to August 1994. He also held various
positions, most recently Audit Manager for Parente, Randolph, Orlando, Carey &
Associates, CPA's from November 1982 to March 1992.
Kenneth R. Knudsen, 51, has been Senior Vice President of Sales & Marketing
of the Company since June 1997 and Vice President of Sales and General Manager
of RCN Telecom Services, Inc. from January 1996 to May 1997. Previously, Mr.
Knudsen served as Chief Executive Officer and Partner of KCI Consulting, Inc.
from 1994 to January 1996 and Senior Vice President of Ryan Management Group
from 1993 to 1994. From 1970 to 1988 he also held Officer and Senior Management
positions at Nabisco, Ocean Spray Cranberries, Frito-lay, Inc. and Procter and
Gamble Company.
Salvatore M. Quadrino, 50, has been Chief Administrative Officer of the
Company since February 1998. Previously he served as Vice President, Treasurer
and Chief Financial Officer of Erol's from September 1997 to February 1998. From
October 1996 to August 1997, he worked as an independent financial consultant in
the service and distribution industry. From October 1994 to September 1996, he
served as President and Chief Executive Officer of Suburban Propane, a division
of Hanson PLC, which conducted its initial public offering in March 1996, and
from March to October 1996 he served as a member of Suburban Propane's Board of
Supervisors. Mr. Quadrino initially was hired in a turn around capacity, served
as Vice President and Chief Financial Officer of Suburban Propane from October
1990 to September 1994 and as Vice President, Chief Financial Officer and
Treasurer of Petrolane from August 1990 until its sale in July 1993.
Paul E. Sigmund, 33, has been Executive Vice President of the Company since
September 1997 and Executive Vice President of RCN International Holdings, Inc.
since 1996. Previously, Mr. Sigmund was a Vice President at Smith Barney, Inc.
from 1994 to 1996, an Associate at the law firm of Skadden, Arps, Slate, Meagher
& Flom from 1993 to 1994 and an Investment Associate at the International
Finance Corporation/World Bank from 1986 to 1989.
Timothy J. Stoklosa, 37, has been the Senior Vice President and Treasurer
of the Company since September 1997. He has also served as Executive Vice
President and Chief Financial Officer and a Director of Cable Michigan since
such date. Mr. Stoklosa has been Senior Vice President of Finance of
Commonwealth Telephone since February 1997, Treasurer of Commonwealth Telephone
since August 1994 and Executive Vice President and Chief Financial Officer of
Mercom since October 1997. Previously, Mr. Stoklosa was Vice President of
Finance of Commonwealth Telephone from May 1995 to February 1997, Manager of
Mergers and Acquisitions at PKS from October 1991 to August 1994 and Senior
Financial Analyst of Corporate Development at Citizens Utilities Co. from
February 1990 to October 1991.
Executive Compensation
The following table sets forth certain information regarding the
compensation paid for the periods indicated to the Chief Executive Officer of
RCN and the four other most highly compensated executive officers of RCN
(collectively, the "Named Executive Officers"). As previously stated, all
amounts regarding shares and per share data of RCN Common Stock have been
adjusted to reflect the Stock Dividend.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------- ------------------------------------
Awards Payouts Total
------------ ---------- ---------
Other
Annual Restricted Securities All Other
Compensation Stock Underlying LTIP Compensation
Nmme and Principal Position Year Salary($)(1) Bonus($) ($)(1) Awards($)(2) Options(#) Payout($) ($)(3)
- --------------------------- ---- ------------ --------- ------------ ----------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
David C. McCourt........... 1997 $500,000 $1,400,000 -- $380,000 1,000,000 -- $2,703 $1,902,703
Chairman and Chief 1996 491,154 700,000 -- 238,333 -- -- 5,478 1,196,632
Executive Officer 1995 397,885 700,000 -- 220,000 500,000 -- 5,612 1,103,497
Michael J. Mahoney......... 1997 $248,654 $500,000 -- $149,731 400,000 -- $5,871 $754,525
President and Cheif 1996 235,027 175,000 -- 67,017 -- -- 5,478 415,505
Operating Officer 1995 222,462 100,000 -- 65,000 -- -- 5,952 328,414
Bruce C. Godfrey........... 1997 $243,077 $500,000 -- $148,615 400,000 -- $5,763 $748,840
Executive Vice President 1996 221,462 165,000 -- 74,333 -- -- 4,965 391,427
and Chief Financial 1995 183,731 150,000 -- 67,000 -- -- 4,790 338,521
Officer
Mark Haverkate............. 1997 $205,192 $100,000 -- $61,038 80,000 -- $16,045 $308,177
Executive Vice President, 1996 158,231 135,000 -- 51,667 -- -- 3,641 296,872
Business Development 1995 137,952 100,000 -- 48,000 70,000 -- 5,058 243,010
Michael A. Adams........... 1997 $203,269 $150,000 -- 70,654 230,000 -- $16,045 $369,314
President, Technology and 1996 138,673 155,000 -- 36,950 -- -- 3,853 297,526
Network Development 1995 122,885 46,000 -- 34,200 40,000 -- 3,991 172,876
</TABLE>
- -------------------
(1) The only type other Annual Compensation for each of the Named Executive
Officers was in the form of perquisites and was less than the level
required for reporting.
(2) Represents the market value on the date of grant of restricted stock
awards. In connection with 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
were adjusted so that following the Distribution, each such participant was
credited with an aggregate equivalent value of restricted shares of common
stock of Commonwealth Telephone, RCN and Cable Michigan.
(3) Includes the following amounts for the last fiscal year: (i) David McCourt:
$486 - Company paid life insurance; $2,217 - 401(k) Company match; (ii)
Bruce Godfrey: $486 - Company paid life insurance; $5,277 - 401(k) Company
match; (iii) Michael Mahoney: $486 - Company paid life insurance; $5,385 -
401(k) Company match; (iv) Mark Haverkate: $486 - Company paid life
insurance; $2,499 - 401(k) Company match; (v) Michael Adams: $483 - Company
paid life insurance; $3,675 - 401(k) Company match; $11,887 - Relocation
costs.
The following amounts are for 1996 fiscal year: (i) David McCourt: $396 -
Company paid life insurance; $5,082 - 401(k) Company match; (ii) Bruce
Godfrey: $396 - Company paid life insurance; $4,569 - 401(k) Company match;
(iii) Michael Mahoney: $396 - Company paid life insurance; $5,082 - 401(k)
Company match; (iv) Mark Haverkate: $392 - Company paid life insurance;
$3,249 - 401(k) Company match; (v) Michael Adams: $363 - Company paid life
insurance; $3,490 - 401(k) Company match.
The following amounts are for 1995 fiscal year: (i) David McCourt: $530 -
Company paid life insurance; $5,082 - 401(k) Company match; (ii) Bruce
Godfrey: $510 - Company paid life insurance; $4,280 - 401(k) Company match;
(iii) Michael Mahoney: $870 - Company paid life insurance; $5,082 - 401(k)
Company match; (iv) Mark Haverkate: $861 - Company paid life insurance;
$4,197 - 401(k) Company match; (v) Michael Adams: $253 - Company paid life
insurance; $3,738 - 401(k) Company match.
Does not include amounts paid to certain senior offices listed for
relocation expenses incurred in moving said senior officers and their
families to the Company's new executive offices in Princeton, New Jersey.
As of December 31, 1997, the aggregate holdings and value of restricted
stock awards for RCN Common Stock were as follows:
RCN Aggregate
Corporation Shares Value
------------------ ----------
David C. McCourt....................... 49,707.58 $851,242
Michael J. Mahoney..................... 17,585.70 $301,155
Bruce C. Godfrey....................... 18,064.74 $309,359
Mark Haverkate......................... 9,495.76 $162,815
Michael Adams.......................... 8,960.16 $153,442
Vesting of restricted shares is accelerated upon a change in control of
the Company. Dividends, if any, are paid on restricted shares. Subject to
continued employment, restricted share units credited to participants'
accounts vest in three calendar years following the date on which the
share units were initially credited to the participant's account.
RCN Options/SAR Grants in Fiscal Year 1997
<TABLE>
<CAPTION>
Number % of Options
Securities Granted to Potential Realizable Value at
Underlying Employees in Total Exercise Assumed Annual Rates of
Options Fiscal Year or Base Price Expiration Stock Price Appreciation for
Granted(#) 1997 ($/sh) Date Option Term
---------- ------------- -------------- ---------- -------------------------------
5%($) 10%($)
------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David C. McCourt.................... 1,000,000 20.86% 15.315 10/30/2007 $9,627,500 $24,402,500
Michael J. Mahoney.................. 400,000 8.34% 15.315 10/30/2007 $3,851,000 $9,761,000
Bruce C. Godfrey.................... 400,000 8.34% 15.315 10/30/2007 $3,851,000 $9,761,000
Mark Haverkate...................... 20,000 0.42% 8.360 2/12/2007 $ 105,910 $ 266,490
Mark Haverkate...................... 60,000 1.25% 15.315 10/30/2007 $ 577,650 $1,464,150
Michael A. McAdams.................. 30,000 0.63% 8.360 2/21/2007 $ 157,785 $ 399,735
Michael A. McAdams.................. 200,000 4.17% 15.315 10/30/2007 $1,925,500 $4,880,500
</TABLE>
The following table sets forth the fiscal year-end value of unexercised
options held by each Named Executive Officer.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values(1)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at December Money Options at December 31,
31, 1997(2) 1997(2)(3)
------------------------------- --------------------------------
Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
--------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
David C. McCourt.................................... 500,000 1,500,000 $5,116,300 $6,971,950
Michael J. Mahoney.................................. 120,000 1,200,000 1,207,200 1,529,800
Bruce C. Godfrey.................................... 84,000 456,000 845,040 1,288,360
Mark Haverkate...................................... 58,000 282,000 578,128 1,140,527
Michael A. Adams.................................... 58,000 142,000 574,114 893,711
</TABLE>
- -------------------
(1) No RCN stock options were exercised by the Named Executive Officers during
the fiscal year ended December 31, 1997.
(2) Denominated in shares of RCN Common Stock.
(3) The fair market value of RCN Common Stock at December 31, 1997 was $17.125
per share.
Effect of Distribution on Equity-Related Benefits
In connection with the Distribution, each C-TEC option held by the Named
Executive Officers and all other holders of such options was adjusted so that
each such executive officer and other holder currently holds options to purchase
shares of Commonwealth Telephone Common Stock, RCN Common Stock and Cable
Michigan Common Stock, respectively. The number of shares subject to, and the
exercise price of, such options were adjusted to take into account the
Distribution and to ensure that the aggregate intrinsic value of the resulting
RCN, Cable Michigan and Commonwealth Telephone options immediately after the
Distribution was equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution. Shares of restricted C-TEC Common Stock
awarded under the C-TEC Executive Stock Purchase Plan ("ESPP") and share units
awarded under the ESPP that relate to C-TEC Common Stock were adjusted so that
following the Distribution, each such participant was credited with an aggregate
equivalent value of restricted shares of common stock of Commonwealth Telephone,
the Company and Cable Michigan. See Note (4) to "Security Ownership of Certain
Beneficial Owners and Management."
Pension Benefits
C-TEC completed a comprehensive study of its employee benefit plans in
1996. As a result of this study, effective after December 31, 1996, in general,
employees other than those of the C-TEC Group no longer accrue benefits under
the C-TEC defined benefit pension plan, but became fully vested in their
benefits accrued through that date. Such benefits, for the Named Executive
Officers affected by this event, computed as the present value at July 31, 1997
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 $1,500 and $1,000,
respectively, for each committee meeting attended. Pursuant to the RCN
Corporation 1997 Stock Plan for Non-Employee Directors, the retainer will be
paid in shares of RCN Common Stock and each non-employee director will receive
an annual grant of a non-qualified option covering 4,000 shares of RCN Common
Stock.
Compensation Committee Interlocks and Insider Participation
The Company has established a Compensation Committee, all the members of
which are non-employee directors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the table below is information as of March 1, 1998 (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 RCN Common
Stock beneficially owned by (i) each person or entity known by the Company to
own more than five percent of the outstanding RCN 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. 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. As previously stated, all amounts regarding shares
and per share data of RCN Common Stock have been adjusted to reflect the Stock
Dividend.
RCN Common Stock
---------------------------------
Number of
Shares Percent of
Beneficially Outstanding
Name of Beneficial Owner Owned(1) Shares(1)
- -------------------------- --------------- --------------
Directors and Named Executive Officers
Michael A. Adams (2)............................ 22,566 *
James Q. Crowe.................................. 832 *
Alfred Fasola................................... 166 *
Bruce C. Godfrey (2)............................ 53,750 *
Stuart E. Graham................................ 10,174 *
Mark Haverkate (2).............................. 66,364 *
Richard R. Jaros................................ 6,006 *
Michael J. Mahoney (2).......................... 60,042 *
Thomas J. May................................... 2,166 *
David C. McCourt (2)(3)......................... 175,722 *
Thomas P. O'Neill, III.......................... 2,166 *
Eugene Roth..................................... 13,608 *
Walter Scott, Jr................................ 832 *
Dennis Spina.................................... -- --
Michael B. Yanney............................... 4,888 *
All Directors and Executive Officers
as a Group (20 persons)(2)(3).................. 428,584 *
5% Stockholders
Kiewit Telecom Holdings, Inc.(4)................ 26,640,970 46
- -------------------
* Less than 1% of outstanding shares.
(1) Includes shares of Company Common Stock acquired in respect of Matching
Shares but excludes RCN Share Units.
(2) Under the ESPP, participating executive officers who forgo current
compensation are credited with "Share Units," the value of which is based
on the value of a share of Company 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 were adjusted in an
equitable manner so that participants were credited with an aggregate
equivalent value of restricted shares of Commonwealth Telephone, RCN and
Cable Michigan Common Stock. The holdings indicated include Share Units and
Matching Shares.
(3) Includes 450 shares of Company Common Stock which are owned by Mr.
McCourt's wife. Mr. McCourt disclaims beneficial ownership of such shares.
(4) LCI owns 90% of the common stock and all of the preferred stock of Kiewit
Telecom. David C. McCourt, Chairman and Chief Executive Officer of
Commonwealth Telephone and RCN, owns the remaining 10% of the common stock
of Kiewit Telecom. LCI is a wholly owned subsidiary of PKS. The address for
Kiewit Telecom, LCI and PKS is 1000 Kiewit Plaza, Omaha, Nebraska 68131.
The table below shows in respect of each Named Executive Officer the number
of shares of RCN Common Stock purchased outright, Share Units relating to RCN
Common Stock acquired by each such Named Executive Officer in lieu of current
compensation, and the forfeitable Matching Shares of RCN Common Stock held by
each such Named Executive Officer:
<TABLE>
<CAPTION>
Share Unit
Acquired Under Total Purchased
Shares the ESPP in Lieu Total Shares and Acquired
Purchased of Current Purchased and Restricted and Restricted
Outright Compensation Acquired Matching Shares Matching Shares
-------- ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams..................... 1,834 10,366 12,200 10,366 22,566
Bruce C. Godfrey..................... 14,636 19,558 34,194 19,558 53,752
David C. McCourt..................... 68,788 53,466 122,254 53,466 175,720
Michael J. Mahoney................... 21,732 19,154 40,886 19,154 60,040
Mark Haverkate....................... 46,416 9,974 56,390 9,974 66,364
</TABLE>
The information set forth above does not give effect to the ownership of
Company securities by Kiewit Telecom. Certain executive officers or directors of
the Company are directly or indirectly affiliated with Kiewit Telecom. For
information with respect to the beneficial ownership of securities by Kiewit
Telecom, see "Security of Ownership Certain Beneficial Owners and Management."
Peter Kiewit Sons' Inc.
Set forth below is certain information regarding the beneficial ownership
of equity securities of PKS as of February 28, 1998, by each director, the Named
Executive Officers and by all persons, as a group, who are currently directors
or executive officers of the Company. The equity securities of PKS are 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>
Name of Beneficial Owner Number of Percent of Number of Percent of
Class C Shares Class C Shares Class D Shares Class D Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Michael A. Adams.................................. -- -- -- --
James Q. Crowe.................................... -- -- 5,666,360 3.9%
Alfred Fasola..................................... -- -- -- --
Bruce C. Godfrey.................................. -- -- -- --
Stuart E. Graham.................................. -- -- -- --
Mark Haverkate.................................... -- -- -- --
Richard R. Jaros.................................. -- -- 748,749(2) *
Michael J. Mahoney................................ -- -- -- --
Thomas J. May..................................... -- -- -- --
David C. McCourt.................................. -- -- 57,500 *
Thomas P. O'Neill, III............................ -- -- -- --
Eugene Roth....................................... -- -- -- --
Walter Scott, Jr.................................. 100,000 1.3% 17,636,397 12.0%
Dennis Spina...................................... -- -- -- --
Michael B. Yanney................................. -- -- 50,000 --
All Directors and Executive Officers as a
Group (20 persons).......................... 100,000 1.3% 24,161,161 16.4%
* Less than 1% of the outstanding of the class.
</TABLE>
(footnotes continued on next page)
- -------------------
(1) PKS is the sole stockholder of Level 3 Communications, Inc., formerly
Kiewit Diversified Group Inc. ("LCI"), which holds 90% of the common stock
of Kiewit Telecom and all of the preferred stock of Kiewit Telecom. David
C. McCourt owns the remaining 10% of the common stock of Kiewit Telecom.
The address for each of Kiewit Telecom, LCI and PKS is 1000 Kiewit Plaza,
Omaha, Nebraska 68131. Kiewit Telecom was formerly known as RCN
Corporation.
(2) Includes 185,000 shares in the Jaros Family Limited Partnership.
DESCRIPTION OF THE DISTRIBUTION AND RELATED AGREEMENTS
This section of the Prospectus describes certain agreements among the
Company, Commonwealth Telephone and Cable Michigan that will govern certain of
the on-going relationships among such entities, 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 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 were filed as exhibits to the Company's
Information Statement on Form 10 ("Form 10"), and are incorporated herein by
reference.
The Distribution Documents were entered into in connection with the
Distribution and are, therefore, not the result of arm's length negotiation
between unrelated parties as the Company, Commonwealth Telephone 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. Any additional or modified agreements, arrangements and transactions
entered into between the Company and either or both of Commonwealth Telephone
and Cable Michigan will be negotiated at arm's length.
Background
On February 12, 1997, the Board of Directors of C-TEC (now Commonwealth
Telephone) approved a plan to restructure C-TEC (the "Restructuring"). Under the
Restructuring, C-TEC would be separated into three different, publicly traded
companies engaged, respectively, in the following businesses:
(i) the business of the Company;
(ii) a cable television business in the State of Michigan, which would be
owned by Cable Michigan and would include C-TEC's 61.92% interest in
Mercom, Inc.; and
(iii) C-TEC's Pennsylvania telephone and engineering business, which would
be owned by Commonwealth Telephone and would 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 related to the Commonwealth Telephone Company and
Pennsylvania CLEC operations.
Following the Distribution, C-TEC's name was changed to Commonwealth
Telephone Enterprises, Inc.
The C-TEC Board of Directors determined that the Restructuring and the
subsequent Distribution would, among other things, (i) facilitate possible
future equity or equity-linked offerings by the Company; (ii) facilitate
possible future acquisitions and joint venture investments by the Company; (iii)
facilitate the ability of the Company to grow in both size and profitability;
(iv) allow the management of the Company to focus attention and financial
resources on its business; and (v) allow for the establishment of an employee
stock ownership plan for the employees of the Company with stock that correlates
more closely to the Company's business, as well as permit the Company to offer
other employee incentives that are more directly linked to the performance of
its business.
On September 30, 1997, C-TEC effected the Distribution by the delivery of
the shares of Company Common Stock to the Distribution Agent for distribution to
the holders of record of C-TEC Common Stock and C-TEC Class B Common Stock. As a
result of the Distribution, 100% of the shares outstanding on such date of
Company Common Stock were distributed to holders of C-TEC Common Equity.
Terms of Distribution Agreement
Commonwealth Telephone, Cable Michigan and the Company entered into a
Distribution Agreement prior to the Distribution, among other things, to define
certain aspects (other than those with respect to taxes, which shall be governed
by the Tax Sharing Agreement (defined below)) of the relationship among
Commonwealth Telephone, Cable Michigan and the Company after the Distribution
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 Commonwealth Telephone, Cable Michigan and the Company.
Indemnification
The Company, Cable Michigan and Commonwealth Telephone have agreed to
indemnify one another against certain liabilities. The Company has agreed to
indemnify Commonwealth Telephone and its subsidiaries (collectively, the
"Commonwealth Telephone Group") and the respective directors, officers,
employees and affiliates of each person in the Commonwealth Telephone Group
(collectively, the "Commonwealth Telephone Indemnitees") and Cable Michigan and
its subsidiaries (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 Commonwealth Telephone 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 Commonwealth Telephone Indemnitees, arising out of the provision by the
Commonwealth Telephone 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 Commonwealth Telephone 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 Commonwealth Telephone (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 Commonwealth Telephone
Indemnitees from and against any and all Losses incurred or suffered by any of
the Company Indemnitees or the Commonwealth Telephone 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 Commonwealth
Telephone Indemnitees, arising out of the provision by the Commonwealth
Telephone 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 Commonwealth Telephone 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 Commonwealth Telephone (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).
Commonwealth Telephone 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
Commonwealth Telephone Group to pay, perform or otherwise discharge any of the
Commonwealth Telephone Liabilities (as defined below), (ii) arising out of the
breach by any member of the Commonwealth Telephone 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 Commonwealth Telephone Group
except to the extent that such Losses result from the gross negligence or
willful misconduct of a Company Indemnitee. "Commonwealth Telephone Liabilities"
refers to (i) all liabilities of the Commonwealth Telephone Group under the
Distribution Agreement or any of the other Distribution Documents, (ii) all
other liabilities of the Company, Cable Michigan or Commonwealth Telephone (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 Commonwealth Telephone Group prior to the
effective time of the Distribution (the liabilities in clauses (i) and (ii)
collectively, the "True Commonwealth Telephone 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 Commonwealth Telephone
or their respective subsidiaries which (i) (a) arises from the conduct of the
corporate overhead function with respect to Commonwealth Telephone and its
subsidiaries prior to the effective time of the Distribution with certain
exceptions or (b) is one of certain fees and expenses incurred in connection
with the Restructuring and (ii) is not a True Commonwealth Telephone Liability,
a True Cable Michigan Liability or a True Company Liability.
The Company, Cable Michigan and Commonwealth Telephone 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's Form 10, the Company's offering memorandum in connection with the
1997 Notes Offering and Cable Michigan's Informational Statement on Form 10 and
Cable Michigan Prospectus. 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 Commonwealth
Telephone agreed generally to assume employee benefits-related liabilities with
respect to its current and, in some cases, former employees.
Transitional Services and Arrangements
The Company has agreed to provide or cause to be provided to the
Commonwealth Telephone Group certain specified services for a transitional
period after the Distribution. The transitional services to be provided are the
following: (i) accounting, (ii) payroll, (iii) management supervision, (iv) cash
management, (v) human resources and benefit plan administration, (vi) insurance
administration, (vii) legal, (viii) tax, (ix) internal audit, (x) investor and
public relations and (xi) other miscellaneous administrative services. The fee
per year for these services will be 3.5% of the first $175 million of revenue of
the Commonwealth Telephone Group and 1.75% of any additional revenue. Based on
the Commonwealth Telephone Group's revenue for 1996, the fee for that year would
have been approximately $6,326,000.
The Company has also agreed to provide or cause to be provided to the Cable
Michigan Group certain specified services for a transitional period after the
Distribution. The transitional services to be provided are the following: (i)
customer service, (ii) marketing, (iii) accounting, (iv) payroll, (v) management
supervision, (vi) cash management, (vii) human resources and benefit plan
administration, (viii) insurance administration, (ix) legal, (x) tax, (xi)
internal audit, (xii) programming administration, (xiii) billing, (xiv) monthly
cable guides, (xv) investor and public relations, (xvi) provision of third party
programming and (xvii) other miscellaneous administrative services. Subject to
certain limitations, the fee per year for services listed in items (ii)-(xii),
(xv) and (xvii) will be 4.0% of the revenues of the Cable Michigan Group plus a
direct allocation of certain consolidated cable administrative functions. Based
on the Cable Michigan Group's revenue for 1996 and the allocation of certain
consolidated cable administrative functions, the charge for such services for
that year would have been approximately $4,418,000. The charge for customer
service listed in item (i) along with the billing service listed in item (xiii)
will be a pro rata share (based on the relative number of subscribers) of the
fees and expenses incurred by the Company to provide such customer and billing
services for the Company and the Cable Michigan Group. Based on this allocation
arrangement, the charge to Cable Michigan for such customer and billing services
would have been approximately $3,114,000 in 1996. The third party expense
incurred by RCN to obtain third party programming and monthly cable guides for
Cable Michigan referred to in items (xiv) and (xvi) above will be reimbursed to
RCN by Cable Michigan, and no additional fee will be charged with respect
thereto.
Commonwealth Telephone has agreed to provide or cause to be provided to the
Company Group and the Michigan Group financial data processing applications,
lockbox services, storage facilities, LAN and WAN support services, building
maintenance and other miscellaneous administrative services for a transitional
period after the Distribution. The fees for such services and arrangements will
be an allocated portion (based on relative usage) of the cost incurred by
Commonwealth Telephone to provide such services and arrangements to all three
groups. Based on this allocation arrangement, the fee for providing such
services and arrangements to the Company Group and the Cable Michigan Group
would have been approximately $753,000 and $248,000, respectively, for 1996.
The nature, scope and timing of the foregoing services are to be
substantially consistent with the nature, scope and timing of the service
provider's services prior to the Distribution, provided that the service
provider shall not be obligated to hire additional or replacement employees, or
increase the compensation of its existing employees, in order to provide the
services. The services commenced on the Distribution Date and will terminate
upon 60 days notice by either the service provider or the relevant service
recipient, except that the billing, customer service, programming administration
and provision of third party programming services provided by RCN to Cable
Michigan may not be terminated by RCN on less than one year advance notice to
Cable Michigan. A service recipient may also terminate individual services by
giving 60 days notice to the applicable service provider.
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 Commonwealth Telephone
Group were settled prior to the Distribution by payment in full by the party or
parties owing any such obligation; provided however, that certain de minimis
accounts payable and accounts receivable may be settled within 30 days after the
Distribution. The Distribution Agreement provides that all arrangements and
agreements between the parties terminated as of the Distribution Date other than
the Distribution Documents and certain commercial contracts on terms that
management believes to be arm's-length. These contracts comprise switch and
facilities leases, an Internet access resale agreement, an interim carrier
agreement, local and long distance phone service agreements, a maintenance
agreement and switch monitoring and traffic capacity services agreements.
None of the Groups will have any right or license in or to any technology,
software, intellectual property, know-how or other proprietary right owned,
licensed or held for use by another Group.
Miscellaneous
As a result of the Distribution, there exist relationships that may lead to
conflicts of interest. Each of the Company, Commonwealth Telephone and Cable
Michigan are effectively controlled by Kiewit Telecom. In addition, the majority
of the Company's named executive officers are also directors and/or executive
officers of Commonwealth Telephone or Cable Michigan. See "Management." In
particular, David C. McCourt, Chairman and Chief Executive Officer of the
Company, has served as a director and Chairman and Chief Executive Officer of
Cable Michigan since the Distribution and as a director and Chairman and Chief
Executive Officer of C-TEC/Commonwealth Telephone since October 1993. Mr.
McCourt expects to devote approximately 70% of his time to managing the affairs
of the Company. In addition, Michael J. Mahoney, who has been President and
Chief Operating Officer, as well as a director, of the Company since the
Distribution is also a director of Commonwealth Telephone. Mr. Mahoney expects
to devote approximately 85-90% of his time to managing the affairs of the
Company. The Company's other named executive officers expect to devote the
following approximate portions of their time to managing the affairs of the
Company: Mr. Godfrey (80%); Mr. Haverkate (75%) and Mr. Adams (100%). The
success of the Company may be affected by the degree of involvement of its
officers and directors in the Company's business and the abilities of the
Company's officers, directors and employees in managing both the Company and the
operations of Cable Michigan and/or Commonwealth Telephone. Potential conflicts
of interest will be dealt with on a case-by-case basis taking into consideration
relevant factors including the requirements of NASDAQ and prevailing corporate
practices.
Tax Sharing Agreement
The Tax Sharing Agreement, by and among the Company, Cable Michigan and
Commonwealth Telephone (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
Commonwealth Telephone Group will be borne solely by such Group. Adjustments to
all other tax liabilities will be borne 50% by Commonwealth Telephone, 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.
DESCRIPTION OF CERTAIN INDEBTEDNESS
This section of the Prospectus describes the terms and conditions of the
Credit Agreement that certain subsidiaries of the Company have in place and of
the 10% Senior Notes and the 11-1/8% Senior Discount Notes which RCN has
outstanding. 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 was an exhibit to the Company's Form
10 filed with the Commission, and to the provisions of the documents governing
such 10% Senior Notes and the 11-1/8% Senior Discount Notes, which were filed as
exhibits to the Company's Registration Statement filed with the Commission, and
are incorporated herein by reference.
Credit Agreement
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, RCN
Cable and its subsidiaries RCN of New Jersey, Inc. (formerly ComVideo Systems,
Inc.; "ComVideo") and RCN of Southeast New York, Inc. (formerly C-TEC Cable
Systems of New York, Inc.; "Cable Systems New York" and together with ComVideo,
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 RCN Cable in RCN Telecom Services, Inc. (a
member of the RCN Group), (iii) to finance permitted acquisitions, and (iv) for
capital expenditures, working capital and general corporate purposes. Borrowings
under the Credit Agreement are subject to the conditions that there can be no
default or event of default under the Credit Agreement and that the
representations and warranties of the Borrowers contained in the Credit
Agreement and related pledge agreements must be true. Each Borrower is jointly
and severally liable for all borrowings and other obligations under the Credit
Facilities.
The interest rate on the Credit Facilities is, 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 includes a
spread that varies, based on RCN Cable'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 accrues and is payable
quarterly in arrears.
The entire amount of the Revolving Credit Facility is available to the
Borrowers until June 30, 2002. As of December 31, 1997, $3 million of principal
was outstanding thereunder. Revolving loans may be repaid and reborrowed from
time to time.
The entire $100 million of the Term Credit Facility was borrowed, all of
which remained outstanding as of December 31, 1997. The Term Credit Facility
must be repaid over six years in quarterly installments, at the end of
September, December, March and June of each year from September 30, 1999 through
June 30, 2005. The aggregate annual installments payable on the term loan are as
follows:
1999.................................. $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 Credit Facility in whole or
in part at any time, without penalty, subject to customary "breakage" charges.
Any amount of the Term Credit Facility 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 Credit Facility. Any
excess amounts of such net cash proceeds not applied to repay Revolving Credit
Facility are applied to reduce the scheduled installments of the Term Credit
Facility 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 RCN Cable 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 RCN Cable.
In addition, the Borrowers are subject to a prohibition on granting other
negative pledges to other parties on the assets of RCN Cable and certain of its
subsidiaries (subject to customary exceptions). The stock and assets of RCN
Telecom Services of Pennsylvania, Inc. (formerly C-TEC Cable Systems of
Pennsylvania, Inc.), RCN Telecom Services, Inc. and RCN International Holdings,
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 that (A) PKS shall cease to hold, either
directly or indirectly through one or more PKS entities, 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 RCN Cable.
1997 Notes Offering
10% Senior Notes due 2007
The 10% Senior Notes were issued under an indenture dated October 17, 1997
between RCN and The Chase Manhattan Bank, as Trustee (the "10% Indenture"). The
10% Senior Notes are general senior obligations of RCN, limited to $225 million
aggregate principal amount and will mature on October 15, 2007. The 10% Senior
Notes will be collateralized, pending disbursement pursuant to the Escrow and
Security Agreement dated as of October 17, 1997 among RCN, The Chase Manhattan
Bank, as Trustee, and The Chase Manhattan Bank, as Escrow Agent (the "Escrow
Agreement"), by a pledge of the Escrow Account (as defined in the Escrow
Agreement), which contains approximately $61 million of the net proceeds from
the sale of the 10% Senior Notes, representing funds that, together with the
proceeds from the investment thereof, will be sufficient to pay interest on the
10% Senior Notes for six scheduled interest payments. Interest on the 10% Senior
Notes will be payable in cash at a rate of 10% per annum semi-annually in
arrears on each April 15 and October 15, commencing April 15, 1998.
The 10% Indenture contains provisions which are substantially similar to
the ones which will be contained in the indenture governing the Notes, including
certain covenants that, among other things, limit the ability of RCN and its
subsidiaries to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, engage in transactions with stockholders
and affiliates, create liens, sell assets and engage in mergers and
consolidations.
The 10% Senior Notes are redeemable, in whole or in part, at any time on or
after October 15, 2002 at the option of RCN. The 10% Senior Notes may be
redeemed at redemption prices starting at 105% of the principal amount and
declining to 100% of the principal amount, plus any accrued and unpaid interest.
11-1/8% Senior Discount Notes due 2007
The 11-1/8% Senior Discount Notes were issued under an indenture dated
October 17, 1997 between RCN and The Chase Manhattan Bank, as Trustee (the
"11-1/8% Indenture"). The 11-1/8% Senior Discount Notes are general senior
obligations of RCN, limited to $601,045,000 aggregate principal amount at
maturity and will mature on October 15, 2007. The 11-1/8% Senior Discount Notes
were issued at a discount to yield gross proceeds of $350,000,524. The 11-1/8%
Senior Discount Notes will not bear cash interest prior to October 15, 2002. The
yield to maturity of the 11-1/8% Senior Discount Notes, determined on a
semi-annual bond equivalent basis, will be 11-1/8% per annum.
The 11-1/8% Indenture contains provisions which are substantially similar
to the ones which will be contained in the indenture governing the Notes,
including certain covenants that, among other things, limit the ability of RCN
and its subsidiaries to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, engage in transactions with stockholders
and affiliates, create liens, sell assets and engage in mergers and
consolidations.
The 11-1/8% Senior Discount Notes are redeemable, in whole or in part, at
any time on or after October 15, 2002 at the option of RCN. The 11-1/8% Senior
Discount Notes may be redeemed at redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued and unpaid interest.
DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under an Indenture (the "Indenture") dated as
of February 6, 1998 between RCN and The Chase Manhattan Bank, as trustee (in
such capacity, the "Trustee"). The Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus constitutes a part. Upon the
issuance of the New Notes, the Indenture will be subject to the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The following summary of
certain provisions of the Indenture 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 Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the Trust Indenture
Act of 1939, as in effect on the date of such Indenture, and to the Trust
Indenture Act, in the case of the New Notes. Whenever particular provisions or
definitions of the Indenture, the Notes or the terms defined therein are
referred to herein, such provisions or definitions are incorporated herein by
reference. As used in this section, "Company" refers to RCN Corporation. The
definitions of certain capitalized terms used in the following summary are set
forth below under "--Certain Definitions."
General
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights to the Old Notes and except that, if the Exchange Offer is
required to be consummated under the Registration Rights Agreement and the
Company fails to consummate the Exchange Offer within 135 days after the Issue
Date, then the interest rate on the Old Notes will increase, with respect to the
each 90-day period until the consummation of the Exchange Offer in an amount
equal to 0.25% per annum of the principal amount of the Notes, subject to a
maximum amount of 1.00% of the principal amount of the Notes.
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. See "Book-Entry;
Delivery and Form." Principal of, premium, if any, and interest on the Notes are
payable, and the Notes are exchangeable and transferable, at the office or
agency of RCN in the City of New York maintained for such purposes (which
initially will be the corporate trust office of the Trustee). See "Book-Entry;
Delivery and Form." No service charge will be made for any registration of
transfer, exchange or redemption of the Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith.
Any Old Notes that remain outstanding after the completion of an Exchange
Offer, together with the New Notes issued in connection with such Exchange
Offer, will be treated as a single class of securities under the Indenture.
Maturity, Interest and Principal
The New Notes will be general senior unsecured obligations of RCN, limited
to $567,000,000 aggregate principal amount at maturity, and will mature on
February 15, 2008. See "--Ranking." The Old Notes were issued at a discount to
yield gross proceeds of $350,587,440. See "Certain U.S. Federal Income Tax
Considerations." The Notes will not bear cash interest prior to February 15,
2003. Commencing on August 15, 2003, interest on the Notes will be payable, in
cash at a rate of 9.80% per annum, semi-annually in arrears on each February 15
and August 15 to the holders of record of Notes at the close of business on the
February 1 and August 1 immediately preceding such interest payment date.
Interest will accrue from the most recent interest payment date to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for, from February 15, 2003. Interest will be computed on the
basis of a 360-day year of twelve 30-day months. Interest on overdue principal
and, to the extent permitted by law, on overdue installments of interest will
accrue at the rate of interest borne by the Notes. The yield to maturity of the
Notes, determined on a semi-annual bond equivalent basis, will be 9.80% per
annum.
Redemption
Optional Redemption by RCN. The Notes will be redeemable, in whole or in
part, at any time on or after February 15, 2003 at the option of RCN, upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount at maturity) set forth below, plus accrued
and unpaid interest to the redemption date, if redeemed during the 12-month
period beginning February 15 of the years indicated below:
Year Redemption Price
- ---- ----------------
2003................................................ 104.900%
2004................................................ 103.267%
2005................................................ 101.633%
2006 and thereafter................................. 100.000%
Redemption Following Public Equity Offerings. Notwithstanding the
foregoing, on or prior to February 15, 2001, RCN may, at its option, use the net
proceeds of one or more Public Equity Offerings (as defined below) yielding
gross cash proceeds of not less than $30 million to redeem up to an aggregate of
35% of the aggregate principal amount at maturity of Notes originally issued, in
each case on a pro rata basis (or as nearly pro rata as practicable), at a
redemption price of 109.80% of the Accreted Value of Notes; provided that not
less than 65% of the originally issued aggregate principal amount at maturity of
Notes would remain outstanding immediately after such redemption. To effect the
foregoing redemption, RCN must mail a notice of redemption not later than 60
days after the consummation of the Public Equity Offering that resulted in the
requisite gross proceeds.
As used above, "Public Equity Offering" means an underwritten public
offering of Common Stock of RCN effected on a primary basis and registered with
the Commission under the Securities Act.
Selection; Effect of Redemption Notice. Notice of an optional redemption
must be given no less than 30 nor more than 60 days prior to the applicable
redemption date. In the case of a partial redemption of an issue of Notes,
selection of the Notes for redemption will be made by lot, pro rata or by such
other method as the applicable Trustee in its sole discretion deems fair and
appropriate or in such manner as complies with the requirements of the principal
securities exchange, if any, on which the applicable Notes being redeemed are
listed and of the Depository Trust Company ("DTC"); provided that any redemption
following one or more Public Equity Offerings will be made on a pro rata or on
as nearly a pro rata basis as practicable (subject to the procedures of DTC).
Upon giving of a redemption notice, interest on Notes called for redemption will
cease to accrue from and after the date fixed for redemption (unless RCN
defaults in providing the funds for such redemption) and, upon redemption on
such redemption date, such Notes will cease to be outstanding.
Mandatory Redemption
Sinking Fund. RCN will not be required to make any mandatory sinking fund
payments in respect of the Notes.
Offers to Purchase upon Change of Control and Certain Asset Sales.
Following the occurrence of a Change of Control, RCN will be required to make an
offer to purchase all outstanding Notes at a price of 101% of the Accreted Value
thereof plus accrued and unpaid interest, if any, to the date of purchase, and
purchase all Notes validly tendered pursuant thereto. In addition, RCN may be
obligated to make an offer to purchase Notes with a portion of the Net Cash
Proceeds of certain Asset Sales at a price of 100% of the Accreted Value thereof
plus accrued and unpaid interest, if any, to the date of purchase. See
"--Certain Covenants--Change of Control" and "--Certain Covenants--Disposition
of Proceeds of Asset Sales," respectively.
Ranking
The indebtedness of RCN evidenced by the Notes will rank senior in right of
payment to all subordinated indebtedness of RCN and pari passu in right of
payment with all other existing and future unsubordinated indebtedness of RCN.
RCN is a holding company with limited assets and no business operations of its
own. RCN operates its business through its subsidiaries. Any right of RCN and
its creditors, including holders of the Notes, to participate in the assets of
any of RCN's subsidiaries upon any liquidation or administration of any such
subsidiary will be subject to the prior claims of the subsidiary's creditors,
including trade creditors. For a discussion of certain adverse consequences of
RCN being a holding company and of the terms of potential future indebtedness of
RCN and its subsidiaries, see "Risk Factors--Holding Company Structure;
Structural Subordination."
Certain Covenants
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that RCN will
not, and will not permit any Restricted Subsidiary or Restricted Affiliate to,
directly or indirectly, create, incur, assume, issue, guarantee or in any manner
become directly or indirectly liable for or with respect to, contingently or
otherwise, the payment of (collectively, to "incur") any Indebtedness (including
any Acquired Indebtedness), except for Permitted Indebtedness; provided that (A)
(i) RCN will be permitted to incur Indebtedness (including Acquired Indebtedness
and Buildout Indebtedness) and (ii) a Restricted Subsidiary or Restricted
Affiliate will be permitted to incur Acquired Indebtedness or Buildout
Indebtedness, if, in either case, after giving pro forma effect to such
incurrence (including the application of the net proceeds therefrom), either (X)
the ratio of Total Consolidated Indebtedness to Consolidated Pro Forma Operating
Cash Flow would not be greater than or equal to 5.5:1.0 if such Indebtedness is
incurred prior to October 15, 2000 or 5.0:1.0 if such Indebtedness is incurred
on or after October 15, 2000 or (Y) the ratio of Total Consolidated Indebtedness
to Total Invested Equity Capital would not exceed 2.0:1.0 and (B) on or after
October 15, 2002, a Restricted Affiliate will be permitted to incur Acquired
Indebtedness or Buildout Indebtedness, if, after giving pro forma effect to such
incurrence (including the application of the net proceeds therefrom), the ratio
of Total Affiliate Indebtedness to Affiliate Pro Forma Operating Cash Flow of
such Restricted Affiliate would not be greater than or equal to 4.0:1.0.
Limitation on Restricted Payments. The Indenture provides that RCN will
not, and will not permit any of the Restricted Subsidiaries or Restricted
Affiliates to, make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, RCN would
be able to incur $1.00 of Indebtedness under clause (A)(X) of the proviso
of the covenant described under "Limitation on Additional Indebtedness";
and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date and all Designation Amounts does not exceed an amount equal
to the sum of, without duplication, (a) 50% of cumulative Consolidated Net
Income accrued on a cumulative basis during the period beginning on January
1, 1998 and ending on the last day of the fiscal quarter of RCN immediately
preceding the date of such proposed Restricted Payment (or, if such
cumulative Consolidated Net Income for such period is a deficit, minus 100%
of such deficit) plus (b) the aggregate net cash proceeds received by RCN
from the issue or sale (other than to a Restricted Subsidiary or to a
Restricted Affiliate) of its Capital Stock (other than Disqualified Stock)
on or after the Issue Date (including, without duplication, upon the
exercise of options, warrants or rights) plus (c) the aggregate net
proceeds received by RCN from the issuance (other than to a Restricted
Subsidiary or to a Restricted Affiliate) on or after the Issue Date of its
Capital Stock (other than Disqualified Stock) upon the conversion of, or
exchange for, Indebtedness of RCN or a Restricted Subsidiary plus (d) in
the case of the disposition or repayment of any Investment constituting a
Restricted Payment (other than an Investment made pursuant to clause (v),
(vi) or (vii) of the following paragraph) made after the Issue Date an
amount equal to the lesser of the return of capital with respect to such
Investment and the cost of such Investment, in either case, less the cost
of the disposition of such Investment plus (e) in the case of the
Revocation of the Designation of a Subsidiary as an Unrestricted
Subsidiary, an amount equal to the consolidated net Investment in such
Subsidiary on the date of Revocation but not in an amount exceeding the net
amount of any Investments constituting Restricted Payments made (or deemed
made) in such Subsidiary after the Issue Date plus (f) in the case of the
JV Designation after the Issue Date of a New Joint Venture as a Restricted
Affiliate, an amount equal to the consolidated net Investment in such New
Joint Venture on the date of such JV Designation but not in an amount
exceeding the net amount of any Investments constituting Restricted
Payments made (or deemed made) in such New Joint Venture after the Issue
Date. For purposes of the preceding clauses (b) and (c) and without
duplication, the value of the aggregate net cash proceeds received by RCN
upon the issuance of Capital Stock either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or
upon the exercise of options, warrants or rights will be the net cash
proceeds received upon the issuance of such Indebtedness, options, warrants
or rights plus the incremental amount received by RCN upon the conversion,
exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit: (i) the payment of any
dividend or other distribution within 60 days after the date of declaration
thereof, if at such date of declaration such payment would comply with the
provisions of the Indenture; (ii) so long as no Default shall have occurred and
be continuing, the purchase, redemption, retirement or other acquisition of any
shares of Capital Stock of RCN (A) in exchange for or conversion into or (B) out
of the net cash proceeds of the substantially concurrent issue and sale (other
than to a Restricted Subsidiary or to a Restricted Affiliate) of shares of
Capital Stock of RCN (other than Disqualified Stock); provided that any such net
cash proceeds pursuant to the immediately preceding subclause (B) are excluded
from clause (iii)(b) of the preceding paragraph; (iii) so long as no Default
shall have occurred and be continuing, the purchase, redemption, defeasance or
other acquisition or retirement for value of Subordinated Indebtedness made by
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in which cash is paid in lieu of fractional shares
or scrip), or out of the net cash proceeds of, a substantially concurrent issue
or sale (other than to a Restricted Subsidiary or to a Restricted Affiliate) of
(A) Capital Stock (other than Disqualified Stock) of RCN; provided that any such
net cash proceeds, to the extent so used, are excluded from clause (iii)(b) of
the preceding paragraph, and/or (B) other Subordinated Indebtedness, having an
Average Life to Stated Maturity that is equal to or greater than the Average
Life to Stated Maturity of the Subordinated Indebtedness being purchased,
redeemed, defeased or otherwise acquired or retired; (iv) so long as no Default
shall have occurred and be continuing, any Investment constituting a Restricted
Payment made by RCN or any Restricted Subsidiary in any Restricted Affiliate to
fund the capital requirements for financing or supporting a Permitted Business
of such Restricted Affiliate; (v) so long as no Default shall have occurred and
be continuing, Investments constituting a Restricted Payment made by RCN or any
Restricted Subsidiary in any person (including any Unrestricted Subsidiary or a
Restricted Affiliate) in an amount not to exceed $10 million in the aggregate at
any time outstanding; (vi) so long as no Default shall have occurred and be
continuing, the making of a direct or indirect Investment constituting a
Restricted Payment out of the proceeds of the issue or sale (other than to a
Subsidiary or to a Restricted Affiliate) of Capital Stock (other than
Disqualified Stock) of RCN; provided that any such net cash proceeds are
excluded from clause (iii)(b) of the preceding paragraph; or (vii) so long as no
Default shall have occurred and be continuing, any Investment constituting a
Restricted Payment made in Megacable S.A. de C.V. not to exceed $20 million in
the aggregate at any time outstanding. Restricted Payments of the type set forth
in the preceding clauses (v) and (vii) shall be included in making the
determination of available amounts under clause (iii) of the preceding paragraph
to the extent they are outstanding.
In no event shall a Restricted Payment made on the basis of consolidated
financial statements prepared in good faith in accordance with GAAP be subject
to rescission or constitute a Default by reason of any requisite subsequent
restatement of such financial statements which would have made such Restricted
Payment prohibited at the time that it was made.
Limitation on Business. The Indenture provides that RCN will not, and will
not permit any of the Restricted Subsidiaries or Restricted Affiliates to,
engage in a business which is not substantially a Permitted Business.
Limitation on Liens Securing Certain Indebtedness. The Indenture provides
that RCN will not, and will not permit any Restricted Subsidiary or Restricted
Affiliate to, create, incur, assume or suffer to exist any Liens of any kind
against or upon any property or assets of RCN or any Restricted Subsidiary or
Restricted Affiliate, whether now owned or hereafter acquired, or any proceeds
therefrom, which secure either (x) Subordinated Indebtedness unless the Notes
issued thereunder are secured by a Lien on such property, assets or proceeds
that is senior in priority to the Liens securing such Subordinated Indebtedness
or (y) Senior Debt Securities unless the Notes issued thereunder are equally and
ratably secured with the Liens securing such Senior Debt Securities other than
the Lien on the escrow account in favor of the escrow agent and the trustee
under the indenture governing the 10% Senior Notes.
Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries and Restricted Affiliates. The Indenture provides that RCN will not
permit any Restricted Subsidiary or Restricted Affiliate directly or indirectly,
to assume, guarantee or in any other manner become liable, whether as issuer,
guarantor or co-obligor, with respect to (i) any Subordinated Indebtedness or
(ii) any Senior Debt Securities, unless, in each case, such Restricted
Subsidiary or Restricted Affiliate, as the case may be, simultaneously executes
and delivers a supplemental indenture providing for the guarantee of payment of
the Notes by such Restricted Subsidiary or Restricted Affiliate, as the case may
be, on a basis senior to any such Subordinated Indebtedness or pari passu with
any such Senior Debt Securities, as the case may be. Each guarantee of the Notes
created pursuant to such provisions is referred to as a "Guarantee" and the
issuer of each such Guarantee, so long as the Guarantee remains outstanding, is
referred to as a "Guarantor."
Notwithstanding the foregoing, in the event of the unconditional release of
any Guarantor from its obligations in respect of the Indebtedness which gave
rise to the requirement that a Guarantee be given, such Guarantor shall be
released from all obligations under its Guarantee. In addition, upon any sale or
disposition (by merger or otherwise) of any Guarantor by RCN or a Restricted
Subsidiary to any person that is not an Affiliate of RCN or any of the
Restricted Subsidiaries which is otherwise in compliance with the terms of the
Indenture and as a result of which such Guarantor ceases to be a Restricted
Subsidiary of RCN, such Guarantor will be deemed to be automatically and
unconditionally released from all obligations under its Guarantee; provided that
each such Guarantor is sold or disposed of in accordance with the "Disposition
of Proceeds of Asset Sales" covenant.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), RCN shall make an offer to
purchase (the "Change of Control Offer"), on a business day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to any Change
of Control Payment Date. Notice of a Change of Control Offer shall be given to
holders of Notes, not less than 25 days nor more than 45 days before the Change
of Control Payment Date. The Change of Control Offer is required to remain open
for at least 20 business days and until the close of business on the Change of
Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that RCN
will have available funds sufficient to pay for all of the Notes that might be
delivered by holders of Notes seeking to accept the Change of Control Offer. RCN
shall not be required to make a Change of Control Offer following a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements applicable to a Change
of Control Offer made by RCN and purchases all Notes validly tendered and not
withdrawn under such Change of Control Offer.
If RCN is required to make a Change of Control Offer, RCN will comply with
all applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries or Restricted Affiliates. The Indenture provides that RCN will not,
and will not permit any Restricted Subsidiary or Restricted Affiliate to,
directly or indirectly, create or otherwise enter into or cause to become
effective any consensual encumbrance or consensual restriction of any kind on
the ability of any Restricted Subsidiary or Restricted Affiliate to (a) pay
dividends, in cash or otherwise, or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits to
the extent owned by RCN or any Restricted Subsidiary or Restricted Affiliate,
(b) pay any Indebtedness owed to RCN or any Restricted Subsidiary or Restricted
Affiliate, (c) make any Investment in RCN or any Restricted Subsidiary or
Restricted Affiliate or (d) transfer any of its properties or assets to RCN or
to any Restricted Subsidiary or Restricted Affiliate, except for (i) any
encumbrance or restriction in existence on the Issue Date, (ii) customary
non-assignment provisions, (iii) any encumbrance or restriction pertaining to an
asset subject to a Lien to the extent set forth in the security documentation
governing such Lien, (iv) any encumbrance or restriction applicable to a
Restricted Subsidiary or Restricted Affiliate at the time that it becomes a
Restricted Subsidiary or Restricted Affiliate that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; provided that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the holders
of Notes than those under or pursuant to the agreement being replaced or the
agreement evidencing the Indebtedness refinanced, (vi) any encumbrance or
restriction imposed upon a Restricted Subsidiary or Restricted Affiliate
pursuant to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of such Restricted
Subsidiary or Restricted Affiliate or any Asset Sale to the extent limited to
the Capital Stock or assets in question, and (vii) any customary encumbrance or
restriction applicable to a Restricted Subsidiary or Restricted Affiliate that
is contained in an agreement or instrument governing or relating to Indebtedness
contained in any Permitted Credit Facility; provided that (subject to customary
net worth, leverage, invested capital and other financial covenants) the
provisions of such agreement permit the payment of interest and principal and
mandatory repurchases pursuant to the terms of the Indenture and the Notes and
other indebtedness that is solely an obligation of RCN; provided, further, that
such agreement may contain customary covenants regarding the merger of or sale
of all or any substantial part of the assets of RCN or any Restricted Subsidiary
or Restricted Affiliate, customary restrictions on transactions with affiliates,
and customary subordination provisions governing indebtedness owed to RCN or any
Restricted Subsidiary or Restricted Affiliate.
Disposition of Proceeds of Asset Sales. The Indenture provides that RCN
will not, and will not permit any Restricted Subsidiary or Restricted Affiliate
to, make any Asset Sale unless (a) RCN or such Restricted Subsidiary or
Restricted Affiliate, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the shares or assets
sold or otherwise disposed of and (b) at least 75% of such consideration
consists of cash or Cash Equivalents; provided that the amount of any
liabilities (other than Subordinated Indebtedness or Indebtedness of a
Restricted Subsidiary that would not constitute Restricted Subsidiary
Indebtedness) that are assumed by the transferee of any such assets pursuant to
an agreement that unconditionally releases RCN or such Restricted Subsidiary or
Restricted Affiliate, as the case may be, from further liability shall be
treated as cash for purposes of this covenant. RCN or the applicable Restricted
Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from any
such Asset Sale by RCN or a Restricted Subsidiary and the Net Cash Proceeds of
any Asset Sale by a Restricted Affiliate to the extent distributed to RCN or a
Restricted Subsidiary within 365 days of the receipt thereof to repay an amount
of Indebtedness (other than Subordinated Indebtedness) of RCN in an amount not
exceeding the Other Senior Debt Pro Rata Share and elect to permanently reduce
the amount of the commitments thereunder by the amount of the Indebtedness so
repaid, (ii) apply the Net Cash Proceeds from any such Asset Sale by RCN or a
Restricted Subsidiary and the Net Cash Proceeds of any Asset Sale by a
Restricted Affiliate to the extent distributed to RCN or a Restricted Subsidiary
to repay any Restricted Subsidiary Indebtedness and elect to permanently reduce
the commitments thereunder by the amount of the Indebtedness so repaid or (iii)
apply the Net Cash Proceeds from any Asset Sale by RCN or a Restricted
Subsidiary and the Net Cash Proceeds of any Asset Sale by a Restricted Affiliate
to the extent distributed to RCN or a Restricted Subsidiary within 365 days
thereof, to an investment in properties and assets that will be used in a
Permitted Business (or in Capital Stock and other securities of any person that
will become a Restricted Subsidiary or Restricted Affiliate as a result of such
investment to the extent such person owns properties and assets that will be
used in a Permitted Business) of RCN or any Restricted Subsidiary ("Replacement
Assets"). Notwithstanding anything herein to the contrary, in the event of any
Asset Sale of all or substantially all of the properties or assets of any
Restricted Affiliate Group, whether in a single transaction or series of related
transactions, the Restricted Affiliate Group shall be required to distribute the
Net Cash Proceeds therefrom, after providing for all Indebtedness and other
liabilities of such Restricted Affiliate Group, to RCN or a Restricted
Subsidiary and the Other Partner on a pro rata basis in accordance with their
respective equity interests. Any Net Cash Proceeds from any Asset Sale that are
neither used to repay, and permanently reduce the commitments under, any
Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding
sentence or invested in Replacement Assets within the 365-day period as set
forth in clause (iii) shall constitute "Excess Proceeds." Any Excess Proceeds
not used as set forth in clause (i) of the second preceding sentence shall
constitute "Offer Excess Proceeds" subject to disposition as provided below.
When the aggregate amount of Offer Excess Proceeds equals or exceeds $10
million, RCN shall make an offer to purchase (an "Asset Sale Offer"), from all
holders of Notes issued under the Indenture, that aggregate principal amount of
Notes as can be purchased by application of such Offer Excess Proceeds at a
price in cash equal to 100% of the outstanding Accreted Value thereof plus
accrued and unpaid interest, if any, to the purchase date. Each Asset Sale Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law. To the extent that the aggregate purchase price for the
Notes tendered pursuant to an Asset Sale Offer is less than the Offer Excess
Proceeds, RCN or any Restricted Subsidiary may use such deficiency for general
corporate purposes. If the aggregate purchase price for the Notes validly
tendered and not withdrawn by holders thereof exceeds the amount of Notes which
can be purchased with the Offer Excess Proceeds, Notes to be purchased will be
selected on a pro rata basis. Upon completion of such Asset Sale Offer, the
amount of Offer Excess Proceeds shall be reset to zero.
Notwithstanding the two immediately preceding paragraphs, RCN, the
Restricted Subsidiaries and the Restricted Affiliates will be permitted to
consummate an Asset Sale without complying with such paragraphs to the extent
(i) at least 75% of the consideration of such Asset Sale constitutes Replacement
Assets, cash or Cash Equivalents (including obligations deemed to be cash under
this covenant) and (ii) such Asset Sale is for Fair Market Value; provided that
any consideration constituting (or deemed to constitute) cash or Cash
Equivalents received by RCN, any of the Restricted Subsidiaries or any of the
Restricted Affiliates in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two preceding paragraphs.
If RCN is required to make an Asset Sale Offer, RCN will comply with all
applicable tender offer rules, including, to the extent applicable, Section
14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities
laws and regulations.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries and Restricted Affiliates. The Indenture provides that RCN (i) will
not permit any Restricted Subsidiary to issue any Preferred Stock (other than to
RCN or a Restricted Subsidiary) and (ii) will not permit any person (other than
RCN or a Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary. In addition, RCN (i) will not permit any Restricted Affiliate to
issue any Preferred Stock (other than (x) to RCN or a Restricted Subsidiary or
(y) to the holders of Common Stock in such Restricted Affiliate on a pro rata
basis based upon their ownership of Common Stock) or (ii) will not permit any
person not referred to in the preceding parenthetical of clause (i) of this
sentence to own any Preferred Stock of any Restricted Affiliate.
Limitation on Transactions with Affiliates. The Indenture provides that RCN
will not, and will not permit, cause or suffer any Restricted Subsidiary to,
conduct any business or enter into any transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Common Stock of RCN or any officer or director of RCN (each, an "Affiliate
Transaction"), unless the terms of the Affiliate Transaction are set forth in
writing, and are fair and reasonable to RCN or such Restricted Subsidiary, as
the case may be. Each Affiliate Transaction involving aggregate payments or
other Fair Market Value in excess of $5 million shall be approved by a majority
of the Board, such approval to be evidenced by a Board Resolution stating that
the Board has determined that such transaction or transactions comply with the
foregoing provisions. In addition to the foregoing, each Affiliate Transaction
involving aggregate consideration of $10 million or more shall be approved by a
majority of the Disinterested Directors; provided that, in lieu of such approval
by the Disinterested Directors, RCN may obtain a written opinion from an
Independent Financial Advisor stating that the terms of such Affiliate
Transaction to RCN or the Restricted Subsidiary, as the case may be, are fair
from a financial point of view. In addition, the Indenture provides that a
Restricted Affiliate will not enter into any transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of the Other Partner, unless the terms of such transaction or transactions are
in writing, and are fair and reasonable to such Restricted Affiliate. For
purposes of this covenant, any Affiliate Transaction approved by a majority of
the Disinterested Directors or as to which a written opinion has been obtained
from an Independent Financial Advisor, on the basis set forth in the preceding
sentence, shall be deemed to be on terms that are fair and reasonable to RCN and
the Restricted Subsidiaries, as the case may be, and therefore shall be
permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
RCN and/or any of the Restricted Subsidiaries, (ii) transactions pursuant to
agreements and arrangements existing on the Issue Date, (iii) transactions among
any of RCN or the Restricted Subsidiaries, on the one hand, and any of the
Restricted Affiliates, on the other hand, provided that such transactions are in
the ordinary course of business and are related to or in furtherance of a
Permitted Business, (iv) dividends paid by RCN pursuant to and in compliance
with the covenant "Limitation on Restricted Payments," (v) customary directors'
fees, indemnification and similar arrangements, consulting fees, employee
salaries bonuses, employment agreements and arrangements, compensation or
employee benefit arrangements or legal fees and (vi) grants of customary
registration rights with respect to securities of RCN.
Reports. The Indenture provides that, whether or not RCN has a class of
securities registered under the Exchange Act, RCN shall furnish without cost to
each holder of record of Notes issued thereunder (in sufficient quantities for
distribution to beneficial holders) and file with the Trustee and the
Commission, (i) within the applicable time period required under the Exchange
Act, after the end of each fiscal year of RCN, the information required by Form
10-K (or any successor form thereto) under the Exchange Act with respect to such
period, (ii) within the applicable time period required under the Exchange Act
after the end of each of the first three fiscal quarters of each fiscal year of
RCN, the information required by Form 10-Q (or any successor form thereto) under
the Exchange Act with respect to such period and (iii) any current reports on
Form 8-K (or any successor forms) required to be filed under the Exchange Act.
Designations of Unrestricted Subsidiaries. The Indenture provides that RCN
will not designate any Subsidiary of RCN (other than a newly created Subsidiary
in which no Investment has previously been made) as an "Unrestricted Subsidiary"
under the Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) except in the case of a Permitted Investment or an Investment made
pursuant to clause (iii) or (iv) of the second paragraph of the covenant
"Limitation on Restricted Payments," immediately after giving effect to
such Designation, RCN would be able to incur $1.00 of Indebtedness under
clause (A)(X) of the proviso of the covenant "Limitation on Additional
Indebtedness"; and
(c) RCN would not be prohibited under the Indenture from making an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "US Designation Amount") equal to the
Fair Market Value of the net Investment of RCN or any other Restricted
Subsidiary in such Subsidiary on such date. In the event of any such
Designation, RCN shall be deemed to have made an Investment constituting a
Restricted Payment pursuant to the covenant "Limitation on Restricted
Payments" for all purposes of the Indenture in the US Designation Amount.
The Indenture further provides that neither RCN nor any Restricted
Subsidiary shall at any time (x) provide a guarantee of, or similar credit
support to, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness);
provided that RCN may pledge Capital Stock or Indebtedness of any
Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no
claim whatsoever against RCN other than to obtain such pledged property,
(y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
other Indebtedness which provides that the holder thereof may (upon notice,
lapse of time or both) declare a default thereon (or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity)
upon the occurrence of a default with respect to any other Indebtedness
that is Indebtedness of an Unrestricted Subsidiary (including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent
permitted under the covenants "Limitation on Restricted Payments" and
"Limitation on Transactions with Affiliates."
The Indenture further provides that RCN will not revoke any Designation of
a Subsidiary as an Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Designations of Restricted Affiliates. The Indenture provides that RCN will
not designate any Joint Venture (other than a newly created Joint Venture in
which no Investment has previously been made) and each of its Subsidiaries as a
"Restricted Affiliate" under the Indenture (a "JV Designation") unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such JV Designation; and
(b) all Liens and Indebtedness of such Joint Venture outstanding
immediately following such JV Designation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture.
Notwithstanding the foregoing, the BECO Joint Venture and the Starpower
Joint Venture shall initially constitute Restricted Affiliates at the Issue
Date. RCN and the Restricted Subsidiaries shall at all times maintain a
Restricted Affiliate so that it qualifies as a Joint Venture under clauses (a)
and (b) of the definition thereof, unless either (1) RCN is able to, and does in
fact, make an effective JV Revocation under the provisions set forth below at
the time of such event or (2) the Restricted Affiliate ceases to qualify as a
Joint Venture by reason of an Asset Sale by RCN or a Restricted Subsidiary of
all of RCN's or such Restricted Subsidiary's interest in the Capital Stock of
such Restricted Affiliate to any person other than RCN or a Restricted
Subsidiary or any of their respective Affiliates, which, in the case of this
clause (2), shall be deemed an effective JV Revocation.
The Indenture further provides that RCN will not revoke any JV Designation
of a Joint Venture as a Restricted Affiliate (a "JV Revocation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such JV Revocation;
(b) except in the case of a Permitted Investment or an Investment made
pursuant to clause (v) or (vi) of the second paragraph of the covenant
"Limitation on Restricted Payments" and except in the case in which the
Restricted Affiliate will become a Restricted Subsidiary, immediately after
giving effect to such JV Revocation, RCN would be able to incur $1.00 of
Indebtedness under the proviso of clause (A)(X) of the covenant "Limitation
on Additional Indebtedness"; and
(c) RCN would not be prohibited under the Indenture from making an
Investment at the time of such JV Revocation (assuming the effectiveness of
such JV Revocation) in an amount (the "JV Revocation Amount") equal to the
Fair Market Value of the net Investment of RCN or any other Restricted
Subsidiary in such Restricted Subsidiary on such date. In the event of any
such JV Revocation, except in the case in which the Restricted Affiliate
will become a Restricted Subsidiary, RCN shall be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant
"Limitation on Restricted Payments" for all purposes of the Indenture in
the JV Revocation Amount.
All JV Designations and JV Revocations must be evidenced by Board
Resolutions delivered to the Trustee certifying compliance with the foregoing
provisions.
Consolidation, Merger, Sale of Assets, Etc.
The Indenture provides that RCN will not (i) consolidate or combine with or
merge with or into or, directly or indirectly, sell, assign, convey, lease,
transfer or otherwise dispose of all or substantially all of its properties and
assets to any person or persons in a single transaction or through a series of
transactions, or (ii) permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if it would result in the
disposition of all or substantially all of the properties or assets of RCN and
the Restricted Subsidiaries on a consolidated basis, unless, in the case of
either (i) or (ii), (a) RCN shall be the continuing person or, if RCN is not the
continuing person, the resulting, surviving or transferee person (the "surviving
entity") shall be a company organized and existing under the laws of the United
States or any State or territory thereof; (b) the surviving entity shall
expressly assume all of the obligations of RCN under the Notes and the
Indenture, and shall, if required by law to effectuate such assumption, execute
a supplemental indenture to effect such assumption which supplemental indenture
shall be delivered to the Trustee and shall be in form and substance reasonably
satisfactory to the Trustee; (c) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
RCN or the surviving entity (assuming such surviving entity's assumption of RCN
obligations under the Notes and Indenture), as the case may be, would be able to
incur $1.00 of Indebtedness under clause (A)(X) of the proviso of the covenant
"Limitation on Additional Indebtedness"; (d) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default shall have occurred and be continuing; and (e) RCN or the surviving
entity, as the case may be, shall have delivered to the Trustee an Officers'
Certificate stating that such transaction or series of transactions, and, if a
supplemental indenture, is required in connection with such transaction or
series of transactions to effectuate such assumption, such supplemental
indenture complies with this covenant and that all conditions precedent in the
Indenture relating to the transaction or series of transactions have been
satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the assets
of RCN in accordance with the foregoing in which RCN or the Restricted
Subsidiary, as the case may be, is not the continuing corporation, the successor
corporation formed by such a consolidation or into which RCN or such Restricted
Subsidiary is merged or to which such transfer is made will succeed to, and be
substituted for, and may exercise every right and power of, RCN or such
Restricted Subsidiary, as the case may be, under the Indenture with the same
effect as if such successor corporation had been named as RCN or such Restricted
Subsidiary therein; and thereafter, except in the case of (i) any lease or (ii)
any sale, assignment, conveyance, transfer, lease or other disposition to a
Restricted Subsidiary of RCN, RCN shall be discharged from all obligations and
covenants under the Indenture and the Notes issued thereunder.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants "Limitation on
Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on
Liens"), Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "Limitation on Designations of
Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property or
assets, of RCN and the Restricted Subsidiaries in existence immediately prior to
such transaction or series of related transactions will be deemed to have been
incurred upon such transaction or series of related transactions.
Events of Default
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or
more; or
(ii) default in the payment of the principal of, or premium, if any, on the
Notes when due; or
(iii) default in the performance, or breach, of any covenant described under
"--Certain Covenants--Change of Control," "--Disposition of Proceeds of
Asset Sales" or "--Consolidation, Merger, Sale of Assets, Etc."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above) and continuance of such default or breach for a period of 30 days or
more after written notice to RCN by the Trustee or to RCN and the Trustee
by the holders of at least 25% in Accreted Value of the outstanding Notes
(when such notice is deemed received in accordance with the Indenture); or
(v) failure to perform any term, covenant, condition or provision of one
or more classes or issues of Indebtedness in an aggregate principal amount
of $10 million or more under which RCN or a Material Restricted Subsidiary
is obligated, and either (a) such Indebtedness is already due and payable
in full or (b) such failure results in the acceleration of the maturity of
such Indebtedness; or
(vi) any holder of at least $10 million in aggregate principal amount of
Indebtedness of RCN or any Material Restricted Subsidiary shall commence
judicial proceedings or take any other action to foreclose upon, or dispose
of, assets of RCN or any Material Restricted Subsidiary having an aggregate
Fair Market Value, individually or in the aggregate, of $10 million or more
or shall have exercised any right under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure; provided that, in any such case, RCN or any Material
Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(vii) one or more final non-appealable judgments, orders or decrees for the
payment of money of $10 million or more, either individually or in the
aggregate, shall be entered against RCN or any Material Restricted
Subsidiary or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days or more during
which a stay of enforcement of such judgment or order, by reason of pending
appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to RCN or any Material
Restricted Subsidiary shall have occurred.
If an Event of Default (other than an Event of Default specified in clause
(viii) with respect to RCN) under the Indenture occurs and is continuing, then
the Trustee thereunder or the holders of at least 25% in Accreted Value of the
outstanding Notes may by written notice, and the Trustee upon request of the
holders of not less than 25% in Accreted Value of the outstanding Notes shall,
declare the Default Amount of the outstanding Notes issued thereunder to be due
and payable immediately, together with all accrued and unpaid interest and
premium, if any, thereon. Upon any such declaration, the Default Amount shall
become due and payable immediately. If an Event of Default under the Indenture
specified in clause (viii) with respect to RCN occurs and is continuing, then
the Default Amount will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration or any ipso facto acceleration pursuant
to clause (viii) under the Indenture, the holders of a majority in Accreted
Value of outstanding Notes may, by notice to the applicable Trustee, rescind
such declaration of acceleration and its consequences if all existing Events of
Default, other than nonpayment of the principal of, and accrued and unpaid
interest on, such Notes that has become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree. The holders of a majority in
Accreted Value of the outstanding Notes also have the right to waive past
defaults, except a default in the payment of the principal of, or any interest
on, any outstanding Note, or in respect of a covenant or a provision that cannot
be modified or amended without the consent of all holders of the Notes.
No holder of any of the Notes issued under the Indenture has any right to
institute any proceeding with respect to such Indenture or any remedy
thereunder, unless the holders of at least 25% in Accreted Value of the
outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as Trustee, the Trustee has failed
to institute such proceeding within 60 days after receipt of such notice and the
Trustee has not within such 60-day period received directions inconsistent with
such written request by holders of a majority in Accreted Value of the
outstanding Notes. Such limitations do not apply, however, to a suit instituted
by a holder of a Note for the enforcement of the payment of the principal of,
premium, if any, or any accrued and unpaid interest on, such Note on or after
the respective due dates expressed in such Note.
During the existence of an Event of Default under the Indenture, the
Trustee is required to exercise such rights and powers vested in it under such
Indenture and use the same degree of care and skill in its exercise thereof as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs. Subject to the provisions of the Indenture relating to the
duties of the Trustee, if an Event of Default shall occur and be continuing, the
Trustee is not under any obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the holders
of a majority in Accreted Value of the outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust, or power conferred on the
Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that, except in the case of a Default in payment of principal of or
premium, if any, on any Note when due or in the case of any Default in the
payment of any interest on the Notes or in the case of any Default arising from
the occurrence of any Change of Control, the Trustee shall be protected in
withholding such notice if it determines in good faith that the withholding of
such notice is in the interest of such holders.
RCN is required to furnish to the Trustee annually a statement as to
compliance with all conditions and covenants under the Indenture.
Satisfaction and Discharge of the Indenture; Defeasance
RCN may terminate its obligations under the Indenture, when (1) either: (A)
all Notes issued thereunder that have been theretofore authenticated and
delivered have been delivered to the Trustee for cancellation, or (B) all such
Notes issued thereunder that have not theretofore delivered to the Trustee for
cancellation will become due and payable (a "Discharge") under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by such Trustee in the name, and at the expense, of RCN, and RCN has irrevocably
deposited or caused to be deposited with such Trustee funds in an amount
sufficient to pay and discharge the entire indebtedness on such issue of Notes,
not theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, on and interest to the date of deposit or maturity or date of
redemption; (2) RCN has paid or caused to be paid all other sums then due and
payable under the Indenture by RCN; and (3) RCN has delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
RCN may elect, at its option, to have its obligations under the Indenture
discharged with respect to the outstanding Notes ("legal defeasance"). Such
defeasance means that RCN will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes under the Indenture, except
for (1) the rights of holders of Notes to receive payments in respect of the
principal of and any premium and interest on the Notes when payments are due,
(2) RCN's obligations with respect to the Notes concerning issuing temporary
Notes, registration of transfer of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (3) the rights, powers, trusts, duties and
immunities of the Trustee, and (4) the defeasance provisions of the Indenture.
In addition, RCN may elect, at its option, to have its obligations released with
respect to certain covenants in the Indenture, including covenants relating to
Asset Sales and Changes of Control ("covenant defeasance"), and any omission to
comply with such obligation shall not constitute a Default or an Event of
Default with respect to the Notes under such Indenture. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "Events of Default" will no longer constitute
an Event of Default with respect to such Notes.
In order to exercise either legal defeasance or covenant defeasance with
respect to outstanding Notes: (1) RCN must irrevocably have deposited or caused
to be deposited with the Trustee as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to the benefits of the holders of the Notes: (A) money in an
amount, or (B) U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide, not later than the due date of any payment, money in an amount, or (C)
a combination thereof, in each case sufficient without reinvestment, in the
opinion of an internationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee to pay and
discharge, and which shall be applied by the Trustee to pay and discharge, the
entire Indebtedness in respect of the principal of and premium, if any, and
interest on the Notes on the maturity thereof or (if RCN has made irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of RCN) the redemption date
thereof, as the case may be, in accordance with the terms of such Indenture and
Notes; (2) in the case of legal defeasance under the Indenture, RCN shall have
delivered to the Trustee an opinion of counsel stating that, under then
applicable Federal income tax law, the holders of the Notes will not recognize
gain or loss for federal income tax purposes as a result of the deposit,
defeasance and discharge to be effected with respect to the Notes and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would be the case if such deposit, defeasance and discharge were
not to occur; (3) in the case of covenant defeasance under the Indenture, RCN
shall have delivered to the Trustee an opinion of counsel to the effect that the
holders of such outstanding Notes will not recognize gain or loss for U.S.
federal income tax purposes as a result of the deposit and covenant defeasance
to be effected with respect to the Notes and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as would
be the case if such deposit and covenant defeasance were not to occur; (4) no
Default with respect to the outstanding Notes shall have occurred and be
continuing at the time of such deposit after giving effect thereto or, in the
case of legal defeasance, no Default relating to bankruptcy or insolvency shall
have occurred and be continuing at any time on or prior to the 91st day after
the date of such deposit (it being understood that this condition shall not be
deemed satisfied until after such 91st day); (5) such legal defeasance or
covenant defeasance shall not cause the applicable Trustee to have a conflicting
interest within the meaning of the Trust Indenture Act (assuming all Notes were
in default within the meaning of such Act); (6) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under, any other agreement or instrument to which RCN is a party or by which it
is bound; (7) such legal defeasance or covenant defeasance shall not result in
the trust arising from such deposit constituting an investment company within
the meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder; and
(8) RCN shall have delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent with respect to such
defeasance or covenant defeasance have been complied with.
Amendment and Waivers
From time to time, RCN, when authorized by resolutions of the Board, and
the Trustee, without the consent of the holders of Notes, may amend, waive or
supplement the Indenture and the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
to provide for the assumption of RCN's obligations to holders of the Notes in
the case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the holders of the Notes, to add Guarantors
with respect to the Notes, to secure the Notes, to maintain the qualification of
the Indenture under the Trust Indenture Act or to make any change that does not
adversely affect the rights of any holder. Other amendments and modifications of
the Indenture or the Notes issued thereunder may be made by RCN and the Trustee
with the consent of the holders of not less than a majority of the aggregate
Accreted Value of the outstanding Notes; provided that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal amount of, or extend the fixed
maturity of the Notes, or alter or waive the redemption provisions of the Notes
(other than, subject to clause (vii) below, provisions relating to repurchase of
Notes upon the occurrence of an Asset Sale or a Change of Control) or change the
calculation of "Accreted Value", (ii) change the currency in which any Notes or
any premium or the accrued interest thereon is payable, (iii) reduce the
percentage in Accreted Value outstanding of Notes which must consent to an
amendment, supplement or waiver or consent to take any action under the
Indenture or the Notes, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to the Notes, (v) waive a default
in payment with respect to the Notes or any Guarantee, (vi) reduce the rate or
extend the time for payment of interest on the Notes, (vii) following the
occurrence of an Asset Sale or a Change of Control, alter the obligation to
purchase Notes as a result thereof in accordance with the Indenture or waive any
default in the performance thereof, (viii) adversely affect the ranking of the
Notes, or (ix) release any Guarantor from any of its obligations under its
Guarantee or the Indenture, except in compliance with the terms of the
Indenture.
Regarding the Trustee
The Chase Manhattan Bank will serve as Trustee. The Indenture provides
that, except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture. If an
Event of Default has occurred and is continuing, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of RCN, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions;
provided that if he acquires any conflicting interest (as defined) he must
eliminate such conflict or resign.
Governing Law
The Indenture provides that the Indenture and Notes are governed by and
construed in accordance with laws of the State of New York without giving effect
to principles of conflicts of law.
Certain Definitions
Set forth below is a summary of certain defined terms used in the
Indenture, unless otherwise noted. Reference is made to the Indenture for the
full definition of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
"Accreted Value" means, as of any date (the "Specified Date") with respect
to each $1,000 principal amount at maturity of the Notes:
(i) if the Specified Date is one of the following dates (each a
"Semi-Annual Accrual Date"), the amount set forth opposite such date below:
Semi-Annual
Accrual Date
----------------
Issue Date................................................... $ 618.32
February 15, 1998............................................ $ 619.83
August 15, 1998.............................................. $ 650.21
February 15, 1999............................................ $ 682.07
August 15, 1999.............................................. $ 715.49
February 15, 2000............................................ $ 750.55
August 15, 2000.............................................. $ 787.32
February 15, 2001............................................ $ 825.90
August 15, 2001.............................................. $ 866.37
February 15, 2002............................................ $ 908.88
August 15, 2002.............................................. $ 953.36
February 15, 2003............................................ $ 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (A) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (i) the Accreted Value for the immediately following Semi-Annual
Date less the Accreted Value for the immediately preceding Semi-Annual
Accrual Date and (ii) a fraction, the numerator of which is the number of
days actually elapsed from the immediately preceding Semi-Annual Accrual
Date to the Specified Date and the denominator of which is 180 days; and
(iii) if the Specified Date is on or after February 15, 2003, $1,000.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or Restricted Affiliate or assumed
in connection with an Asset Acquisition by such person and not incurred in
connection with, or in anticipation of, such person becoming a Restricted
Subsidiary or Restricted Affiliate or such Asset Acquisition; provided that
Indebtedness of such person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of the transactions by
which such person becomes a Restricted Subsidiary or Restricted Affiliate or
such Asset Acquisition shall not constitute Acquired Indebtedness.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Affiliate Income Tax Expense" means, with respect to any period and any
Restricted Affiliate, the aggregate provision for United States corporation,
local, foreign and other income taxes of such Restricted Affiliate and its
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Affiliate Interest Expense" means, with respect to any period and any
Restricted Affiliate, without duplication, the sum of (i) the interest expense
of such Restricted Affiliate and its Subsidiaries for such period as determined
on a consolidated basis in accordance with GAAP, including, without limitation,
(a) any amortization of debt discount, (b) the net cost under Interest Rate
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and similar transactions and (e) all accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued during such period as determined on a
consolidated basis in accordance with GAAP and (iii) the amount of dividends in
respect of Disqualified Stock paid during such period.
"Affiliate Net Income" means, with respect to any period and any Restricted
Affiliate, the net income of such Restricted Affiliate and its Subsidiaries for
such period as determined on a consolidated basis in accordance with GAAP,
adjusted, to the extent included in calculating such net income of such
Restricted Affiliate and its Subsidiaries, by excluding, without duplication,
(i) all extraordinary, unusual or nonrecurring gains or losses of such person
(net of fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) income of such Restricted Affiliate and its Subsidiaries
derived from or in respect of all unconsolidated Investments, except to the
extent of any dividends or distributions actually received by such Restricted
Affiliate or any of its Subsidiaries, (iii) net income (or loss) of any other
person combined with such Restricted Affiliate or any of its Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized by such person upon
the termination of any employee pension benefit plan during such period, and (v)
gains or losses in respect of any Asset Sales (net of fees and expenses relating
to the transaction giving rise thereto) during such period.
"Affiliate Operating Cash Flow" means, with respect to any period and any
Restricted Affiliate, the Affiliate Net Income of such Restricted Affiliate and
its Subsidiaries on a consolidated basis for such period increased, only to the
extent deducted in arriving at Affiliate Net Income for such period, by the sum
of (i) the Affiliate Income Tax Expense accrued according to GAAP for such
period (other than taxes attributable to extraordinary gains or losses and gains
and losses from Asset Sales); (ii) Affiliate Interest Expense for such period;
(iii) depreciation of such Restricted Affiliate for such period; (iv)
amortization of such Restricted Affiliate and its Subsidiaries for such period,
including, without limitation, amortization of capitalized debt issuance costs
for such period, all determined in accordance with GAAP; and (v) other non-cash
charges decreasing Affiliate Net Income.
"Affiliate Pro Forma Operating Cash Flow" means Affiliate Operating Cash
Flow for the latest four fiscal quarters for which consolidated financial
statements of the applicable Restricted Affiliate are available. For purposes of
this definition, "Affiliate Operating Cash Flow" shall be calculated after
giving effect on a pro forma basis for the applicable four fiscal quarter period
to, without duplication, any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Restricted Affiliate or any of its Subsidiaries
incurring Acquired Indebtedness) occurring during the period commencing on the
first day of such four fiscal quarter period to and including the date of the
transaction giving rise to the need to calculate "Affiliate Pro Forma Operating
Cash Flow" as if such Asset Sale or Asset Acquisition occurred on the first day
of such period.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by RCN or any
Restricted Subsidiary or Restricted Affiliate to any other person, or any
acquisition or purchase of Capital Stock of any other person by RCN or any
Restricted Subsidiary or Restricted Affiliate, in either case pursuant to which
such person shall (a) become a Restricted Subsidiary or Restricted Affiliate or
(b) shall be merged with or into RCN or any Restricted Subsidiary or Restricted
Affiliate or (ii) any acquisition by RCN or any Restricted Subsidiary or
Restricted Affiliate of the assets of any person which constitute substantially
all of an operating unit or line of business of such person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
RCN or a Restricted Subsidiary, in one transaction or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary (other than
customary stock option programs) or any Restricted Affiliate, (ii) any assets of
RCN or any Restricted Subsidiary or any Restricted Affiliate which constitute
substantially all of an operating unit or line of business of RCN and the
Restricted Subsidiaries and the Restricted Affiliates or (iii) any other
property or asset of RCN or any Restricted Subsidiary or any Restricted
Affiliates outside of the ordinary course of business. For the purposes of this
definition, the term "Asset Sale" shall not include (i) any disposition of
properties and assets of RCN and/or the Restricted Subsidiaries that is governed
under "--Consolidation, Merger, Sale of Assets, Etc." above, (ii) sales of
property or equipment that have become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of RCN or any
Restricted Subsidiary or Restricted Affiliate, as the case may be, and (iii) for
purposes of the covenant "Disposition of Proceeds of Asset Sales," any sale,
conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions occurring within
one year, either (x) involving assets with a Fair Market Value not in excess of
$500,000 or (y) which constitutes the incurrence of a Capitalized Lease
Obligation.
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
provided that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of RCN
or any Restricted Subsidiary or Restricted Affiliate.
"BECO Joint Venture" means RCN-BECOCOM, LLC, a Massachusetts limited
liability company formed under the terms of a Joint Venture Agreement dated as
of December 23, 1996 between RCN Telecom Services, Inc. and Boston Energy
Technology Group, Inc.
"Board" means the Board of Directors of RCN.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of RCN to have been duly adopted by the Board and to
be in full force and effect on the date of such certification, and delivered to
the Trustee.
"Buildout Costs" means the cost of the construction, expansion, development
or acquisition (other than an Asset Acquisition of any person that is not a
Restricted Affiliate on the Issue Date) of properties or assets (tangible or
intangible) to be utilized, directly or indirectly, for the design, development,
construction, installation, integration, management or provision of a Permitted
Business.
"Buildout Indebtedness" means Indebtedness incurred by RCN and/or any
Restricted Subsidiary and/or any Restricted Affiliate to the extent the proceeds
thereof are used to finance or support Buildout Costs in respect of a Permitted
Business of RCN and/or any Restricted Subsidiary and/or Restricted Affiliate.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness (with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less) issued or directly and fully guaranteed or insured
by the United States or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof or such
Indebtedness constitutes a general obligation of such country); (ii) deposits,
certificates of deposit or acceptances (with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less)
of any financial institution that is a member of the Federal Reserve System, in
each case having combined capital and surplus and undivided profits (or any
similar capital concept) of not less than $500.0 million and whose senior
unsecured debt is rated at least "A-1" by S& P or "P-1" by Moody's; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
(other than an Affiliate of RCN) organized under the laws of the United States
or any State thereof and rated at least "A-1" by S& P or "P-1" by Moody's; (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States
Government or issued by any agency thereof and backed by the full faith and
credit of the United States Government maturing within 365 days from the date of
acquisition; and (v) money market funds which invest substantially all of their
assets in securities described in the preceding clauses (i) through (iv).
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding the Kiewit Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership"of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of RCN; or
(b) RCN consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into, RCN, in any such event pursuant to a transaction in
which the outstanding Voting Stock of RCN is converted into or exchanged for
cash, securities or other property, other than any such transaction where (i)
the outstanding Voting Stock of RCN is converted into or exchanged for (1)
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation or its parent corporation and/or (2) cash, securities and other
property in an amount which could be paid by RCN as a Restricted Payment under
the Indenture and (ii) immediately after such transaction no "person" or "group"
(as such terms are used in Sections 13( d) and 14(d) of the Exchange Act),
excluding the Kiewit Holders, is the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Stock of
the surviving or transferee corporation or its parent corporation, as
applicable; or (c) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board (together with any new
directors whose election by the Board or whose nomination for election by the
stockholders of RCN was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease for
any reason (other than by action of the Kiewit Holders) to constitute a majority
of the Board then in office.
"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
aggregate provision for United States corporation, local, foreign and other
income taxes of RCN and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP and of each of the
Restricted Affiliates for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of RCN and the Restricted
Subsidiaries and the Restricted Affiliates for such period as determined on a
consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount, (b) the net cost under Interest Rate
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and similar transactions and (e) all accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued during such period as determined on a
consolidated basis in accordance with GAAP and (iii) the amount of dividends in
respect of Disqualified Stock paid during such period.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of RCN and the Restricted Subsidiaries for such period
in accordance with GAAP, adjusted, without duplication, (A) to include the
consolidated net income of the Restricted Affiliates only to the extent of the
equity interest of RCN and the Restricted Subsidiaries and (B) adjusted, to the
extent included in calculating such adjusted consolidated net income of RCN and
the Restricted Subsidiaries, by excluding, without duplication, (i) all
extraordinary, unusual or nonrecurring gains or losses of such person (net of
fees and expenses relating to the transaction giving rise thereto) for such
period, (ii) subject to clause (A) above, income of RCN and the Restricted
Subsidiaries and the Restricted Affiliates derived from or in respect of all
unconsolidated Investments, except to the extent of any dividends or
distributions actually received by RCN or any Restricted Subsidiary, (iii) the
portion of net income (or loss) of such person allocable to minority interests
in Restricted Subsidiaries and Restricted Affiliates for such period, (iv) net
income (or loss) of any other person combined with RCN or any Restricted
Subsidiary or Restricted Affiliate on a "pooling of interests" basis
attributable to any period prior to the date of combination, (v) any gain or
loss, net of taxes, realized by such person upon the termination of any employee
pension benefit plan during such period, (vi) gains or losses in respect of any
Asset Sales (net of fees and expenses relating to the transaction giving rise
thereto) during such period and (vii) except to the extent permitted by clause
(vii) of the covenant "Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries," the net income of any Restricted Subsidiary
or Restricted Affiliate for such period to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary or Restricted
Affiliate of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary or Restricted Affiliate or its stockholders.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income for such period increased, only to the extent (which, in
the case of the Restricted Affiliates, means to the extent of the equity
interest of RCN and the Restricted Subsidiaries) deducted in arriving at
Consolidated Net Income for such period, by the sum of (i) the Consolidated
Income Tax Expense accrued according to GAAP for such period (other than taxes
attributable to extraordinary gains or losses and gains and losses from Asset
Sales); (ii) Consolidated Interest Expense for such period; (iii) depreciation
of RCN and the Restricted Subsidiaries and the Restricted Affiliates for such
period; (iv) amortization of RCN and the Restricted Subsidiaries and the
Restricted Affiliates for such period, including, without limitation,
amortization of capitalized debt issuance costs for such period, all determined
on a consolidated basis in accordance with GAAP; and (v) other non-cash charges
decreasing Consolidated Net Income.
"Consolidated Pro Forma Operating Cash Flow" means Consolidated Operating
Cash Flow for the latest four fiscal quarters for which consolidated financial
statements of RCN are available. For purposes of calculating "Consolidated
Operating Cash Flow" for any four fiscal quarters for purposes of this
definition, (i) any Subsidiary of RCN that is a Restricted Subsidiary on the
date of the transaction giving rise to the need to calculate "Consolidated Pro
Forma Operating Cash Flow" (the "Transaction Date") (or would become a
Restricted Subsidiary in connection with the transaction that requires
determination of such amount) shall be deemed to have been a Restricted
Subsidiary at all times during such four fiscal quarters, (ii) any Joint Venture
that is a Restricted Affiliate on the Transaction Date (or would become a
Restricted Affiliate in connection with the transaction that requires the
determination of such amount) shall be deemed to have been a Restricted
Affiliate at all times during such four fiscal quarters, (iii) any Subsidiary of
RCN that is not a Restricted Subsidiary on the Transaction Date (or would cease
to be a Restricted Subsidiary in connection with the transaction that requires
the determination of such amount) shall be deemed not to have been a Restricted
Subsidiary at any time during such four fiscal quarters and (iv) any Joint
Venture that is not a Restricted Affiliate on the Transaction Date (or would
cease to be a Restricted Affiliate in connection with the transaction that
requires the determination of such amount) shall be deemed not to have been a
Restricted Affiliate at any time during such four fiscal quarters. In addition
to and without limitation of the foregoing, for purposes of this definition,
"Consolidated Operating Cash Flow" shall be calculated after giving effect on a
pro forma basis for the applicable four fiscal quarter period to, without
duplication, any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of RCN's or one of the Restricted Subsidiaries' or
Restricted Affiliates' (including any person who becomes a Restricted Subsidiary
or Restricted Affiliate as a result of the Asset Acquisition) incurring Acquired
Indebtedness) occurring during the period commencing on the first day of such
four fiscal quarter period to and including the Transaction Date, as if such
Asset Sale or Asset Acquisition occurred on the first day of such period.
"consolidation" means (i) with respect to RCN, the consolidation of the
accounts of the Restricted Subsidiaries with those of RCN, all in accordance
with GAAP; provided that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary or Restricted Affiliate with the
accounts of RCN and (ii) with respect to any Restricted Affiliate, the
consolidation of the accounts of the Subsidiaries of such Restricted Affiliate
with those of such Restricted Affiliate, all in accordance with GAAP. The term
"consolidated" has a correlative meaning to the foregoing.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means, the Accreted Value, premium, if any, and accrued
and unpaid interest, if any, in respect of the Notes.
"Designation Amounts" means, at any date of determination, the sum of all
US Designation Amounts and all JV Revocation Amounts.
"Designation" has the meaning set forth under "--Certain Covenants--
Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors of RCN other than a
director who (i) has any material direct or indirect financial interest in or
with respect to such transaction or series of related transactions or (ii) is an
employee or officer of RCN or an Affiliate that is itself a party to such
transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the applicable Notes; provided, further, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the final maturity date of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in "Disposition of Proceeds
of Asset Sales" and "Change of Control" covenants described above and such
Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to RCN's repurchase of
such Notes as are required to be repurchased pursuant to the "Disposition of
Proceeds of Asset Sales" and "Change of Control" covenants described above and
at all times subject to the covenant "Limitation on Restricted Payments."
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Any Asset Sale pursuant to the terms
of the deadlock event "buy-sell" arrangements in Section 7.8 of the Amended and
Restated Operating Agreement of RCN-BECOCOM, LLC, as in effect on the Issue
Date, or Section 7.15 of the Amended and Restated Operating Agreement of
Starpower Communications, LLC, as in effect on the Issue Date, shall be deemed
to have been made for Fair Market Value. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof) or (B) evidenced by a note, debenture or
similar instrument or letter of credit (including a purchase money obligation)
or (C) for the payment of money relating to a Capitalized Lease Obligation or
other obligation relating to the deferred purchase price of property or (D) in
respect of an Interest Rate Obligation or currency agreement; or (ii) any
liability of others of the kind described in the preceding clause (i) which the
person has guaranteed or which is otherwise its legal liability; or (iii) any
obligation secured by a Lien (other than Liens on Capital Stock or Indebtedness
of any Unrestricted Subsidiary) to which the property or assets of such person
are subject, whether or not the obligations secured thereby shall have been
assumed by or shall otherwise be such person's legal liability (the amount of
such obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured); (iv) all Disqualified Stock
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends; and (v) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
"Limitation on Additional Indebtedness" and "Limitation on Restricted Payments"
and the definition of "Events of Default," in determining the principal amount
of any Indebtedness to be incurred by RCN or a Restricted Subsidiary or which is
outstanding at any date, the principal amount of any Indebtedness which provides
that an amount less than the principal amount at maturity thereof shall be due
upon any declaration of acceleration thereof shall be the accreted value thereof
at the date of determination. Indebtedness of any person that becomes a
Restricted Subsidiary shall be deemed incurred at the time that such person
becomes a Restricted Subsidiary.
"Independent Financial Advisor" means a United States investment banking,
consulting or accounting firm of national standing in the United States (i)
which does not, and whose directors, officers and employees or Affiliates do not
have, a material direct or indirect financial interest in RCN or any of its
Subsidiaries or Affiliates and (ii) which, in the judgment of the Board, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Interest Rate Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other person. Notwithstanding the
foregoing, in no event shall any issuance of Capital Stock (other than
Disqualified Stock) of RCN in exchange for Capital Stock, property or assets of
another person constitute an Investment by RCN in such other person.
"Issue Date" means the original date of issuance of the Notes.
"JV Designation" has the meaning set forth under "--Certain Covenants--
Designation of Restricted Affiliates."
"JV Designation Amount" has the meaning set forth under "--Certain
Covenants--Designation of Restricted
Affiliates."
"JV Revocation" has the meaning set forth under "--Certain Covenants--
Designation of Restricted Affiliates."
"Joint Venture" means any person engaged in a Permitted Business in which
RCN or one of the Restricted Subsidiaries (the "RCN Partner") owns not less than
50% of the Voting Stock and not less than 50% of each class of Capital Stock and
in respect of which (a) there are no more than five other beneficial holders of
Capital Stock and Voting Stock (the "Other Partners"), (b) all of its
Subsidiaries are wholly owned by such person and (c) the RCN Partner and the
Other Partners have entered into contractual arrangements that require their
joint consent to take actions in respect of any of the following: (1) the
payment or distribution of any dividends, whether in cash or other property, by
such person or any of its Subsidiaries to the RCN Partner; (2) the making of any
advance or loan of any cash or other property by such person or any of its
Subsidiaries to RCN or any of the Restricted Subsidiaries; (3) the incurrence of
any Indebtedness by such person or any of its Subsidiaries; or (4) any other
material operating or financial decision with respect to the business of such
person or any of its Subsidiaries; provided that customary financial and other
restrictive covenants in any loan or advances made by the RCN Partner and the
Other Partners to such person or any of its Subsidiaries and not entered into
with the purpose of influencing the management of such person or any of its
Subsidiaries shall not, by itself, cause such person to not constitute a Joint
Venture.
"Kiewit Holders" means Peter Kiewit Sons' Inc., Level 3 Communications,
Inc. and Kiewit Telecom Holdings, Inc. and any of their respective controlled
Affiliates.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person 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.
"Material Restricted Subsidiary" means any Restricted Subsidiary of RCN,
which, at any date of determination, is a "Significant Subsidiary" (as that term
is defined in Regulation S-X issued under the Securities Act), but shall, in any
event, include (x) any Guarantor or (y) any Restricted Subsidiary of RCN which,
at any date of determination, is an obligor under any Indebtedness in an
aggregate principal amount equal to or exceeding $10 million.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to RCN or any Restricted Subsidiary or Restricted Affiliate)
net of (i) brokerage commissions and other fees and expenses (including fees and
expenses of legal counsel, accountants, consultants and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) amounts required to be paid to any person (other than RCN
or any Restricted Subsidiary or any Restricted Affiliate) owning a beneficial
interest in or having a Permitted Lien on the assets subject to the Asset Sale
and (iv) appropriate amounts to be provided by RCN or any Restricted Subsidiary
or any Restricted Affiliate, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by RCN or any Restricted Subsidiary or any Restricted Affiliate, as the
case may be, after such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"New Joint Venture" means any Joint Venture (excluding in any event the
BECO Joint Venture and the Starpower Joint Venture) formed after the Issue Date
and in which no Investment has been made on or prior to the Issue Date.
"Other Partners" has the meaning set forth in the definition of "Joint
Venture."
"Other Senior Debt Pro Rata Share" means under the Indenture the amount of
the applicable Excess Proceeds obtained by multiplying the amount of such Excess
Proceeds by a fraction, (i) the numerator of which is the aggregate accreted
value and/or principal amount, as the case may be, of all Indebtedness (other
than (x) the Notes and (y) Subordinated Indebtedness) of RCN outstanding at the
time of the applicable Asset Sale with respect to which RCN is required to use
Excess Proceeds to repay or make an offer to purchase or repay and (ii) the
denominator of which is the sum of (a) the aggregate principal amount of all
Notes that are outstanding at the time of the offer to purchase or repay with
respect to the applicable Asset Sale and (b) the aggregate principal amount or
the aggregate accreted value, as the case may be, of all other Indebtedness
(other than Subordinated Indebtedness) of RCN outstanding at the time of the
applicable Asset Sale Offer with respect to which RCN is required to use the
applicable Excess Proceeds to offer to repay or make an offer to purchase or
repay.
"Permitted Business" means any telecommunications business (including,
without limitation, the development and provision of voice, video and data
transmission products, services and systems), and any business reasonably
related to the foregoing.
"Permitted Credit Facility" means (i) any senior commercial term loan
and/or revolving credit facility (including any letter of credit subfacility)
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements and (ii) any senior
credit facility entered into with any vendor or supplier (or any financial
institution acting on behalf of or for the purpose of directly financing
purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is incurred for the purpose of financing the cost (including the cost
of design, development, construction, manufacture or acquisition) of personal
property or fixtures used, or to be used, in a Permitted Business.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of RCN and/or any Restricted Subsidiary and/or any
Restricted Affiliate outstanding on the Issue Date;
(c) (i) Indebtedness of any Restricted Subsidiary or Restricted Affiliate
owed to and held by RCN or a Restricted Subsidiary or Restricted Affiliates
and (ii) Indebtedness of RCN, not secured by any Lien, owed to and held by
any Restricted Subsidiary or Restricted Affiliate; provided that an
incurrence of Indebtedness shall be deemed to have occurred upon (x) any
sale or other disposition (excluding assignments as security to financial
institutions) of any Indebtedness of RCN or a Restricted Subsidiary or
Restricted Affiliate referred to in this clause (c) to a person (other than
RCN or a Restricted Subsidiary or Restricted Affiliate) or (y) any sale or
other disposition by RCN or any Restricted Subsidiary of Capital Stock of a
Restricted Subsidiary or Restricted Affiliate, or Designation of an
Unrestricted Subsidiary or JV Revocation of a Restricted Affiliate, which
holds Indebtedness of RCN or another Restricted Subsidiary or Restricted
Affiliate such that such Restricted Subsidiary or Restricted Affiliate, in
any such case, ceases to be a Restricted Subsidiary or Restricted
Affiliate, as the case may be;
(d) Interest Rate Obligations of RCN and/or any Restricted Subsidiary
and/or any Restricted Affiliate relating to Indebtedness of RCN and/or such
Restricted Subsidiary and/or such Restricted Affiliate, as the case may be
(which Indebtedness (x) bears interest at fluctuating interest rates and
(y) is otherwise permitted to be incurred under the "Limitation on
Additional Indebtedness" covenant), but only to the extent that the
notional principal amount of such Interest Rate Obligations does not exceed
the principal amount of the Indebtedness (and/or Indebtedness subject to
commitments) to which such Interest Rate Obligations relate;
(e) Indebtedness of RCN and/or any Restricted Subsidiary and/or any
Restricted Affiliate in respect of performance bonds of RCN or any
Restricted Subsidiary or Restricted Affiliate or surety bonds provided by
RCN or any Restricted Subsidiary or Restricted Affiliate incurred in the
ordinary course of business;
(f) Indebtedness of RCN and/or any Restricted Subsidiary and/or any
Restricted Affiliate to the extent it represents a replacement, renewal,
refinancing or extension (a "Refinancing") of outstanding Indebtedness of
RCN and/or of any Restricted Subsidiary and/or any Restricted Affiliate
incurred or outstanding pursuant to clause (a), (b), (g) or (h) of this
definition or the proviso of the covenant "Limitation on Additional
Indebtedness"; provided that (1) Indebtedness of RCN may not be Refinanced
to such extent under this clause (f) with Indebtedness of any Restricted
Subsidiary or Restricted Affiliate, (2) Indebtedness of a Restricted
Affiliate may not be Refinanced with Indebtedness of RCN or a Restricted
Subsidiary in an amount exceeding the RCN Share of such Indebtedness and
(3) any such Refinancing shall only be permitted under this clause (f) to
the extent that (x) it does not result in a lower Average Life to Stated
Maturity of such Indebtedness as compared with the Indebtedness being
Refinanced and (y) it does not exceed the sum of the principal amount (or,
if such Indebtedness provides for a lesser amount to be due and payable
upon a declaration of acceleration thereof, an amount no greater than such
lesser amount) of the Indebtedness being Refinanced plus the amount of
accrued interest thereon and the amount of any reasonably determined
prepayment premium necessary to accomplish such Refinancing and such
reasonable fees and expenses incurred in connection therewith;
(g) Buildout Indebtedness (including under one or more Permitted Credit
Facilities); provided that no Indebtedness may be incurred under this
clause (g) on any date on or after October 15, 2002;
(h) Indebtedness of RCN and/or any Restricted Subsidiary and/or any
Restricted Affiliate incurred under one or more Permitted Credit
Facilities, and any Refinancings (whether an initial Refinancing or one or
more successive Refinancings) of the foregoing otherwise incurred in
compliance with clause (f), such that the aggregate principal amount of the
Indebtedness of RCN and the Restricted Subsidiaries and the RCN Share of
any Indebtedness of a Restricted Affiliate does not exceed $150 million at
any time outstanding; provided, however, such amount shall be increased to
$200 million if RCN shall designate as a Restricted Affiliate pursuant to
the covenant "Designations of Restricted Affiliates" a Joint Venture formed
to develop a Permitted Business in a Metropolitan Statistical Area which
contains greater than 400,000 households;
(i) Subordinated Indebtedness of any Restricted Affiliate owed to and held
by any of the Other Partners in such Restricted Affiliate to the extent (x)
such Indebtedness is incurred to fund the proportionate share (based upon
equity ownership) of RCN or any Restricted Subsidiary of any mandatory
capital call made by such Restricted Affiliate and in respect of which RCN
or such Restricted Subsidiary has defaulted and (y) such Indebtedness is
not secured by any Lien; and
(j) in addition to the items referred to in clauses (a) through (j) above,
Indebtedness of RCN and/or the Restricted Subsidiaries having an aggregate
principal amount not to exceed $10 million at any time outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Obligations incurred in compliance with the covenant "Limitation on
Additional Indebtedness"; and (d) Investments in RCN or any Restricted
Subsidiary or Investments made in any person as a result of which such person
becomes a Restricted Subsidiary.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such person.
"RCN Share" means, with respect to the Indebtedness of any Restricted
Affiliate, an amount of such Indebtedness determined by reference to the
percentage common equity interest of RCN and the Restricted Subsidiaries in such
Restricted Affiliate.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Affiliate" means any Joint Venture designated as such pursuant
to and in compliance with the covenant "Designation of Restricted Affiliates,"
until an effective JV Revocation in respect thereof has been made.
"Restricted Affiliate Group" means, collectively, any Restricted Affiliate
whose Capital Stock is owned directly by RCN or a Restricted Subsidiary and all
of its Subsidiaries.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of RCN or any
payment made to the direct or indirect holders (in their capacities as such) of
Capital Stock of RCN (other than dividends or distributions payable solely in
Capital Stock (other than Disqualified Stock) of RCN or in options, warrants or
other rights to purchase Capital Stock (other than Disqualified Stock) of RCN;
(ii) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock of RCN (other than any such Capital Stock owned by RCN or a
Wholly Owned Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value prior to any scheduled repayment,
sinking fund or maturity of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv)
the making by RCN or any Restricted Subsidiary or any Restricted Affiliate of
any Investment (other than a Permitted Investment) in any person.
"Restricted Subsidiary" means any Subsidiary of RCN that has not been
designated by the Board, by a Board Resolution delivered to the Trustee, as an
Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Designations of Unrestricted Subsidiaries." Any such designation may be revoked
by a Board Resolution delivered to the Trustee, subject to the provisions of
such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which RCN is not also obligated (by
means of a guarantee or otherwise) other than, in the case of this clause (ii),
Indebtedness under any Permitted Credit Facilities.
"Revocation" has the meaning set forth under "--Certain
Covenants--Designations of Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Corporation.
"Senior Debt Securities" means any unsubordinated debt securities
(including any guarantee of such securities) issued by RCN and/or any Restricted
Subsidiary and/or any Restricted Affiliate, whether in a public offering or a
private placement; it being understood that the term "Senior Debt Securities"
shall not include any Permitted Credit Facility or other commercial bank
borrowings or similar borrowings, recourse transfers of financial assets,
capital leases or other types of borrowings issued in a manner not customarily
viewed as a "securities offering."
"Starpower Joint Venture" means Starpower Communications LLC, an
unregulated limited liability company organized on October 28, 1997 pursuant to
a Certificate of Formation and governed by an Amended and Restated Operating
Agreement dated as of December 18, 1997 between RCN Telecom Services of
Washington, Inc. and Pepco Communications, L.L.C.
"Subordinated Indebtedness" means any Indebtedness of RCN or any Guarantor
which is expressly subordinated in right of payment to any other Indebtedness of
RCN or such Guarantor; provided that, for purposes of the covenants "Limitation
on Liens Securing Certain Indebtedness" and "Limitation on Certain Guarantees
and Indebtedness of Restricted Subsidiaries and Restricted Affiliates,"
"Subordinated Indebtedness" means any Indebtedness of RCN or any Restricted
Subsidiary or Restricted Affiliate that is expressly subordinated in right of
payment to any other Indebtedness of such person.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person. In no event shall "Subsidiary" include any Joint Venture.
"Total Affiliate Indebtedness" means, at any date of determination, with
respect to any Restricted Affiliate, the aggregate consolidated amount of all
Indebtedness of such Restricted Affiliate and its Subsidiaries outstanding as of
the date of determination.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the sum of (i) the aggregate amount of all Indebtedness of RCN
and the Restricted Subsidiaries and (ii) the sum of the RCN Share of the
Indebtedness of each of the Restricted Affiliates, in each case outstanding as
of the date of determination and determined on a consolidated basis.
"Total Invested Equity Capital" means, at any time of determination, the
sum of, without duplication, (i) $216.6 million plus (ii) the aggregate cash
proceeds received by RCN from capital contributions in respect of existing
Capital Stock (other than Disqualified Stock) or the issuance or sale of Capital
Stock (other than Disqualified Stock but including Capital Stock issued upon
conversion of convertible Indebtedness or from the exercise of options, warrants
or rights to purchase Capital Stock (other than Disqualified Stock)) on or
subsequent to the Issue Date, other than to a Restricted Subsidiary or to a
Restricted Affiliate; plus (iii) the aggregate cash proceeds received by RCN or
any Restricted Subsidiary from the sale, disposition or repayment of any
Investment made after the Issue Date and constituting a Restricted Payment
(other than any Investments made pursuant to clause (iv) of the second paragraph
of the covenant "Limitation on Restricted Payments") in an amount equal to the
lesser of (a) the return of capital with respect to such Investment and (b) the
initial amount of such Investment, in either case, less the cost of the
disposition of such Investment, plus (iv) in the case of the Revocation of the
Designation of a Subsidiary as an Unrestricted Subsidiary, an amount equal to
the consolidated Net Investment in such Subsidiary on the date of Revocation but
not in an amount exceeding the net amount of any Investments constituting
Restricted Payments made (or deemed made) in such Subsidiary after the Issue
Date plus (v) in the case of the JV Designation after the Issue Date of a New
Joint Venture as a Restricted Affiliate, an amount equal to the consolidated net
Investment in such New Joint Venture on the date of such JV Designation but not
in an amount exceeding the net amount of any Investments constituting Restricted
Payments made (or deemed made) in such New Joint Venture after the Issue Date
minus (vi) the aggregate amount of all Restricted Payments (other than
Restricted Payments referred to in clause (iv) or clause (iii)( B) of the second
paragraph of the covenant "Limitation on Restricted Payments") declared or made
on and after the Issue Date.
"Unrestricted Subsidiary" means any Subsidiary of RCN designated as such
pursuant to and in compliance with the covenant "Designations of Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution
delivered to the applicable Trustee, subject to the provisions of such covenant.
"US Designation Amount" has the meaning set forth under "--Certain
Covenants--Designation of Unrestricted Subsidiaries."
"U.S. Government Securities" means securities that are direct obligations
of the United States of America for the payment of which its full faith and
credit is pledged.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary in
which all of the outstanding Capital Stock is owned by RCN or another Wholly
Owned Restricted Subsidiary. For the purposes of this definition, any directors'
qualifying shares or investments by foreign nationals mandated by applicable law
shall be disregarded in determining the ownership of a Restricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
The Old Notes were and the New Notes will be represented by one or more
permanent global note in definitive, fully registered book-entry form (the
"Global Securities") which will be registered in the name of a nominee of the
Depository Trust Company ("DTC") and deposited on behalf of purchasers of the
Notes represented thereby with a custodian for DTC for credit to the respective
accounts of the purchasers (or to such other accounts as they may direct) at
DTC.
The Global Securities. The Company expects that pursuant to procedures
established by DTC (a) upon issuance of the Global Securities, DTC or its
custodian will credit on its internal system portions of the Global Securities
which shall be comprised of the corresponding respective amounts of the Global
Securities to the respective accounts of persons who have accounts with such
depositary and (b) ownership of the Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee (with respect to interests of Participants (as defined below) and
the records of Participants (with respect to interests of persons other than
Participants). Ownership of beneficial interests in the Global Securities will
be limited to persons who have accounts with DTC ("Participants") or persons who
hold interests through Participants.
So long as DTC or its nominee is the registered owner or holder of any of
the Notes, DTC or such nominee will be considered the sole owner or holder of
such Notes represented by the Global Securities for all purposes under the
Indenture and under the Notes represented thereby. No beneficial owner of an
interest in the Global Securities will be able to transfer such interest except
in accordance with the applicable procedures of DTC in addition to those
provided for under the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest) on the Notes represented by the Global Securities will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
None of the Company, the Trustee or any paying agent under the Indenture will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest (including Additional Interest)
on the Notes represented by the Global Securities, will credit Participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the Global Securities as shown on the records of DTC or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in the Global Securities held through such Participants
will be governed by standing instructions and customary practice as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payment will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Securities in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Indenture.
Any beneficial interest in one of the Global Securities that is transferred
to a person who takes delivery in the form of an interest in the other Global
Security will, upon transfer, cease to be an interest in such Global Security
and, accordingly, will thereafter be subject to all transfer restrictions, if
any, and other procedures applicable to beneficial interests in such other
Global Security for as long as it remains such an interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Securities are credited and only in
respect of the aggregate principal amount of as to which such Participant or
Participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Securities for
Certificated Securities, which it will distribute to its Participants and which
will be legended as set forth under the heading "Notice to Investors."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among Participants of
DTC, it is under no obligation to perform such procedures, and such procedures
may be discontinued at any time. Neither RCN nor either Trustee will have any
responsibility for the performance by DTC or its direct or indirect participants
of their respective obligations under the rules and procedures governing their
operations.
Certificated Securities. Interests in the Global Securities will be
exchanged for Certificated Securities if (i) DTC notifies the Company that it is
unwilling or unable to continue as depositary for the Global Securities, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to the Notes. Upon
the occurrence of any of the events described in the preceding sentence, the
Company will cause the appropriate Certificated Securities to be delivered.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences of the exchange of the Old Notes for New Notes and the ownership
and disposition of the Notes to U.S. Holders (as defined below). This summary is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date of
this Prospectus may affect the tax consequences described herein, possibly with
retroactive effect. This summary discusses only Notes held as capital assets
within the meaning of Section 1221 of the Code. It does not discuss all of the
tax consequences that may be relevant to a holder in light of his particular
circumstances or to holders subject to special rules, such as persons who are
not U.S. Holders, certain financial institutions, insurance companies, dealers
in securities and holders who hold the Notes as part of a straddle or a hedging
or conversion transaction. Persons considering the exchange of the Old Notes for
New Notes should consult their tax advisors with regard to the application of
the United States federal income tax laws to their particular situations as well
as any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of an Old
Note who exchanges it for a New Note and that for United States federal income
tax purposes is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust. The term also includes certain former citizens or
residents of the United States.
Tax Consequences of the Exchange of Old Notes for New Notes
There will be no federal income tax consequences to Holders exchanging Old
Notes for New Notes pursuant to the Exchange Offer. For federal income tax
purposes, the New Notes will be considered a continuation of the Old Notes and
the exchange of Old Notes for New Notes hereunder will not alter the federal
income tax consequences, including the accrual of original issue discount
("OID") on the Notes, as described below, of owning the Notes to Holders. A U.S.
Holder will have the same adjusted basis and holding period in the New Note as
it had in the Old Note immediately before the exchange.
The discussion below relating to the Notes is equally applicable to the Old
Notes and the New Notes.
Stated Interest
Payments of stated interest on the Notes will not be separately taxable to
holders thereof, but, rather, such stated interest will be included in income as
original issue discount ("OID") on an accrual basis, as described below.
Original Issue Discount
The excess of a Note's "stated redemption price at maturity" over its
"issue price" will generally constitute OID for federal income tax purposes. The
stated redemption price at maturity of a Note will equal the sum of all cash
payments (whether denominated as principal or interest) payable on the Notes.
The issue price of a Note is equal the first price to the public (not including
bond houses, brokers, or similar persons or organizations acting in the capacity
of underwriters, placement agents, or wholesalers) at which a substantial amount
of the Notes is sold for money. Regardless of their method of accounting, U.S.
Holders of the Notes will be required to include such OID in income for United
States federal income tax purposes as it accrues, in accordance with a constant
yield method based on a compounding of interest, before the receipt of cash
payments attributable to such income. Under this method, U.S. Holders of the
Notes generally will be required to include in income increasingly greater
amounts of OID in successive accrual periods.
The Company does not intend to treat the possibility of an optional
redemption or repurchase of the Notes as giving rise to any additional accrual
of OID or recognition of ordinary income upon redemption, sale or exchange of
the Notes. U.S. Holders may wish to consider that United States Treasury
Regulations regarding the treatment of certain contingencies were recently
issued and may wish to consult their tax advisers in this regard.
Market Discount and Premium
If a U.S. Holder purchased a Note for an amount that was less than its
"adjusted issue price," the amount of the difference would be treated as "market
discount" for United States federal income tax purposes, unless such difference
was less than a specified de minimis amount. The adjusted issue price of a Note
is defined as the sum of the issue price of the Note and the aggregate amount of
previously accrued OID, less any prior principal and interest payments on the
Note.
Under the market discount rules of the Code, a U.S. Holder will be required
to treat any prior payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Note as ordinary income to the extent of the market
discount which has not previously been included in income (pursuant to an
election by the Holder to include such market discount in income as it accrues)
and is treated as having accrued on such Note at the time of such payment or
disposition. If such Note is disposed of in a nontaxable transaction (other than
as provided in Code Sections 1276(c) and (d)), accrued market discount will be
includible as ordinary income to the U.S. Holder as if such Holder had sold the
Note at its then fair market value. In addition, unless the U.S. Holder elects
to include market discount in income as it accrues, the U.S. Holder may be
required to defer, until the maturity of the Note or its earlier disposition
(including a nontaxable transaction other than as provided in Code Sections
1276(c) and (d)), the deduction of all or a portion of the interest expense on
any indebtedness incurred or maintained to purchase or carry such Note.
A U.S. Holder who purchased a Note for an amount that was greater than its
adjusted issue price but less than its stated redemption price at maturity would
be considered to have purchased such Note at an "acquisition premium." Under the
acquisition premium rules of the Code and the regulations thereunder, unless
such Holder makes the election described under "Election to Treat all Interest
as Original Issue Discount" below, the amount of OID which such Holder must
include in its gross income with respect to such Note for any taxable year will
be reduced by the portion of such acquisition premium properly allocable to such
year.
Election to Treat All Interest as Original Issue Discount.
A U.S. Holder may elect to include in gross income all interest that
accrues on a Note using the constant-yield method described above under the
heading "Original Issue Discount", with the modifications described below. For
purposes of this election, interest includes stated interest, OID, de minimis
OID, market discount, de minimis market discount and unstated interest, as
adjusted by any acquisition premium. As provided for above, payments of stated
interest on the Notes will already be included in income as OID.
In applying the constant-yield method to a Note with respect to which this
election has been made, the issue price of the Note will equal the electing U.S.
Holder's adjusted basis in the Note immediately after its acquisition and the
issue date of the Note will be the date of its acquisition by the electing U.S.
Holder. This election will generally apply only to the Note with respect to
which it is made and may not be revoked without the consent of the Internal
Revenue Service.
If the election to apply the constant-yield method to all interest on a
Note is made with respect to a Note with market discount, the electing U.S.
Holder will be treated as having made the election discussed above under "Market
Discount" to include market discount in income currently over the life of all
debt instruments held or thereafter acquired by such U.S. Holder.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize taxable gain or loss equal to the difference between the amount
realized on such sale, exchange or retirement and such U.S. Holder's adjusted
tax basis in the Note. A U.S. Holder's adjusted tax basis in a Note will
generally equal the cost of such Note to the Holder, increased by the amount of
any market discount and OID previously included in income by such U.S. Holder
with respect to such Note and reduced by any principal and interest payments
received by the U.S. Holder. Except as otherwise described under "Market
Discount and Premium" above, gain or loss realized on the sale, exchange or
retirement of a Note will be capital gain or loss. Recently enacted legislation
includes substantial changes to the United States federal taxation of capital
gains recognized by individuals, including a 20% maximum tax rate for certain
gains from the sale of capital assets held for more than 18 months. The
deduction of capital losses is subject to certain limitations. Prospective
investors should consult their tax advisors regarding the treatment of capital
gains and losses.
Backup Withholding and Information Reporting
Certain noncorporate U.S. Holders may be subject to information reporting
and backup withholding at a rate of 31% on payments of principal, premium, if
any, and interest (including OID) on, and the proceeds of a disposition of, a
Note. Backup withholding will apply only if the U.S. Holder (i) fails to furnish
its Taxpayer Identification Number ("TIN") which, in the case of an individual,
would be his or her Social Security Number, (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS that it has failed to properly report payments of
interest and dividends or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding. U.S. Holders
should consult their tax advisors regarding their qualification for an exemption
from backup withholding and the procedure for obtaining such an exemption if
applicable.
The amount of any backup withholding from a payment to a U.S. Holder will
be allowed as a credit against such U.S. Holder's United States federal income
tax liability and may entitle such U.S. Holder to a refund, provided that the
required information is furnished to the IRS.
The Company will furnish annually to the IRS and to record holders of the
Notes (other than with respect to certain exempt holders) information relating
to the stated interest and the OID accruing during the calender year. Such
information will be based on the amount of OID that would have accrued to a U.S.
Holder who acquired the Note on original issue.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any such broker-dealer for use in connection with any such resale.
In addition, until , 1998 (90 days after the date of this Prospectus),
all dealers effecting transactions in the New Notes may be required to deliver
a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal.
The Company has agreed in the Registration Rights Agreement to indemnify
each broker-dealer reselling New Notes pursuant to this Prospectus, and their
officers, directors and controlling persons, against certain liabilities in
connection with the offer and sale of the New Notes, including liabilities under
the Securities Act, or to contribute to payments that such broker-dealers may be
required to make in respect thereof.
LEGAL MATTERS
The validity of the Notes offered hereby is being passed upon for the
Company by Davis Polk & Wardwell, New York, New York.
INDEPENDENT ACCOUNTANTS
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.
EXPERTS
The consolidated financial statements of RCN Corporation as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995,
appearing in this Prospectus and Registration Statement (defined below) have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in their report thereon appearing elsewhere herein and in the Registration
Statement and have been so included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Erols Internet, Inc. at December 31, 1996 and
1997 and for the period from August 1, 1995 (inception) to December 31, 1995 and
for the years ended December 31, 1996 and 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Notes offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Notes, reference is hereby made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the copy of such contract or document filed as exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
Each purchaser of the New Notes will be furnished with a copy of the
Prospectus and any related amendments or supplements to this Prospectus (as so
amended or supplemented, unless the context otherwise requires, the
"Prospectus"). Each person receiving this Prospectus acknowledges that (i) such
person has been afforded an opportunity to request from the Company, and to
review and has received, all additional information considered by it to be
necessary to verify the accuracy and completeness of the information herein,
(ii) such person has not relied on the Exchange Agent or any person affiliated
with the Exchange Agent in connection with this investigation of the accuracy of
such information or its investment decision and (iii) except as provided
pursuant to (i) above, no person has been authorized to give any information or
to make any representation concerning the New Notes offered hereby other than
those contained herein and, if given or made, such other information or
representation should not be relied upon as having been authorized by the
Company or the Exchange Agent. Written requests for such information should be
directed to: RCN Corporation, 105 Carnegie Center, Princeton, New Jersey,
Attention: Valerie Haertel.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith is required to file reports and other
information with the Commission. The Registration Statement, as well as such
reports and other information filed by the Company with the Commission, may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained by
mail from the Commission's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission. In addition, such reports and other
information concerning the Company may also be inspected at the offices of the
National Association of Securities Dealers Automated Quotation at 1735 K Street,
N.W., Washington, D.C. 20006.
INDEX TO FINANCIAL STATEMENTS
RCN Corporation
<TABLE>
<S> <C>
Report of Independent Accountants...............................................................................F-1
Consolidated Statements of Operations for the three years ended December 31, 1997, 1996 and 1995................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.......................................................F-3
Consolidated Statements of Cash Flows for the three years ended December 31, 1997, 1996 and 1995................F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
1997, 1996 and 1995..........................................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-8
Erols Internet, Inc.
Report of Ernst & Young LLP, Independent Auditors..............................................................F-31
Balance Sheets as of December 31, 1996 and 1997................................................................F-32
Statements of Operations for the period from August 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997..................................................................F-33
Statements of Stockholders' Deficit for the period from August 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997..................................................................F-34
Statements of Cash Flows for the period from August 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997..................................................................F-35
Notes to Financial Statements..................................................................................F-37
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of RCN Corporation:
We have audited the accompanying consolidated balance sheets of RCN
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCN Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Cooper & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Sales ..................................................... $127,297 $104,910 $91,997
Costs and expenses, excluding depreciation and
amortizatio .............................................. 134,967 79,107 75,003
Nonrecurring charges ...................................... 10,000 -- --
Depreciation and amortization ............................. 53,205 38,881 22,336
--------- --------- ---------
Operating (loss) .......................................... (70,875) (13,078) (5,342)
Interest income ........................................... 22,824 25,602 29,001
Interest expense .......................................... (25,602) (16,046) (16,517)
Other income (expense), net ............................... 131 (546) (304)
--------- --------- ---------
(Loss) income before income taxes ......................... (73,522) (4,068) 6,838
(Benefit) provision for income taxes ...................... (20,849) 979 1,119
--------- --------- ---------
(Loss) income before minority interest and equity in
unconsolidated entities ................................... (52,673) (5,047) 5,719
Minority interest in loss (income) of consolidated entities 7,296 1,340 (144)
Equity in (loss) of unconsolidated entities ............... (3,804) (2,282) (3,461)
--------- --------- ---------
(Loss) income before extraordinary item ................... (49,181) (5,989) 2,114
Extraordinary charge - debt prepayment penalty, net of tax
of $1,728 ............................................... (3,210) -- --
--------- --------- ---------
Net (loss) income ......................................... $(52,391) $(5,989) $2,114
========= ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Basic earnings per average common share:
Income (loss) before extraordinary charge ................. $ (0.89) $ (0.11) $ (0.04)
Extraordinary charge - debt prepayment penalty ............ $ (0.06) -- --
Net income (loss) to shareholders ......................... $ (0.95) $ (0.11) $ (0.04)
Weighted average shares outstanding ....................... 54,965,716 54,918,394 54,890,334
Diluted earnings per average common share:
Income (loss) before extraordinary charge ................. $ (0.89) $ (0.11) $ (0.04)
Extraordinary charge - debt prepayment penalty ............ $ (0.06) -- --
Net income (loss) to shareholders ......................... $ (0.95) $ (0.11) $ (0.04)
Weighted average shares and common stock equivalents
outstanding ........................................... 54,965,716 54,918,394 54,890,334
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
--------------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments.............................................. $ 222,910 $ 61,843
Short-term investments........................................................... 415,603 46,831
Accounts receivable from related parties......................................... 9,829 12,614
Accounts receivables, net of reserve for doubtful accounts of $2,134 in 1997 and
$861 in 1996.................................................................. 17,815 10,413
Unbilled revenues................................................................ 1,695 844
Material and supply inventory, at average cost................................... 2,745 1,140
Prepayments and other............................................................ 5,314 4,556
Deferred income taxes............................................................ 4,821 4,371
Investments restricted for debt service.......................................... 22,500 --
--------------- -----------
Total current assets 703,232 142,612
--------------- -----------
Notes receivable - affiliates....................................................... -- 155,481
Property, plant and equipment, net of accumulated depreciation of $107,419 in 1997
and $84,529 in 1996.............................................................. 200,340 135,828
Investments restricted for debt service............................................. 39,411 --
Investments......................................................................... 70,424 76,547
Intangible assets, net.............................................................. 96,547 93,471
Deferred charges and other assets................................................... 41,038 24,146
--------------- -----------
Total assets........................................................................ $ 1,150,992 $628,085
=============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable to related parties.............................................. $3,748 $4,880
Accounts payable................................................................. 24,835 13,642
Advance billings and customer deposits........................................... 7,318 6,859
Accrued taxes.................................................................... 488 1,950
Accrued interest................................................................. 5,549 5,041
Accrued contract settlements..................................................... 3,126 3,565
Accrued cable programming expense................................................ 3,498 3,188
Accrued expenses................................................................. 21,143 18,167
--------------- -----------
Total current liabilities........................................................... 69,705 57,292
--------------- -----------
Long-term debt...................................................................... 686,103 131,250
Notes payable - affiliates.......................................................... -- 11,554
Deferred income taxes............................................................... 19,612 28,245
Other deferred credits.............................................................. 2,596 3,290
Minority interest................................................................... 16,392 5,389
Commitments and contingencies.......................................................
Preferred stock..................................................................... -- --
Common shareholders' equity......................................................... 356,584 390,765
--------------- -----------
Total liabilities and shareholders' equity.......................................... $ 1,150,992 $628,085
=============== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Cash Flows from operating activities
Net income (loss)....................................................... $(52,391) $(5,989) $2,114
Gain on pension curtailment/settlement.................................. -- (3,437) --
Accretion of discounted debt............................................ 8,103 -- --
Gain on sale of partnership interest.................................... (661) -- --
Extraordinary item - debt prepayment penalty............................ 3,210 -- --
Depreciation and amortization........................................... 53,205 38,881 22,336
Deferred income taxes and investment tax credits, net................... (10,503) (6,477) 6,696
Provision for losses on accounts receivable............................. 2,732 1,788 614
Equity in loss of unconsolidated entities............................... 3,804 2,282 3,461
Minority interest....................................................... (7,296) (1,340) 144
Net change in certain assets and liabilities, net of business acquisitions:
Accounts receivable and unbilled revenues............................ (14,979) (3,780) (5,550)
Material and supply inventory........................................ (1,605) (814) 777
Accounts payable..................................................... 11,193 2,954 3,983
Accrued expenses..................................................... 3,353 4,283 2,783
Accounts receivable from related parties............................. 3,180 1,572 11,860
Accounts payable to related parties.................................. (1,132) (5,448) (419)
Other, net........................................................... 367 597 529
Other................................................................... 1,081 (1,241) (769)
------- ------ -------
Net cash provided by operating activities.................................. 1,661 23,831 48,559
------- ------ -------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (79,042) (38,548) (29,854)
Purchase of short-term investments...................................... (445,137) (75,091) (238,257)
Sales and maturities of short-term investments.......................... 76,923 149,086 245,112
Acquisitions, net of cash acquired...................................... (30,490) (30,090) (121,147)
Purchase of loan receivable............................................. -- (13,088) --
Proceeds from sale of partnership interest.............................. 1,990 -- --
Other................................................................... (14) (1,646) (2,057)
------- ------ --------
Net cash used in investing activities...................................... 475,860 9,377 (146,203)
------- ------ -------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Redemption of long-term debt............................................ (141,250) (44,750) (28,741)
Issuance of long-term debt.............................................. 688,000 19,000 19,300
Change in affiliate notes, net.......................................... 97,624 32,802 (6,130)
Extraordinary item - debt prepayment penalty............................ (3,210) -- --
Payments made for debt financing costs.................................. (19,743) -- --
Cash contribution from joint venture partner............................ 9,016 -- --
(Increase) related to investments restricted for debt service........... (61,250) -- --
Proceeds from issuance of stock......................................... 230 -- --
Transfers from C-TEC.................................................... 89,323 78,550 132,707
Transfers (to) C-TEC.................................................... (23,474) (76,211) (148,339)
-------- ------- -------
Net cash provided by (used in) financing activities........................ 635,266 9,391 (31,203)
-------- ------- -------
Net increase (decrease) in cash and temporary cash investments............. 161,067 23,845 (128,847)
Cash and temporary cash investments at beginning of year................... 61,843 37,998 166,845
-------- ------- -------
Cash and temporary cash investments at end of year......................... $222,910 $61,843 $37,998
======== ======= =======
Supplemental disclosures of cash flow information
Cash paid during the periods
for:
Income taxes............................................................ $1,090 $549 $497
======== ======= =======
Interest (net of amounts capitalized)................................... $16,536 $16,046 $16,404
======== ======= =======
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as a purchase. A summary of the
transaction is as follows:
Cash paid........................................................ $40,000
Non-capitalizable costs ......................................... (10,000)
Reduction of minority interest................................... (3,812)
---------
Fair value of assets acquired.................................... $26,188
=========
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
=========
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
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.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to Shareholders' Net Investment in connection with the
Distribution.
BECO's contribution of the IRU to the RCN-BECOCOM joint venture (Note 7(a)) is
reflected as "Advanced Fiber Plant" as its fair value.
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
Common Shares Cumulative Total
Issued and Additional Paid Shareholder's Translation Shareholder's
Outstanding Common Stock in Capital Deficit Net Investment Adjustment Equity
------------- ------------ -------------- ------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 .......... 1,400 $ 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 ......... 1,400 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 ......... 1,400 1 -- -- 393,819 (3,055) 390,765
Net loss from 1/1/97 through
9/30/97 ...................... (35,275) 35,275
Net loss from 10/1/97 through
12/31/97 ..................... (17,116) (17,116)
Transfers from C-TEC ............ 17,980 17,980
Common stock issued in connection
with the distribution ........ 54,967,952 54,968 321,556 (376,524) --
Issuance of common stock ........ 20,518 20 210 230
----------- --------- --------- -------- ----------- ----------- -----------
Balance, December 31, 1997 ......... $54,989,870 $54,989 $321,766 $(17,116) $ -- $ (3,055) $356,584
=========== ========= ========= ======== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, RCN Corporation (the "Company" or "RCN") was
operated as part of C-TEC Corporation ("C-TEC"). On September 30, 1997, C-TEC
distributed 100 percent of the outstanding shares of common stock of its wholly
owned subsidiaries, RCN Corporation ("RCN") and Cable Michigan, Inc. ("Cable
Michigan") to holders of record of C-TEC's Common Stock and C-TEC's Class B
Common Stock as of the close of business on September 19, 1997 (the
"Distribution") in accordance with the terms of a Distribution Agreement dated
September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN consists primarily of
C-TEC's bundled residential voice, video and Internet access operations in the
Boston to Washington, D.C. corridor, its existing New York, New Jersey and
Pennsylvania cable television operations, a portion of its long distance
operations and its international investment in Megacable, S.A. de
C.V.("Megacable") Cable Michigan, Inc. consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc.. In connection with the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE").
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of all wholly and majority owned subsidiaries. However, 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, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods. All material
intercompany transactions and balances have been eliminated. Investments
accounted for by the equity method include a 40% interest in Megacable, a
Mexican cable television system operator. Joint ventures which the Company
controls and in which the minority investors do not possess significant veto
rights are consolidated. Other joint ventures are accounted for by the equity
method.
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. Prior to the Distribution, the
corporate office allocated 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
prior to the Distribution, C-TEC. The financial services company charges
interest expense on outstanding advances and pays interest income on excess cash
invested for affiliates.
CTE, RCN and Cable Michigan have entered into certain agreements providing
for the Distribution, and governing various ongoing relationships, including the
provision of support services, between the three companies, including a
distribution agreement and a tax-sharing agreement.
2. SEGMENT INFORMATION
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 high density markets in
the Boston to Washington, D.C. corridor. The Company also seeks to serve certain
commercial accounts on or near its networks. RCN's initial advanced fiber
optic networks have been established in New York City and, through a joint
venture with the Boston Edison Company ("BECO"), in Boston and surrounding
communities. RCN has also entered into a joint venture named Starpower
Communications, LLC ("Starpower") with Pepco Communications, LLC ("Pepco
Communications"), an indirect wholly owned subsidiary of Potomac Electric Power
Company ("PEPCO"), to develop an advanced fiber network in the Washington, D.C.
area. In February 1998, RCN acquired Boston's and Washington, D.C.'s largest
Internet service providers ("ISP"), Ultranet Communications, Inc. ("Ultranet")
and Erols Internet, Inc. ("Erols"), respectively. 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.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Hybrid Fiber/Coaxial
Sales................................................................ $ 92,100 $ 84,096 $ 66,404
Operating income before depreciation and amortization................ 39,767 40,094 28,458
Depreciation and amortization........................................ 33,713 33,131 20,723
Operating Income..................................................... 6,054 6,963 7,735
Additions of property, plant and equipment........................... 19,258 14,010 19,226
Identifiable assets.................................................. 159,763 335,285 359,401
Advanced Fiber, Wireless Video and Other Operating
Sales................................................................ $ 35,111 $ 20,768 $ 25,528
Operating loss before depreciation and amortization.................. (39,882) (11,711) (8,416)
Depreciation and amortization........................................ 18,480 4,970 904
Operating loss....................................................... (58,362) (16,681) (9,320)
Additions of property, plant and equipment........................... 56,454 23,714 6,453
Identifiable assets.................................................. 166,478 87,419 14,491
Corporate
Sales................................................................ $ 86 $ 46 $ 65
Operating loss before depreciation and amortization and nonrecurring
charge............................................................ (7,555) (2,580) (3,048)
Nonrecurring charge.................................................. 10,000 -- --
Depreciation and amortization........................................ 1,012 780 709
Operating loss....................................................... (18,567) (3,360) (3,757)
Additions of property, plant and equipment........................... 3,330 824 4,175
Identifiable assets.................................................. 824,751 205,381 275,718
Consolidated
Sales................................................................ $ 127,297 $ 104,910 $ 91,997
Operating loss before depreciation and amortization and nonrecurring
charge............................................................ (7,670) 25,803 16,994
Nonrecurring charge.................................................. 10,000 -- --
Depreciation and amortization........................................ 53,205 38,881 22,336
Operating loss....................................................... (70,875) (13,078) (5,342)
Additions of property, plant and equipment........................... 79,042 38,548 29,854
Identifiable assets.................................................. 1,150,992 628,085 649,610
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Temporary Cash Investments - For purposes of reporting cash flows,
the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be temporary cash investments.
Temporary cash investments are stated at cost which approximates market.
Short Term Investments and Investments Restricted for Debt Service -
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, 1997 and 1996, marketable debt and equity
securities have been categorized as available for sale. The Company states its
short term investments at cost, which approximates market. Investments
restricted for debt service have been categorized as held to maturity.
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 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 property, plant and equipment are:
Lives
-----------
Hybrid fiber/coaxial plant 5-22 years
Advanced fiber plant 10-15 years
Wireless & other plant 5 years
Buildings and leasehold improvements 5-45 years
Furniture, fixtures and vehicles 3-10 years
Other 3 years
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred. Major replacements and betterments
are capitalized. Gain or loss is recognized on major retirements and
dispositions.
Intangible Assets - Intangible assets are amortized on a straight-line
basis over the expected period of benefit ranging from 2 to 15 years.
Accounting for Impairments - The Company follows 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 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.
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 service revenue is 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 $12,203, $1,441 and $862 in 1997,
1996 and 1995, respectively.
Stock Based Compensation - The Company applies Accounting Principles Board
Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans. The Company has adopted the disclosure - only
provisions of Statement of Financial Accounting Standards No. 123 -- "Accounting
for Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share - The Company has adopted statement of Financial
Accounting Standards No. 128 --"Earnings Per Share" ("SFAS 128"). Basic earnings
(loss) per share is computed based on net income (loss) divided by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to be
dilutive common stock equivalents. The conversion of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and have a dilutive effect if the Company had
income from continuing operations is 517,506.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by the number of average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common equity for each
share of C-TEC common equity owned.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ------------ -------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge............ $ 49,181 $ (5,989) $ 2,114
=========== =========== ===========
Basic earnings per average common share:
Average shares outstanding........................... 54,965,716 54,918,394 54,890,334
(Loss) income per average common share............... $ (0.89) $ (0.11) $ (0.04)
Diluted earnings per average common share:
Average shares outstanding........................... 54,965,716 54,918,394 54,890,334
----------- ----------- -----------
Dilutive shares resulting from stock options......... 54,965,716 54,918,394 54,890,334
=========== =========== ===========
(Loss) income per average common share............... $ (0.89) $ (0.11) $ (0.04)
</TABLE>
Income Taxes - The Company and its subsidiaries report income for federal
tax purposes on a consolidated basis.. Prior to the Distribution, the Company
and its subsidiaries were included in the consolidated federal income tax return
of C-TEC. Income tax expense is allocated to subsidiaries on a separate return
basis except that the Company's 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. 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 reporting
purposes. 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.
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. Assets and liabilities
are translated into U.S. dollars at the rates in effect at the end of the fiscal
period. Prior to 1997, 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. Effective January
1, 1997, since the three-year cumulative rate of inflation at December 31, 1996
exceeded 100%, Mexico is treated for accounting purposes as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The remeasurement
of the Mexican peso into U.S. dollars creates translation adjustments which are
included in net income. 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 were transferred to the Company
in connection with the Distribution.
On August 30, 1996, FNY Holding Company, Inc., formerly a wholly owned
subsidiary of C-TEC ("FNY") acquired from Kiewit Telecom Holdings, C-TEC's
controlling shareholder at the time, an 80.1% interest in Freedom New York, LLC
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 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 intangible 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 the Acquisition
Agreement, 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. In
addition, FNY paid $922 to Kiewit Telecom Holdings which represents compensation
for foregone interest on the amount invested by Kiewit Telecom Holdings in
Freedom. This amount has been charged to operations.
On March 21, 1997, the Company paid $15,000 in full satisfaction of
contingent consideration payable for the original acquisition of Freedom.
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
were primarily allocated to excess cost over fair value of net assets acquired
and are being 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.
On May 15, 1995, C-TEC Cable Systems, Inc, ("RCN Cable") formerly a wholly
owned subsidiary of C-TEC, 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 RCN Cable. In addition, RCN 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 RCN Cable. As of
May 15, 1995, RCN Cable also assumed management of Twin County. As a result, RCN
Cable had control of Twin County and accordingly Twin County is 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 was $39,500 which was recorded as additional paid-in
capital to the Company. In 1996, the $4,000 promissory note was canceled and RCN
Cable paid cash of $500 in settlement of certain purchase price adjustments.
RCN 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.), formerly a wholly owned subsidiary of C-TEC, purchased a
40% equity position in 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 acquired is approximately $94,000, which is being amortized on a
straight-line basis over 15 years.
In January 1995, RCN 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 RCN Cable in
1996 at net book value of $1,977. The Company disposed of its investment in 1997
and realized a gain of $661.
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 cash of 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 1996.
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.
Years Ended December 31,
--------------------------------
1997 1996
------------ -------------
(Unaudited)
Sales....................................... $127,297 $110,116
(Loss) from continuing operations
before extraordinary items................ $(72,245) $(20,189)
Net (loss).................................. $(53,831) $(16,807)
Pro Forma Earnings Per Share:
(Loss) from continuing operations
before extraordinary items................ $ (1.31) $ (0.37)
Net (loss).................................. $ (0.98) $ (0.31)
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at cost, include the following at December
31, 1997 and 1996:
1997 1996
------------ -------------
Federal Agency notes........................ $110,966 $ --
Commercial Paper............................ 43,859 8,823
Corporate debt securities................... 222,785 38,008
Certificates of deposit..................... 37,993 --
----------- -----------
Total....................................... $415,603 $ 46,831
=========== ===========
At December 31, 1997, short term investments with an amortized cost of
$329,714 have contractual maturities of one to three years. All remaining short
term investments have contractual maturities under one year.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997 1996
------------ -------------
Hybrid fiber/coaxial plant.................. $157,652 $148,172
Advanced fiber plant........................ 76,572 29,226
Wireless & other plant...................... 4,771 4,245
Buildings, leasehold improvements
and land.................................. 16,607 10,989
Furniture, fixtures and vehicles............ 23,399 18,119
Construction in process..................... 28,195 9,013
Other....................................... 563 593
----------- -----------
Total property, plant and equipment......... 307,759 220,357
Less accumulated depreciation............... (107,419) (84,529)
----------- -----------
Property, plant and equipment, net.......... $200,340 $135,828
=========== ===========
Depreciation expense was $24,257, $19,372 and $13,236 for the years ended
December 31, 1997, 1996 and 1995, respectively.
7. INVESTMENTS AND JOINT VENTURES
Investments at December 31, are as follows:
1997 1996
------------ -------------
Megacable................................... $ 70,363 $ 74,232
Partnership................................. -- --
Other....................................... 61 --
----------- -----------
Total Investments........................... $ 70,424 $ 76,547
=========== ===========
Investments carried on the equity method consist of the following at
December 31:
Percentage Owned
1997 1996
------------ -------------
Megacable................................... 40.00% 40.00%
Partnership Interest........................ -- 33.33%
Starpower Communications, LLC............... 50.00% --
a. In September 1996, RCN and Boston Edison Company ("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 was organized to own and
operate an advanced fiber optic telecommunications network and to provide, in
the market in and around Boston, Massachusetts , voice, video and data services,
as well as the communications support component of energy related customer
services offered by BECO. RCN owns 51% of the equity interest in RCN-BECOCOM and
BECO, owns the remaining 49% interest. Future capital contributions are required
to be made on a 51% and 49% basis for RCN and BECO, respectively.
The closing of the transactions contemplated by the Boston Joint Venture
Agreement occurred on June 17, 1997. 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. As a result of its ownership,
management and control, this joint venture with BECO is consolidated in RCN's
financial statements.
Pursuant to an Indefeasible Right of Use Agreement ("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 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. The fair value of the IRU transferred by BECO to the joint venture is
reflected as "Advanced Fiber Plant" in property, plant and equipment.
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. 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 in whole or in part from time to time. In January 1998, BECO notified RCN
that it has elected to exercise its option to the full extent permitted by the
Exchange Agreement with respect to 1997. RCN and BECO are presently in
discussions with respect to the calculation of the agreed upon value for the
exercise of such option.
b. On August 1, 1997, RCN and Potomac Capital Investment Corporation
("PCI"), a wholly owned subsidiary of PEPCO, entered into a letter of intent
(the "Letter of Intent") to form a joint venture which will own and operate a
communications network to provide voice, video, data and other communications
services to residential and commercial customers in the greater Washington,
D.C., Virginia and Maryland area (the "Washington, D.C. Market"). Starpower, an
unregulated limited liability company with a perpetual term, was formed on
October 28, 1997 to construct, own, lease, operate and market a network for the
selling of voice, video, data and other telecommunications services to all
potential commercial and residential customers in the Washington, D.C. Market.
RCN, owns 50% of the equity interest in Starpower and PCI, owns the remaining
50% interest.
The closing of the Starpower joint venture (the "Starpower Closing")
occurred on December 19, 1997.
Pursuant to the Amended and Restated Operating Agreement, RCN and Pepco
Communications are each required to make additional capital contributions in
accordance with a schedule set forth in such agreement on a 50%/50% basis.
Failure of either RCN or Pepco Communications to make a scheduled capital
contribution or to vote in favor of certain additional capital contributions may
result in the recalculation of equity interests. The business and affairs of
Starpower is to be managed by RCN and Pepco Communications. So long as RCN and
Pepco Communications maintain a 50%/50% equity interest in the joint venture,
each of RCN and Pepco Communications will appoint three members to the operating
committee, the approval of which is required for any business action. Certain
fundamental business actions, such as mergers, acquisitions, sales of
substantially all of the assets, liquidation and amendments to the certificate
of organization or any agreement signed at the Starpower Closing, require the
unanimous approval of the operating committee regardless of whether the parties
continue to maintain a 50%/50% ownership interest. As a result of the joint
control, Starpower is accounted for under the equity method of accounting.
A subsidiary of RCN will provide support services including customer
service, billing, marketing and certain administrative, accounting and technical
support services, each of which shall be provided at cost.
c. The basis of the Company's investment in Megacable 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, 1997, the unamortized excess over the underlying equity in the
net assets was $75,886. The Company recorded its proportionate share of (losses)
and amortization of excess cost over net assets of ($3,869), ($2,190) and
($3,061) in 1997, 1996 and 1995, respectively.
Effective January 1, 1997, since the three-year cumulative rate of
inflation at December 31, 1996 exceeded 100%, Mexico is being treated for
accounting purposes under Statement of Financial Accounting Standards No. 52
- --"Foreign Currency Translation", as having a highly inflationary economy. As a
result, the financial statements of Megacable are remeasured as if the
functional currency were the U.S. dollar. The remeasurement of the Mexican peso
into U.S. dollars creates translation adjustments which are included in net
income. Exchange gains (losses) of $(12), $247, and $(932) in 1997, 1996, and
1995, respectively, including translation losses in 1997, are included in the
respective statements of operations through the Company's proportionate share of
losses of Megacable.
The following table reflects the summarized financial position and results
of operations of Megacable as of and for the years ended December 31, 1997 and
1996:
1997 1996
------------ -------------
Assets...................................... 76,323 67,672
Liabilities................................. 8,347 6,455
Stockholders' equity........................ 67,976 61,217
Sales....................................... 30,441 23,225
Costs and expenses.......................... 23,389 15,689
Foreign currency transaction gains
(losses)................................... (31) 618
Net income.................................. 6,653 10,226
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31,
Amortization
Period 1997 1998
-------------- ----------- ------------
Franchises and subscriber lists....... 2-10.5 years $79,273 $78,720
Noncompete agreements................. 5-8 years 11,209 11,209
Goodwill.............................. 5-10 years 42,787 16,830
Building access rights................ 3-4 years 15,197 14,920
Other intangible assets............... 5-15 years 1,469 520
--------- ----------
Total intangible assets............... 149,935 122,199
Less accumulated amortization......... (53,388) (28,728)
Intangible assets, net................ $96,547 $ 93,471
========= ===========
Amortization expense charged to operations in 1997, 1996 and 1995 was
$28,948, $19,509 and $9,100, respectively.
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following at December 31:
1997 1996
---------- ------------
Note and interest receivable - Mazon Corporativo,
S.A. de C.V...................................... $17,682 $15,310
Debt issuance costs............................... 19,743 309
Prepaid pension costs............................. -- 2,967
Prepaid professional services..................... 938 3,439
Other............................................. 2,675 2,121
--------- ----------
Total............................................. $41,038 $24,146
========= ==========
10. DEBT
a. Long-term debt
Long-term debt outstanding at December 31 is as follows:
1997 1996
---------- ------------
Senior Secured Notes 9.65% due 1999............... $ -- $131,250
Revolving Credit Agreement........................ 3,000 --
Term Credit Agreement............................. 100,000 --
Senior Notes 10% due 2007......................... 225,000 --
Senior Discount Notes 111/8% due 2007............. 358,103 --
--------- ----------
Total............................................. 686,103 131,250
Due within one year............................... -- --
--------- ----------
Total Long -Term Debt............................. $686,103 $131,250
========= ==========
In October 1997, pursuant to Rule 144A of the Securities Exchange Act of
1933, the Company completed an offering of 10% Senior Notes with an aggregate
principal amount of $225,000 and 11 1/8% Senior Discount Notes with an aggregate
principal amount at maturity of $601,045, both due 2007, to qualified
institutional buyers as defined in Rule 144A. The Senior Discount Notes were
issued at a discount and generated gross proceeds to the Company of $350,000. In
December 1997, the Company commenced an SEC registered Exchange Offer of its 10%
Senior Notes due 2007, Series B for any and all outstanding 10% Senior Notes due
2007, Series A and its 11 1/8% Senior Discount Notes due 2007, Series B for any
and all outstanding 11 1/8% Senior Discount Notes due 2007 Series A. The
Exchange Offer closed in January of 1998. All outstanding notes were exchanged.
The 10% Senior Notes were issued under an indenture dated October 17, 1997
(the "10% Indenture") between the Company and The Chase Manhattan Bank, as
Trustee. The 10% Senior Notes are general senior obligations of the Company
which mature on October 15, 2007 and are collateralized by a pledge of the
Escrow Account which contains approximately $61,000 of the net proceeds from the
sale of the 10% Senior Notes plus approximately $1,000 of aggregate interest,
representing funds that, together with the future proceeds from the investment
thereof, will be sufficient to pay interest on the 10% Senior Notes for six
scheduled interest payments. Interest on the 10% Senior Notes is payable in cash
semi-annually in arrears on each April 15 and October 15, commencing April 15,
1998.
The 10% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 10% Senior Notes are redeemable, in whole or in part, at any time on or
after October 15, 2002 at the option of the Company. The 10% Senior Notes have
redemption prices starting at 105% of the principal amount and declining to 100%
of the principal amount, plus any accrued interest.
The 11-1/8% Senior Discount Notes were issued under an indenture dated
October 17, 1997 (the "11-1/8% Indenture")between the Company and The Chase
Manhattan Bank, as Trustee. The 11-1/8% Senior Discount Notes are general senior
obligations of the Company, limited to $601,045 aggregate principal amount at
maturity and will mature on October 15, 2007. The 11-1/8% Senior Discount Notes
were issued at a discount to yield gross proceeds of $350,000. The 11-1/8%
Senior Discount Notes will not bear cash interest prior to October 15, 2002.
The 11-1/8% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 11-1/8% Senior Discount Notes are redeemable, in whole or in part, at
any time on or after October 15, 2002 at the option of the Company. The 11-1/8%
Senior Discount Notes have redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued interest.
Certain subsidiaries of the Company, including RCN Cable, have in place a
$125,000 credit agreement comprised of two credit facilities. The first is a
five year revolving credit facility in the amount of $25,000 which provides
credit availability through June 30, 2002. Revolving loans may be repaid and
reborrowed from time to time. The second is a term credit facility in the amount
of $100,000 which is to be repaid over six years in quarterly installments from
September 30, 1999 through June 30, 2005. Interest only is due through June 30,
1999. The interest rate is based on either a LIBOR or Base Rate option, at the
election of the Company (6.82% at December 31, 1997). The credit agreement is
collateralized by a pledge by the Company of its stock in RCN Cable and may, in
the future, be secured by pledges of stock of subsidiaries of the Company. At
December 31, 1997, the entire $100,000 term credit facility is outstanding and
$3,000 of the revolving credit facility is outstanding. RCN Cable used a portion
of its initial Borrowings under the credit facilities to prepay higher priced
Senior Secured Notes. The early extinguishment of the Senior Secured Notes
resulted in an extraordinary charge of $3,210, net of taxes of $1,728. The
credit agreement contains restrictive covenants which, among other things,
require the Company to maintain certain debt to cash flow and interest coverage
ratios and place certain limitations on additional debt and investments. The
Company does not believe that these covenants will materially restrict its
activities.
In 1989, in order to complete the August 29, 1989 Michigan Cable Television
acquisition, RCN 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, RCN 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. The Senior
Secured Notes were collateralized by the stock of certain cable subsidiaries of
the Company. On September 1, 1996 and on each September 1 thereafter, a
mandatory principal repayment was required on the Senior Secured Notes. The
Senior Secured Notes contained restrictive covenants which, among other things,
required maintenance of a specified debt to cash flow ratio. These notes were
prepaid in 1997 as discussed above. The Senior Secured Notes were classified as
long-term at December 31, 1996 since the Company had the intent and the ability
to refinance this obligation on a long-term basis through the above credit
facilities.
In connection with the acquisition of Twin County Trans Video, Inc., RCN
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
------------------------ -----------------
1998................................... $ --
1999................................... $ 3,750
2000................................... $11,250
2001................................... $16,250
2002................................... $20,500
b. Short-term debt
At December 31, 1997, the Company had unused lines of credit for $5,500 at
prime (8.50% at December 31, 1997). 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 31,1997). 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 (benefit) provision for income taxes is reflected in the Consolidated
Statements of Operations as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal............................................... $ (11,795) $ 5,730 $ (5,713)
State................................................. 1,449 1,102 375
--------------- ---------- -----------
Total Current............................................ (10,346) 6,832 (5,338)
--------------- ---------- -----------
Deferred:
Federal............................................... (10,161) (4,751) 7,016
State................................................. (342) (1,000) (377)
--------------- ---------- -----------
Total Deferred........................................... (10,503) (5,751) 6,639
--------------- ---------- -----------
Amortization of ITC...................................... -- (102) (182)
--------------- ---------- -----------
Provision (benefit) for income taxes:
Before extraordinary item............................. (20,849) 979 1,119
Extraordinary item.................................... (1,728) -- --
--------------- ---------- -----------
Total (benefit) provision for income taxes............... $ (22,577) $ 979 $ 1,119
=============== ========== ===========
</TABLE>
At December 31, 1997 and 1995, the Company had tax related balances due
from affiliates of $3,186 and $501, respectively. At December 31, 1996, the
Company had tax related balances due to affiliates of $817.
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Net operating loss carryforwards........................................... $10,078 $ 2,130
Alternative minimum tax credits............................................ 167 219
Employee benefit plans..................................................... 1,031 882
Reserve for bad debt....................................................... 844 693
Start-up costs............................................................. 586 959
Investment in unconsolidated entity........................................ 3,985 4,771
Accruals for nonrecurring charges and contract settlements................. 2,368 2,299
Other, net................................................................. 1,823 1,888
--------- ----------
Total deferred tax assets.................................................. 20,882 13,841
--------- ----------
Property, plant and equipment.............................................. (14,759) (15,019)
Intangible assets.......................................................... (11,253) (17,776)
All other.................................................................. (1,257) (1,229)
--------- ----------
Total deferred liabilities................................................. (27,269) (34,024)
--------- ----------
Subtotal................................................................... (6,387) (20,183)
Valuation allowance........................................................ (8,404) (3,691)
--------- ----------
Total deferred taxes....................................................... $(14,791) $(23,874)
========= ==========
</TABLE>
In the opinion of management, based on the future turnaround of existing
temporary differences for the consolidated taxpaying group, primarily
depreciation, 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
1997 was an increase of $4,713.
Net operating losses will expire as follows:
Federal State
---------- ----------
1999.......................................... $2,793
2000.......................................... 3,087
2001.......................................... 14,532
2002.......................................... 3,141
2003.......................................... 10,244
2004.......................................... 3,767
2011.......................................... 38,116
2012.......................................... 8,028
2017.......................................... $ 8,218 --
---------- ----------
Total......................................... $ 8,218 $83,708
========== ==========
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,
--------------------------------
1997 1996 1995
-------- -------- ---------
(Loss) income before (benefit) provision
for the income taxes and
extraordinary item ...................... $(70,030) $(5,010) $3,233
======== ======== ========
Federal income tax benefit at
statutory rate ........................... $(24,511) $(1,753) $1,131
State income taxes net of federal
income tax benefit ....................... 719 66 (33)
Investment tax credits amortized ........... -- (102) (50)
Amortization of goodwill ................... 830 779 388
Estimated nondeductible expenses ........... 1,913 1,564 (93)
Adjustment to prior year accrual ........... (197) 421 (161)
Other, net ................................. 397 4 (63)
-------- -------- --------
Total (benefit) provision for
income taxes ............................. $(20,849) $ 979 $1,119
======== ======== ========
In 1995, C-TEC 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 the disallowance, the Company's taxes payable
for prior years increased approximately $580. The amount accrued in previous
years was sufficient to satisfy the above adjustment. No additional accrual
during 1995 was required.
In 1997 and 1996, estimated non-deductible expenses relate primarily to
charges in connection with the restructuring of the Company.
12. STOCKHOLDERS' EQUITY AND STOCK PLANS
The Company has authorized 100,000,000 shares of $1 par value common stock
and 200,000,000 shares of $1 par value Class B nonvoting common stock. The
Company also has authorized 25,000,000 shares of $1 par value preferred stock.
At December 31, 1997, 54,989,870 shares of common stock are issued and
outstanding.
In March 1998, the Company's Board of Directors approved a two-for-one
stock split, payable in the form of a 100% stock dividend. The record date for
the stock split is March 20, 1998. Stockholders of record at the market close on
that date will receive an additional share of RCN common stock for each share
held. The distribution date for the stock dividend will be April 3, 1998. All
share and per share data, stock option data, and market prices of the Company's
common stock have been restated to reflect this stock split.
In connection with the Distribution, the Company Board adopted the 1997 RCN
Corporation Stock Option Plan ("the 1997 Plan"), designed to provide equity
based compensation opportunities to key employees when shareholders of the
Company have received a corresponding benefit through appreciation in the value
of RCN Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 5,000,000 shares of Common Stock, plus 3,040,100
shares of Common Stock issuable in connection with the Distribution related
option adjustments, may be issued pursuant to Awards granted under the 1997
Plan.
Unless earlier terminated by the Company Board, the 1997 Plan will expire
on the tenth anniversary of the Distribution. The Company Board or the
Compensation Committee may, at any time, or from time to time, amend or suspend
and, if suspended, reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of RCN were granted stock
option awards under C-TEC's stock option plans. In connection with the
Distribution 3,040,100 options covering Common Stock were issued. Each C-TEC
option was adjusted so that each holder would currently hold options to purchase
shares of CTE Common Stock, RCN Common Stock and Cable Michigan Common Stock.
The number of shares subject to, and the exercise price of, such options were
adjusted to take into account the Distribution and to ensure that the aggregate
intrinsic value of the resulting RCN, Cable Michigan and CTE options immediately
after the Distribution was equal to the aggregate intrinsic value of the C-TEC
options immediately prior to the Distribution.
Information relating to stock options is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding December 31, 1994............... 1,431,000
Granted.................................. 1,257,000
Exercised................................ --
Canceled................................. 280,000
---------
Outstanding December 31, 1995............... 2,408,000
Granted.................................. 190,000
Exercised................................ 58,000
Canceled................................. 272,000
---------
Outstanding December 31, 1996............... 2,268,000 $7.10
Granted.................................. 4,862,100 $14.31
Exercised................................ 20,000 $8.07
Canceled................................. 3,000 $8.36
--------- --------
Outstanding December 31, 1997............... 7,107,100 $14.31
========= ========
Shares exercisable December 31, 1997........ 1,221,000 $7.05
The following table summarizes stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------------- -----------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$6.24 to $8.40 .... 3,017,100 7.5 years $ 7.36 1,221,000 $7.05
$15.32 to $16.82 .. 4,090,000 9.8 years 15.33 -- --
--------- ---------
Total ............. 7,107,100 1,221,000
========= =========
</TABLE>
No compensation expense related to stock option grants was recorded in 1997
as the option exercise prices were equal to fair market value on the date
granted.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black Scholes
option pricing model with weighted average assumptions for dividend yield of 0%
for 1997, 1996 and 1995; expected volatility of 38.6% prior to the Distribution
and 49.8% subsequent to the Distribution for 1997, 39.5% for 1996, and 35.9% for
1995; risk-free interest rate of 6.52%, 5.95% and 6.32% for 1997, 1996 and 1995,
respectively; and expected lives of 5 years for 1997, 1996 and 1995.
The weighted-average fair value of options granted during 1997 was $7.46.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:
1997 1996 1995
----------- ---------- ---------
Net earnings - as reported................. $(52,391) $(5,989) $2,114
Net earnings - pro forma................... $(54,419) $(6,612) $1,695
Basic earnings pr share - as reported...... $ (0.95) $(0.11) $ 0.04
Basic earnings per share - pro forma....... $ (0.99) $(0.12) $ 0.03
Diluted earnings per share - as reported... $ (0.95) $(0.11) $ 0.04
Diluted earnings per share - pro forma..... $ (0.99) $(0.12) $ 0.03
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the C-TEC "Executive Stock Purchase Plan" or "C-TEC
ESPP"). Under the C-TEC ESPP, participants may purchase shares of C-TEC Common
Stock in an amount of between 1% and 20% of their annual base compensation and
between 1% and 100% of their annual bonus compensation provided, however, that
in no event shall the participant's total contribution exceed 20% of the sum of
their annual compensation, as defined by the C-TEC ESPP. Participant's accounts
are credited with the number of share units derived by dividing the amount of
the participant's contribution by the average price of a share of C-TEC Common
Stock at approximately the time such contribution is made. The share units
credited to a participant's account do not give such participant any rights as a
shareholder with respect to, or any rights as a holder or record owner of, any
shares of C-TEC Common Stock. Amounts representing share units that have been
credited to a participant's account will be distributed, either in a lump sum or
in installments, as elected by the participant, following the earlier of the
participant's termination of employment or three calendar years following the
date on which the share units were initially credited to the participant's
account. It is anticipated that, at the time of distribution, a participant will
receive one share of C-TEC Common Stock for each share unit being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow.
Shares of restricted C-TEC Common Stock awarded under the C-TEC Executive
Stock Purchase Plan and share units awarded under the C-TEC ESPP that relate to
C-TEC Common Stock were adjusted so that following the Distribution, each such
participant was credited with an aggregate equivalent value of restricted shares
of common stock of Commonwealth Telephone Enterprises, the Company and Cable
Michigan. In 1997, the Company's Board of Directors approved the RCN Corporation
Executive Stock Purchase Plan (the "RCN ESPP"), with terms substantially the
same as the C-TEC ESPP. The number of shares which may be distributed under the
RCN ESPP as matching shares or in payment of share units is 250,000. At December
31, 1997, 61,412 matching shares have been issued under the RCN ESPP, none of
which are vested. The Company recognizes the cost of the matching shares over
the vesting period. Expense recognized in 1997 and 1996 was $80 and $145,
respectively.
13. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, 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 were
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
------- --------
Benefits earned during the year (service cost)............ $2,365 $1,656
Interest cost on projected benefit obligation............. 3,412 3,083
Actual return on plan assets.............................. (3,880) (12,897)
Other components - net.................................... (1,456) 8,482
------- --------
Net periodic pension cost................................. $441 $ 324
======= ========
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost:
December 31,
-------------------
1996 1995
------- --------
Discount rate............................................. 7.5% 7.0%
Expected long-term rate of return on plan assets.......... 8.0% 8.0%
Weighted average long-term rate of compensation
increases............................................... 6.0% 6.0%
The Company's allocable share of the consolidated net periodic pension
costs, based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $158 and $251 for 1996 and
1995, respectively. These amounts are reflected in operating expenses. As
discussed below, no pension cost (credit) was recognized in 1997.
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 no longer accrue
benefits under the defined benefit pension plans and became 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 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
1997 and 1996 consolidated balance sheets.
The following table sets forth the plans' funded status and amounts
recognized in C-TEC's balance sheet at December 31, 1996:
Plan assets at fair value.......................................... $55,325
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested............................................................. 32,372
Nonvested.......................................................... 1,704
----------
Total.............................................................. 34,076
Effect of increases in compensation................................ 6,042
----------
Plan assets in excess of (less than) projected
benefit obligation............................................... 15,207
Unrecognized transition asset...................................... (3,463)
Unrecognized prior service cost.................................... 2,438
Unrecognized net gain.............................................. (11,215)
----------
Prepaid pension cost............................................... $ 2,967
==========
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 at December 31, 1996.
Prepaid pension cost is included in "Deferred Charges and Other Assets" in
the accompanying 1996 consolidated balance sheet. The prepaid pension asset was
transferred to CTE in connection with the Distribution in 1997.
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 employees contributions. Contributions charged to expense were
$354 and $268 in 1996 and 1995, respectively. Contributions charged to expense
in 1997 prior to the Distribution were $515.
In connection with the Distribution, RCN established a qualified savings
plan under Section 401(k) of the Code that will also qualify as an ESOP under
Sections 401(a) and 4975(e)(7) of the Code (the "ESOP"). Eligible active
employees 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. Contributions charged to expense in 1997 were $306.
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 accrues the cost of
postemployment benefits over employees' service lives. The Company uses the
services of an enrolled actuary to calculate the expense. Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries. The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost. The net periodic postemployment benefit cost
(credit) was approximately $458, $539 and ($106) in 1997, 1996 and 1995,
respectively.
14. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1997
related to its 1998 construction budget.
b. Total rental expense, primarily for office space and pole rentals, was
$3,505, $3,632 and $2,846 for 1997, 1996 and 1995, respectively. At December 31,
1997, rental commitments under noncancelable leases, excluding annual pole
rental commitments of approximately $794 that are expected to continue
indefinitely, are as follows:
Aggregate
Year Amounts
---- ---------
1998........................................ $3,725
1999........................................ $3,314
2000........................................ $2,939
2001........................................ $2,826
2002........................................ $2,848
Thereafter.................................. $8,501
c. The Company has outstanding letters of credit aggregating $3,060 at
December 31, 1997.
d. The Company has entered into various noncancelable contracts for network
services. Future obligations under these agreements are as follows:
Network
Year Services
---- ---------
1998........................................ $3,026
1999........................................ $3,064
2000........................................ $3,012
2001........................................ $2,762
2002........................................ $ 12
Thereafter.................................. $ 14
e. 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.
f. 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 position or results of operations or
liquidity of the Company.
g. The Company has agreed to indemnify Cable Michigan and CTE 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 CTE 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 CTE liability, a true Cable
Michigan liability or a true Company liability.
The Tax Sharing Agreement, by and among the Company, Cable Michigan and CTE
(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 CTE Group will be borne
solely by such group. Adjustments to all other tax liabilities will be borne 50%
by CTE, 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.
h. Under the Starpower Amended and Restated Operating Agreement, the
Company is committed to make quarterly capital contributions aggregating the
following in the years ended December 31:
1998........................................ $56,250
1999........................................ $68,750
2000........................................ $25,000
i. If, within five years after the Distribution, the ESOP portion of the
401(k) Plan does not hold shares representing at least 3% of the number of
shares of Company Common Stock outstanding immediately after the Distribution as
increased by the number of shares issuable to BECO pursuant to the Exchange
Agreement (collectively, "Outstanding Company Common Stock") with a market value
at such time of not less than $24,000, 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.
15. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company had the following transactions with affiliates during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Corporate office costs allocated to affiliates....................... $12,091 $ 12,362 $ 10,009
Cable staff and customer service costs allocated to Cable Michigan... 3,489 3,577 2,952
Interest income on affiliate notes................................... 8,688 15,119 17,340
Interest expense on affiliate notes.................................. 537 354 279
Long-distance terminating access charge expense from CTE............. 1,312 728 862
Royalty fees charged by CTE.......................................... 669 859 533
Revenue from engineering services.................................... -- 296 2,169
Other affiliate revenues............................................. 1,576 -- 6
Other affiliate expenses............................................. 2,199 1,980 2,090
</TABLE>
At December 31, 1997 and 1996, the Company has accounts receivable from
related parties of $9,829 and $12,614, respectively, for these transactions. At
December 31, 1997 and 1996, the Company has accounts payable to related parties
of $3,748 and $4,880, respectively, for these transactions.
The Company had notes receivable of $7,914 in 1996 from advances by the
Company's corporate financial services company to CTE. The Company also had
notes receivable of $147,567 at December 31, 1996, from Cable Michigan, Inc.
primarily related to the acquisition of the Michigan cable operations and
subsequent operations. All intercompany notes receivable were settled in
connection with the Distribution.
The Company had notes payable of $11,854 in 1996 from excess cash advanced
by CTE to the Company's corporate financial services company for investment. All
intercompany notes payable were settled in connection with the Distribution.
16. 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
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base primarily centered
in the Boston to Washington, D.C. corridor of the United States. The Company
routinely assesses the financial strength of its customers. As a consequence,
concentrations of credit risk are limited.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
b. Short-term investments
Short-term investments consist of commercial paper, corporate debt
securities, certificates of deposit and 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
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. Investments restricted for debt service
Investments restricted for debt service consists of an amount placed in
escrow from the proceeds of the 10% Senior Notes which, together with the
proceeds from the investment thereof, will be sufficient to pay interest on the
10% Senior Notes for six scheduled interest payments. Investments restricted for
debt service are carried at amortized cost.
e. 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.
f. Letter 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>
1997 1996
-------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments................ $222,910 $222,910 $61,843 $61,843
Short-term investments............................. $415,603 $415,603 $46,831 $46,831
Note and interest receivable....................... $17,682 $17,682 $15,310 $15,310
Investments restricted for debt service............ $61,911 $61,911 -- --
Financial Liabilities
Fixed rate long-term debt:
Senior Secured Notes............................ -- -- $131,250 $137,459
Senior Notes 10%................................ $225,000 $233,438 -- --
Senior Discount Notes 11.125%................... $358,103 $377,156 -- --
Floating rate long-term debt:......................
Revolving Credit Agreement...................... $ 3,000 $ 3,000 -- --
Term Credit Agreement........................... $100,000 $100,000 -- --
Unrecognized financial instruments:................
Letters of credit............................... $ 3,060 $ 3,060 $ 3,060 $ 3,060
18. QUARTERLY INFORMATION (Unaudited)
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ----------- ----------- -----------
Sales................................................. $29,677 $31,029 $31,148 $35,443
Operating income (loss) before depreciation,
amortization and nonrecurring charges.............. $ 4,153 $ 850 $(4,332) ($8,341)
Operating (loss)...................................... $(18,037) $(12,416) $(18,011) $(22,411)
Loss before extraordinary charge...................... N/A N/A N/A $(17,116)
Loss before extraordinary charge per average (0.31)
common share....................................... N/A N/A N/A $
Common Stock closing price
High.................................................. N/A N/A $ 16.63 $ 21.63
Low................................................... N/A N/A $ 12.44 $ 12.50
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ----------- ----------- -----------
Sales................................................. $24,165 $24,852 $26,746 $29,147
Operating income before depreciation and
amortization....................................... $ 4,199 $ 7,777 $ 9,188 $ 4,639
Operating (loss)...................................... $(4,621) $(1,233) $ (19) $(7,205)
</TABLE>
19. SUBSEQUENT EVENTS
a. In February 1998, the Company completed an offering of 9.8% Senior
Discount Notes with an aggregate principal amount at maturity of $567,000, due
February 2008. The 9.8% Senior Discount Notes were issued at a discount and
generated gross proceeds to the Company of $350,587.
The 9.8% Senior Discount Notes are general senior obligations of the
Company, limited to $567,000 aggregate principal amount at maturity and will
mature on February 15, 2008. The 9.8% Senior Discount Notes were issued at
a discount to yield gross proceeds of $350,587. The 9.8% Senior Discount Notes
will not pay cash interest prior to February 15, 2003. The yield to maturity of
the 9.8% Senior Discount Notes, determined on a semi-annual bond equivalent
basis, will be 9.8% per annum.
The 9.8% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinate indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 9.8% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of the Company. The 9.8% Senior
Discount Notes may be redeemed at redemption prices starting at 104.9% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued and unpaid interest.
b. On January 21, 1998, RCN entered into the Agreement and Plan of Merger
(the "Erols Merger Agreement") among RCN, Erols Internet, Inc. ("Erols"), Erol
Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands corporation ("Gold
& Appel"), and ENET Holdings, Inc., a Delaware corporation and a wholly owned
subsidiary of RCN ("ENET"), to acquire all of the outstanding shares of common
stock of Erols. The merger was consummated on February 20, 1998. Erols merged
with and into ENET (the "Erols Merger"), with ENET as the surviving corporation.
The approximate total Erols Merger consideration was $29,200 in cash, 1,730,648
shares of RCN common stock plus the assumption and repayment of $5,800 of debt.
Additionally, the Company is converting approximately 999,000 Erols stock
options to 699,104 RCN stock options at an average exercise price of $3.424 per
share. The transaction was accounted for under the purchase method of
accounting.
RCN expects to contribute to Starpower approximately 60% of the subscribers
acquired in the acquisition of Erols.
c. On January 21, 1998, RCN, UNET Holdings, Inc., a wholly owned subsidiary
of RCN, and Ultranet Communications, Inc. ("Ultranet") entered into an Agreement
and Plan of Merger (the "Ultranet Merger Agreement"). The total consideration
for the acquisition was 7,368 in cash, 890,384 shares of RCN common stock, and
$3,000 in deferred compensation. Additionally, the Company is converting 63,500
UltraNet stock options to 117,052 RCN stock options at an average exercise price
of $1.825 per share and making cash payments aggregating approximately $503 to
certain other holders of UltraNet stock options. The transaction was consummated
on February 27, 1998. The transaction was accounted for under the purchase
method of accounting.
RCN expects to contribute to RCN-BECOCOM approximately 30% of the
subscribers acquired in the acquisition of Ultranet.
d. RCN paid $12,500 in cash in January 1998 as its initial capital
contribution to Starpower.
e. In January 1998, BECO notified RCN that it has elected to exercise its
option to the full extent permitted by the Exchange Agreement (Note 7) with
respect to 1997. RCN and BECO are presently in discussions with respect to the
calculation of the agreed upon value for the exercise of such option.
f. On February 27, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Lancit Media Entertainment, Ltd. ("Lancit")
and LME Acquisition Corporation ("MergerSub"), a wholly owned subsidiary of RCN.
Pursuant to the terms of the Merger Agreement, MergerSub will be merged with and
into Lancit (the "Merger") such that immediately following the Merger, Lancit
will be a wholly-owned subsidiary of RCN. The consummation of the Merger is
subject to customary conditions, including the adoption and approval of the
Merger and the Merger Agreement by the stockholders of Lancit in accordance with
the provisions of applicable law and the filing and effectiveness of a
registration statement of RCN. There is no assurance that this transaction will
be consummated.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Erols Internet, Inc.
We have audited the accompanying balance sheets of Erols Internet, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for the period from August 1, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Erols Internet, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from August 1, 1995 (inception) to December 31, 1995 and years
ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
January 15, 1998, except for Note 10,
as to which the date is February 20, 1998
EROLS INTERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $2,540,857 $ 103,718
Accounts receivable, less allowance of $42,000 and $161,000 at December
31, 1996 and 1997, respectively........................................... 233,508 544,051
Restricted cash.............................................................. -- 150,000
Note receivable from related parties......................................... 350,000 370,572
Prepaid expenses and other current assets.................................... 21,815 19,953
------------- -------------
Total current assets............................................................ 3,146,180 1,188,294
Property and equipment, net..................................................... 10,499,332 17,840,969
Restricted cash................................................................. 850,166 743,353
Deposits........................................................................ 63,321 395,711
------------- -------------
Total assets.................................................................... $14,558,999 $20,168,327
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities:
Accounts payable............................................................. $9,973,259 $8,651,104
Accrued expenses............................................................. 586,874 1,404,170
Current portion of unearned revenues......................................... 12,916,864 25,582,996
Notes payable................................................................ 700,000 700,000
Current portion of capital lease obligations................................. 613,506 1,466,701
Current portion of deferred gain............................................. 42,444 66,079
------------- -------------
Total current liabilities....................................................... 24,832,947 37,871,050
------------- -------------
Long-term portion of unearned revenues.......................................... 3,440,928 8,906,491
Note payable to stockholder..................................................... -- 5,000,000
Long-term portion of capital lease obligations.................................. 994,343 1,852,026
Long-term portion of deferred gain.............................................. 60,722 66,580
Deferred rent................................................................... 120,611 134,376
Commitments..................................................................... -- --
Stockholders' deficit:
Preferred Stock, $.001 par value; 10,000,000 shares authorized............... -- --
Common Stock, $.001 par value; 50,000,000 shares authorized; 5,586,492
and 5,836,779 shares issued and at December 31, 1996 and 1997,
respectively.............................................................. 5,586 5,837
Additional paid-in capital................................................... 3,127,239 4,066,088
Deferred stock compensation.................................................. (364,250) (202,361)
Accumulated deficit.......................................................... (17,659,127) (37,531,760)
------------- -----------
Total stockholders' deficit..................................................... (14,890,552) (33,662,196)
============= ===========
Total liabilities and stockholders' deficit..................................... $14,558,999 $20,168,327
============= =============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
August 1, 1995 Year ended December 31,
(inception) to ----------------------------------
December 31, 1995 1996 1997
----------------- -------------- ---------------
<S> <C> <C> <C>
Net revenues:
Dial access revenues....................................... $ 125,752 $10,948,863 $ 33,588,925
Other revenues............................................. -- -- 2,939,215
------------- -------------- ---------------
Total net revenues............................................ 125,752 10,948,863 36,528,140
------------- -------------- ---------------
Costs and expenses:
Cost of dial access revenues............................... 63,030 6,002,155 13,338,452
Cost of other revenues..................................... -- -- 1,198,837
Operations and customer support............................ 125,095 6,227,011 9,930,114
Sales and marketing........................................ 188,314 9,475,585 19,777,437
General and administrative................................. 90,880 2,092,421 5,584,224
Depreciation and amortization.............................. 16,741 2,013,967 6,360,573
------------- -------------- ---------------
Total costs and expenses...................................... 484,060 25,811,139 56,189,637
Loss from operations.......................................... (358,308) (14,862,276) (19,661,497)
Other income (expense):
Other expense, net......................................... (658,421) (1,628,201) (49,157)
Interest expense, net...................................... (1,545) (150,376) (161,979)
------------- -------------- ---------------
Net loss...................................................... $(1,018,274) $(16,640,853) $(19,872,633)
============= ============== ===============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred Stock Accumulated Stockholders'
Shares Amount Paid-in Capital Compensation Deficit Deficit
----------- --------- --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 ............. $ -- $ -- $ -- $ -- $ -- $ --
Net loss ........................... -- -- -- (1,018,274) (1,018,274)
---------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1995 .......... -- -- -- -- (1,018,274) (1,018,274)
Contribution of divisional equity to
Erols Internet, Inc. (Note 1) ... 424 -- 1,000 -- -- 1,000
Recapitalization of Erols Internet,
Inc. (Note 1):
Retirement of Common Stock of
Erols Computer, Inc. ........... (424) -- (1,000) -- -- (1,000)
Issuance of Common Stock of Erols
Internet, Inc. ................. 4,272,023 4,272 5,803 -- -- 10,075
Issuance of Common Stock ........... 1,314,469 1,314 2,757,186 -- -- 2,758,500
Compensatory stock options ......... -- -- 364,250 (364,250) -- --
Net loss ........................... -- -- -- -- (16,640,853) (16,640,853)
---------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 .......... 5,586,492 5,586 3,127,239 (364,250) (17,659,127) (14,890,552)
Issuance of Common Stock ........... 250,287 251 938,849 -- -- 939,100
Compensatory stock options ......... -- -- -- 161,889 -- 161,889
Net loss ........................... -- -- -- -- (19,872,633) (19,872,633)
---------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 .......... $5,836,779 $5,837 $4,066,088 $(202,361) $(37,531,760) $(33,662,196)
========== ========= ============ ============ ============ ============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
August 1, 1995
(Inception) to Year ended December 31,
December 31, ------------------------------
1995 1996 1997
--------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. $(1,018,274) $(16,640,853) $(19,872,633)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ................... 16,741 2,013,967 6,360,573
Allowance for doubtful accounts ................. -- 42,000 119,000
Gain related to sale-leaseback transactions ..... (42,444)
Stock and stock option compensation expense ..... -- -- 161,889
Changes in operating assets and liabilities:
Accounts receivable ........................... (14,764) (260,744) (450,115)
Prepaid expenses and other current assets ..... -- (21,815) 1,862
Restricted cash ............................... -- (850,166) (43,187)
Deposits ...................................... -- (63,321) (332,390)
Accounts payable .............................. 92,400 9,880,859 (1,322,155)
Accrued expenses .............................. 29,241 557,633 817,296
Unearned revenues ............................. 743,496 15,614,296 18,131,695
Deferred rent ................................. 68,105 52,506 13,765
------------ ------------ ------------
Net cash (used in) provided by operating activities ... (83,055) 10,324,362 3,543,156
INVESTING ACTIVITIES
Purchases of property and equipment ................ (416,945) (10,174,143) (11,350,440)
Proceeds from disposal of property and equipment ... -- -- 12,172
Advance under note receivable from related parties . -- (350,000) --
------------ ------------ ------------
Net cash used in investing activities ................. (416,945) (10,524,143) (11,338,268)
FINANCING ACTIVITIES
Proceeds from notes payable to bank ................ 500,000 700,000 600,000
Proceeds from notes payable to related party ....... -- -- 5,000,000
Payments of notes payable to bank .................. -- (500,000) (600,000)
Payments on obligations under capital leases ....... -- (227,937) (581,127)
Net proceeds from issuance of Common Stock ............ -- 2,768,575 939,100
------------ ------------ ------------
Net cash provided by financing activities ............. 500,000 2,740,638 5,357,973
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .. -- 2,540,857 (2,437,139)
Cash and cash equivalents at beginning of period ...... -- -- 2,540,857
------------ ------------ ------------
Cash and cash equivalents at end of period ............ -- 2,540,857 103,718
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ......................................... $ 1,545 $ 159,196 $ 281,085
============ ============ ============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. Organization
Erols Internet, Inc. (the "Company") began operations on August 1, 1995 as
a division of OEO, Inc., which changed its name to Erols Internet, Inc. on
December 2, 1996. The Company is an Internet service provider ("ISP"), offering
a combination of low priced, high quality Internet access in targeted markets
located throughout the corridor stretching from Massachusetts to Virginia.
From its inception on August 1, 1995 through December 2, 1996, the Company
operated as a division of OEO, Inc., a company that had two divisions consisting
of the Company's ISP operations and a computer, television and video cassette
recorder repair division. On December 2, 1996, OEO, Inc. reincorporated in the
State of Delaware and changed its name to Erols Internet, Inc. Shortly
thereafter, on December 28, 1996, the assets and liabilities of the computer,
television and video cassette recorder repair division were spun-off to a newly
formed Virginia corporation named Erol's Computer & TV/VCR, Inc.
The financial statements of Erols Internet, Inc. as of and for the five
month period ended December 31, 1995 have been prepared on the basis that Erols
Internet, Inc. operated as a division of OEO, Inc. and accordingly, there are no
equity accounts such as common stock or paid in capital related to the Internet
division. The financial statements of Erols Internet, Inc. as of December 31,
1996 have been prepared on the basis that Erols Internet, Inc. operated as a
separately incorporated company and accordingly, reflect the shares of Common
Stock issued to the former stockholder of OEO, Inc. as a result of the
reincorporation and recapitalization of Erols Internet, Inc. Additionally, the
statements of operations for the period from August 1, 1995 (inception) to
December 31, 1995 and for the period from January 1, 1996 to December 28, 1996
have been prepared from the historical books and records of the Internet
division and include all amounts directly attributable and identifiable to the
Internet business as well as indirect expenses, such as physical operating costs
and management salaries. The physical operating costs and management salaries
were charged based on square feet and hours attributable to the Internet
business, respectively.
The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure, increase internal
staffing, develop its systems and expand into new markets. The Company expects
to continue to focus on increasing its subscriber base and geographic coverage.
Accordingly, the Company expects its cost and operating expenses and capital
expenditures to continue to increase significantly, all of which will have a
negative impact on short-term operating results. The online services and
Internet markets are highly competitive. The Company believes that existing
competitors, Internet-based services, Internet service providers, Internet
directory services and telecommunication companies are likely to enhance their
service offerings resulting in greater competition for the Company. The
competitive conditions could have the following effects: require additional
pricing programs, increase spending on marketing, limit the Company's ability to
expand its subscriber base and result in increase attrition in the existing
subscriber base. There can be no assurance that growth in the Company's revenues
or subscriber base will continue or that the Company will be able to achieve or
sustain profitability or positive cash flow.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the 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
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents. On December 31, 1997, the Company had purchased
$5,125,000 of U.S. Government securities under agreements to resell on January
1, 1998. Due to the short-term nature of the agreements, the Company did not
take possession of the securities which were held by the Company's asset
managers. The market value of the securities approximated the carrying amount at
December 31, 1997.
Restricted Cash
Certain capital lease agreements generally require the Company to maintain
restricted cash deposit accounts with a bank which amounted to $850,166 and
$893,353 as of December 31, 1996 and 1997, respectively.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." The Company made no adjustments to the carrying values of the
assets during the period from August 1, 1995 (inception) to December 31, 1995
and during the years ended December 31, 1996 and 1997.
Stock Compensation
The Company accounts for its stock-based compensation in accordance with
APB No. 25 "Accounting for Stock Issued to Employees" ("APB 25") using the
intrinsic value method. The Company has made pro forma disclosures required by
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") using the
fair value method.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. During the period from August 1, 1995 (inception) to December 31, 1995
and the years ended December 31, 1996 and 1997, the Company offered one, two and
three year contracts for Internet access that are generally paid for in advance
by customers. The Company has deferred recognizing revenue on these advance
payments and amortizes the amounts to revenue on a straight-line basis as the
services are provided.
The Company allows for cancellations of up to thirty days after service is
initiated for a full refund. Any cancellations in the period subsequent to the
first thirty days of service are refunded on a pro-rata schedule. The Company
reviews its history of cancellations periodically and, when appropriate, records
a reserve for estimated amount of returns.
The Company recognizes web page hosting revenues when the services are
rendered. During the year ended 1997, the Company offered monthly and one year
contracts to host customers' web pages. The revenues related to these contracts
were recognized on the straight line basis over the term of the contract.
Revenues from internet classes and product sales are recognized as the service
is performed or product shipped.
Costs of Revenues
Cost of dial access revenues primarily consists of telecommunication
expenses inherent in the network infrastructure. Cost of dial access revenues
also includes fees paid for lease of the Company's backbone, as well as license
fees for Web browser software based on a per user charge, other license fees
paid to third-party software vendors, product costs, and contractor fees for
distribution of software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from August 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, the Company expensed $121,451, $6,530,877 and
$12,267,445, respectively, as advertising costs.
Income Taxes
Prior to December 28, 1996, the Internet Business operated as a division of
OEO, Inc. and accordingly, a consolidated tax return for OEO, Inc. was filed.
Since OEO, Inc. generated consolidated net losses for the period from August 1,
1995 to December 28, 1996, no provision for income taxes would have been
recorded for the consolidated company and, as such, no additional disclosure has
been made as to the Internet division's portion of the net losses for tax
purposes. In connection with the reincorporation of OEO, Inc. and the spin-off
of Erol's Computer & TV/VCR, Inc., the provision for income taxes and the
resulting deferred tax asset (see Note 8) for the Company using the liability
method was calculated for the period December 2, 1996 through December 31, 1996.
There was no provision for income taxes required for this period.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, restricted cash and
accounts receivable. The cash and restricted cash are held by a high credit
quality financial institution. For accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for credit losses,
and such losses have been within management's expectations. The concentration of
credit risk is mitigated by the large customer base. The carrying amount of
the receivables approximates their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results. Although
the Company attempts to maintain multiple vendors for each required product, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are currently acquired from two sources. In addition,
some of the Company's suppliers have limited resources and production capacity.
If the suppliers are unable to meet the Company's needs as it builds out its
network infrastructure, then delays and increased costs in the expansion of the
Company's network infrastructure could result, which would affect operating
results adversely.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income",
which is required to be adopted for the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the Statements of Stockholders' Deficit. The Company will be
required to restate earlier periods provided for comparative purposes. The
disclosure for comprehensive income is not expected to be material.
3. Property and Equipment
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is calculated using the straight-line method over estimated
useful lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Property and equipment consisted of the following:
December 31,
---------------------------
1996 1997
----------- -----------
Computer equipment ............................. $11,570,218 $24,517,954
Furniture, fixtures, and office equipment ...... 721,218 1,378,768
Leasehold improvements ......................... 238,604 335,528
----------- -----------
12,530,040 26,232,250
Less accumulated depreciation .................. 2,030,708 8,391,281
----------- -----------
$10,499,332 $17,840,969
=========== ===========
4. Notes Payable
Pursuant to a promissory note agreement dated December 20, 1995, the
Company owed $500,000 to a financial institution as of December 31, 1995. The
loan bore interest at an annual rate of 1.5% plus prime rate (10% at December
31, 1995). Prior to the repayment of the loan balance, the loan was
collateralized by certain assets of the Company and was guaranteed by an officer
and stockholder of the Company. During 1996, the Company repaid the balance of
the note plus unpaid interest totaling $16,131.
As of December 31, 1996 and 1997, the Company had a short-term line of
credit arrangement with a bank which allowed for aggregate borrowings up to
$700,000. As of December 31, 1996 and 1997, $700,000 was outstanding under this
arrangement. The line of credit bears interest at the bank prime rate plus
1-1/2% per annum (10% as of December 31, 1997). As of December 31, 1996 and
1997, the Company has accrued $2,051 and $7,158, respectively, of interest
related to this line of credit. The note is due on September 25, 1998. The line
of credit is personally guaranteed by an officer and stockholder of the Company.
See Note 6.
During December 1997, the Company entered into a subordinated revolving
line of credit agreement, with a maximum borrowing amount of $5,000,000, and a
$5,000,000 subordinated note payable agreement with a stockholder. The Company
received the proceeds from the $5,000,000 note payable in December 1997 and
utilized the proceeds to repay certain accounts payable. The subordinated
revolving line of credit and note payable bear interest at a fluctuating rate
equal to the greater of 11% per annum or 4-1/2 per annum over the prime rate.
The subordinated revolving line of credit agreement provides for an unused
facility fee equal to 1/2% of the difference between the average daily balance
outstanding and the $5,000,000 maximum borrowing amount, payable quarterly. The
revolving line of credit and the note payable are secured by certain assets of
the Company. The balance of the note payable, as well as any outstanding
borrowings under the line of credit facility, are due upon the acquisition of
more than 50% of the Company's outstanding Common Stock or the sale in an
underwritten public offering of debt or equity securities issued by the Company.
5. Commitments
Operating Leases
The Company leases office space and various office and computer equipment
under non-cancellable operating lease agreements. The leases generally provide
for renewal terms and the Company is required to pay a portion of the common
areas' expenses including maintenance, real estate taxes and other expenses.
Rent expense for the period from August 1, 1995 (inception) to December 31, 1995
and for the years ended December 31, 1996 and 1997, was $12,601, $843,615 and
$2,236,183, respectively. The Company is also required to pay additional rent
based on certain percentages of revenues recorded by the various stores (kiosks)
when the revenues exceed certain predetermined amounts. The Company has not
incurred any significant additional rent charges to date.
As of December 31, 1997, payments due under non-cancellable operating
leases are as follows:
1998................................ $ 1,301,609
1999................................ 914,082
2000................................ 578,203
2001................................ 461,561
2002................................ 314,831
---------------
$ 3,570,286
===============
Capital Leases
The Company leases certain office and computer equipment as a result of
sales-leaseback agreements, which will be accounted for as capital leases. The
Company recorded approximately $192,000 of deferred gain related to the
difference between the sale price of the equipment and present value of the
minimum lease payments. The Company will amortize the deferred gain to other
income over the lease term. Computer equipment held under capital leases at
December 31, 1996 and 1997 amounted to $1,956,407 and $4,320,349, respectively.
Accumulated amortization related to this equipment amounted to $480,384 and
$1,329,551 at December 31, 1996 and 1997, respectively. Amortization related to
capital leased equipment is included in depreciation and amortization expense.
The non-cash portion of these transactions has been excluded from the Statements
of Cash Flows.
As of December 31, 1997, future minimum lease payments under the capital
leases are as follows:
1998............................................... $ 1,805,933
1999............................................... 1,487,236
2000............................................... 536,826
----------------
3,829,995
Less interest...................................... (511,268)
----------------
Present value of net minimum payments.............. 3,318,727
Less current portion............................... 1,466,701
----------------
$ 1,852,026
================
Letters of Credit
During 1996 and 1997, in connection with capital lease agreements, the
Company obtained several letters of credit with a financial institution in the
amounts of the lease obligations. As collateral for these letters of credit, the
financial institution required that the Company invest certain amounts in
certificate of deposits at the financial institution. The total amount of cash
restricted in connection with these letters of credit is approximately $905,000
and $837,000 at December 31, 1996 and 1997, respectively. The certificates of
deposit bear interest at a rate of 4.7%, mature in one year and are renewable at
the option of the financial institution. The letters of credit expire in 1998
and will be automatically renewed, subject to certain withdrawal privileges by
the Company, by the financial institution for an additional one year period for
each year under which the capital lease obligations are outstanding.
Employment Agreements
During 1996 and 1997, the Company executed employment agreements with
certain key executives under which the Company is required to pay the following
base salaries annually over the next two years:
1998...................................... $ 840,000
1999...................................... 225,000
----------------
$ 1,065,000
================
Other Commitments
Effective January 31, 1997, the Company entered into an ISP License
Agreement with a vendor. The Company agreed to license a minimum of 1,000,000
software mailbox products in exchange for $3,000,000, which is to be paid in
quarterly installments over the next three years. After exceeding the 1,000,000
software mail box products, the Company may license additional mailbox products
for a fee of $3.00 per mailbox.
6. Related Party Transactions
Since inception, the Company has shared common facilities and operating
costs such as executive management salaries, accounting, supplies, marketing,
etc., with Erol's Computer & TV/VCR, Inc. (the "Affiliated Company") which
shares common ownership with the Company. During the period from August 1, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and 1997,
$11,530, $721,557 and $0 were charged to operations related to shared facilities
and operating costs, respectively.
The Company executed a promissory note agreement with an Individual (the
"Individual"), an officer and stockholder of the Company, and the Affiliated
Company, whereby the Company agreed to loan $350,000 to the Individual and the
Affiliated Company. The note bears annual interest at a rate equivalent to the
federal rate, defined by the Internal Revenue Code. The balance of the note plus
compounded interest will become due to the Company three weeks after the date on
which the short-term line of credit arrangement expires and the Individual has
been released as a guarantor of the line of credit arrangement with the bank.
Since inception in August 1995 through December 31, 1996, Erols Internet
paid certain expenses related to the Affiliated Company on behalf of the
Affiliated Company. These expenses amounted to $658,422 and $1,645,511 during
the period from August 1, 1995 (inception) to December 31, 1995 and during the
year ended December 31, 1996, respectively. Since there is no intention to repay
these amounts to the Company, the Company has written off the receivable and has
included the amount in other expense in the Statements of Operations.
Effective January 1, 1997, the Company entered into a five year management
agreement with Erol's Computer & VCR (the "Affiliated Company"). Pursuant to
this agreement, the Company will provide office space, general and
administrative services, sales services and print advertising services to the
Affiliated Company in exchange for a management fee. The management fee is based
on actual direct labor charges to the Affiliated Company and an allocation of
facilities costs based on square feet used by the Affiliated Company. During the
year ended December 31, 1997, the management fee amounted to $58,784. The
$58,784 is included in accounts receivable as of December 31, 1997. During
December 1997, the parties agreed to terminate the agreement effective December
31, 1997.
The Company purchased computer equipment for resale and internal use from
the Affiliated Company. During the year ended December 31, 1997, purchases
amounted to $532,714.
7. Stockholders' Deficit
Equity transactions
During 1995, the Company operated as a division of OEO, Inc. and
accordingly, had no Common Stock outstanding. During 1996, as a part of the
reorganization, the sole common stockholder was issued 4,272,023 shares of
voting Common Stock, par value $0.001 in Erols Internet, Inc.
In December 1996, the Company completed a private placement to raise total
proceeds of approximately $3,000,000 from an outside investor (the "Minority
Stockholder"). The Company sold 1,314,469 shares of voting Common Stock at $2.29
per share.
In May 1997, the Company completed a private placement to raise total
proceeds of approximately $500,000 from the Minority Stockholder. The Company
sold 131,447 shares of voting Common Stock at $3.80 per share.
In September 1997, the Company completed a private placement to raise total
proceeds of approximately $500,000 from the Minority Stockholder. The Company
sold 114,600 shares of voting Common Stock at $4.36 per share.
On December 4, 1997, the Board of Directors and stockholders of the Company
approved a 1 for 2.3583672 reverse stock split of the Company's $0.001 par value
voting Common Stock, which became effective on December 5, 1997. In addition,
the Company eliminated the authorized non-voting Common Stock. All references in
the accompanying financial statements to the number of shares of Common Stock
and per-share amounts have been restated to reflect these transactions.
Stock Option Plan
During 1996, the Company adopted a stock option plan (the "Option Plan")
which permits the Company to grant up to 657,234 voting Common Stock options to
employees, board members and others who contribute materially to the success of
the Company. During 1997, the Company increased the number of options available
for grant under the plan to 826,843. Stock options are generally granted at
prices which the Company's Board of Directors believes approximates the fair
market value of its Common Stock at the date of grant. Individual grants
generally become exercisable ratably over a period of three years from the date
of hire. The contractual term of the options is ten years from the date of
grant.
In December 1996, the Company issued 328,617 options to a certain officer
at an exercise price of $1.18 which was considered to be below fair market value
at the time of the option grant. Accordingly, the Company recorded deferred
stock compensation of $364,250 which will be amortized to expense over the
vesting period of three years beginning in January 1997, of which $161,889 was
recognized as expense during 1997.
Common stock option activity was as follows:
Year ended December 31,
1996 1997
------------------- ---------------------
Weighted Weighted
Number Average Average
of Exercise Exercise
Shares Price Shares Price
------- -------- ---------- ---------
Outstanding at beginning of year .... -- $ -- 455,823 $ 1.49
Options granted ..................... 455,823 1.49 675,611 3.04
Options exercised ................... -- -- (4,240) 3.32
Options canceled or expired ......... -- -- (75,333) 2.29
------- ----- --------- ------
Outstanding at end of year .......... 455,823 $1.49 1,051,861 $ 2.42
======= ===== ========= ======
Exercisable at year-end ............. -- $ -- 264,278 $ 1.91
======= ===== ========= ======
As of December 31, 1997, there were 95,119 options available for future
grants under the Option Plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -----------------------------
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
1997 Life Price 1997 Price
Range of Exercise Prices ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lss than $2.30................................. 784,238 9.0 $ 1.82 253,332 $ 1.81
$2.30 - $4.75................................... 267,623 9.0 4.18 10,946 4.17
--------- ---- ------- ----
$1.18 - $4.55................................... 1,051,861 2.42 264,278 1.91
========= ======= ======= ======
</TABLE>
Had compensation expense related to the stock option plan been determined
based on the fair value at the grant date for options granted during the period
from August 1, 1995 to December 31, 1995 and for the years ended December 31,
1996 and 1997 consistent with the provisions of SFAS 123, the Company's net loss
would have been as follows:
Period from
August 1, 1995
(inception) to Years Ended December 31,
December 31,
1995 1996 1997
-------------- --------------- ----------------
Net loss--pro forma......... $ (1,018,274) $ (16,690,399) $ (20,086,156)
============ ============= =============
The effect of applying SFAS 123 on 1995, 1996 and 1997 pro forma net loss
as stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996 and 1997: dividend yield of
0%, expected volatility of 70%; risk-free interest rate of 6.5%; and expected
terms from 3 to 4 years. The weighted average fair values of the options granted
in 1996 and 1997 with a stock price equal to the exercise price is $1.31 and
$1.79, respectively. The weighted average fair value of the options granted in
1996 with a stock price greater than the exercise price in 1996 is $0.38.
Reserve for Issuance
As of December 31, 1997, the Company had reserved 11,151,220, respectively,
shares of non-voting common stock, preferred stock and voting Common Stock
options.
8. Income Taxes
Net deferred income tax assets are as follows:
December 31,
-------------------------------
1996 1997
-------------- --------------
Unearned revenue $ 1,307,553 $ 7,766,210
Operating loss carryforwards 1,913,864 2,793,213
Provision for bad debts 15,960 61,305
Accrued vacation -- 50,005
Deferred rent -- 51,009
Stock options -- 61,452
Depreciation (228,000) (267,131)
-------------- --------------
Deferred tax assets 3,009,377 10,516,063
Valuation allowance (3,009,377) (10,516,063)
-------------- --------------
Net deferred tax assets $ -- $ --
============== ==============
At December 31, 1997, the Company has net operating loss carryforwards
amounting to approximately $7,358,305. Operating loss carryforwards expire in
2010 and 2011.
9. Contingencies
On September 1, 1997, a motion for judgment was filed against the Company
in Virginia state court by the Company's former Vice President, Marketing. The
motion for judgment alleges breach of contract and wrongful termination and
seeks punitive and compensatory damages of approximately $1,000,000.
Additionally, the Company's former Vice President, Marketing seeks to exercise
certain stock options. Discovery has just been initiated and, therefore, it is
premature to reach an opinion on liability or the extent of exposure. However,
the Company believes that it has a meritorious defense and is conducting a
vigorous defense. The Company doesn't believe that the conclusion of this matter
will materially affect the Company's financial position or results of
operations.
10. Subsequent Event
On January 21, 1998, the Company entered into an Agreement and Plan of
Merger with RCN Corporation ("RCN"). In the transaction, RCN will issue common
stock and replacement stock options valued at $48,500,000 and pay $35,000,000 in
cash, including the assumption and repayment of the $5,700,000 note payable, in
exchange for all of the outstanding equity securities of Erols Internet, Inc.
The Agreement and Plan of Merger was closed on February 20, 1998.
In conjunction with the merger agreement with RCN, certain outstanding
options held by two employees of the Company became fully vested. Additionally,
all outstanding options held by non-employees will fully vest and be repurchased
by the Company at a price equal to the difference between $14 and the option
exercise price multiplied by the number of outstanding options.
No person has been authorized to give any
information or make any representations, other
than those contained in this Prospectus, in
connection with the offering made hereby, and, if
given or made, such information or representation
must not be relied upon as having been authorized
by the Company, or any other person. Neither the
delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances create
any implication that there has been no change in
the affairs of the Company since the date hereof.
This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any securities
offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or
in which the person making such offer or
solicitation is not qualified to do so or to any person
to whom it is unlawful to make such offer or
solicitation.
----------------------
TABLE OF CONTENTS
Page
-----
Summary..................................... 1
Risk Factors................................ 15
Use of Proceeds............................. 28
Capitalization.............................. 28
Unaudited Pro Forma Consolidated Financial
Statements................................ 29
Selected Historical Consolidated Financial
Data...................................... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 38
The Exchange Offer.......................... 47
Business.................................... 53
Management.................................. 85
Security Ownership of Certain Beneficial
Owners and Management..................... 92
Description of the Distribution and Related
Agreements................................ 95
Description of Certain Indebtedness......... 100
Description of the New Notes................ 103
Book-Entry; Delivery and Form............... 129
Certain U.S. Federal Income Tax
Considerations............................ 131
Plan of Distribution........................ 134
Legal Matters............................... 134
Independent Accountants..................... 135
Experts..................................... 135
Additional Information...................... 136
Index to Financial Statements............... F-i
======================================================
=====================================================
$567,000,000
[GRAPHIC OMITTED]
[LOGO]
RCN Corporation
9.80% Senior Discount Notes
due 2008, Series B
------------------------------------
PROSPECTUS
------------------------------------
Merrill Lynch & Co.
Salomon Smith Barney
NationsBanc Montgomery
Securities LLC
, 1998
=====================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or it stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL empowers the Company to indemnify,
subject to the standards set forth therein, any person in connection with any
action, suit or proceeding brought before or threatened by reason of the fact
that the person was a director, officer, employee or agent of such company, or
is or was serving as such with respect to another entity at the request of
such company. The DGCL also provides that the Company may purchase insurance
on behalf of any such director, officer, employee or agent.
The Company's Amended and Restated Articles of Incorporation
provides in effect for the indemnification by the Company of each director and
officer of the Company to the fullest extent permitted by applicable law.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Document
- ----------- --------
2.1* Agreement and Plan of Merger dated as of January 21, 1998 among
Erols Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A.,
RCN Corporation and ENET Holding, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K ("Form 8-K") filed on March 6, 1998)
2.2* Amendment No. 1 to Agreement and Plan of Merger dated as of
January 21, 1998 among Erols Internet, Inc., Erol Onaran, Gold
& Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to the Company's Form
8-K)
3.1* Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Company's Information Statement on Form 10/A ("Form 10A")
filed on August 22, 1997)
3.2* By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Form 10A)
4.1 Indenture dated as of February 6, 1998 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 9.80% Senior Discount Notes due 2008
4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B
(included in Exhibit 4.1)
4.3 Registration Rights Agreement dated as of February 6, 1998 by and
among the Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers
4.4* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4
("Form S-4") filed on November 26, 1997)
4.5* Form of the 10% Senior Exchange Notes due 2007 (included in
Exhibit 4.4) (incorporated by reference to Exhibit 4.2 to the
Company's Form S-4)
4.6* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to the Company's Form S-4)
4.7* Form of the 11 1/8% Senior Discount Exchange Notes due 2007
(included in Exhibit 4.6) (incorporated by reference to
Exhibit 4.4 to the Company's Form S-4)
4.8* Registration Rights Agreement dated as of October 17, 1997 by and
among the Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers (incorporated by
reference to Exhibit 4.5 to the Company's Form S-4)
4.9* Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as
Trustee under the Indenture (as defined therein), and the
Company (incorporated by reference to Exhibit 4.6 to the
Company's Form S-4)
5.1 Opinion of Davis Polk & Wardwell
10.1* Tax Sharing Agreement by and among C-TEC Corporation, Cable
Michigan, Inc. and the Registrant (incorporated by reference to
Exhibit 10.1 to the Company's Form 10A)
10.2* Dark Fiber IRU Agreement dated as of May 8, 1997 among
Metropolitan Fiber Systems/McCourt, Inc. and RCN Telecom
Services of Massachusetts, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's Form 10A)
10.3* Dark Fiber IRU Agreement dated as of May 8, 1997 among
Metropolitan Fiber Systems of New York, Inc. and RCN Telecom
Services of New York, Inc. (incorporated by reference to
Exhibit 10.3 to the Company's Form 10A)
10.4* Telephone Service to Reseller Agreement for Boston among
Metropolitan Fiber Systems/McCourt, Inc. and RCN Telecom
Services of Massachusetts, Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Form 10A)
10.5* Telephone Service to Reseller Agreement for New York among
Metropolitan Fiber Systems of New York, Inc. and RCN Telecom
Services of New York, Inc. (incorporated by reference to
Exhibit 10.5 to the Company's Form 10A)
10.6* OVS Agreement dated May 8, 1997 between RCN Telecom Services,
Inc. and MFS Communication Company, Inc. (incorporated by
reference to Exhibit 10.6 of the Company's Form 10A)
10.7* Joint Venture Agreement dated as of December 23, 1996 between RCN
Telecom Services, Inc. and Boston Energy Technology Group, Inc.
(incorporated by reference to Exhibit 10.7 to the Company's
Form 10A)
10.8* Amended and Restated Operating Agreement of RCN-BECOCOM, LLC
dated as of June 17, 1997 (incorporated by reference to Exhibit
10.8 to the Company's Form 10A)
10.9* Management Agreement dated as of June 17, 1997 among RCN
Operating Services, Inc. and BECOCOM, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Form 10A)
10.10* Construction and Indefeasible Right of Use Agreement dated as of
June 17, 1997 between BECOCOM, Inc. and RCN-BECOCOM, LLC
(incorporated by reference to Exhibit 10.10 to the Company's
Form 10A)
10.11* License Agreement dated as of June 17, 1997 between Boston Edison
Company and BECOCOM, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Form 10A)
10.12* Joint Investment and Non-Competition Agreement dated as of June
17, 1997 among RCN Telecom Services of Massachusetts, Inc.,
BECOCOM, Inc. and RCN-BECOCOM, LLC (incorporated by reference
to Exhibit 10.12 to the Company's Form 10A)
10.13* 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**
(incorporated by reference to Exhibit 4.1 to the Company's
Information Statement on Form 10 ("Form 10") filed on July 9,
1997)
12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges
21.1* Subsidiaries (incorporated by reference to Exhibit 21.1 to the
Company's Form 10)
23.1 Consent of Coopers & Lybrand L.L.P. with respect to RCN
Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect
to Erols Internet, Inc.
24.1 Power of Attorney (included on the signature page of the
Registration Statement)
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal to 9.80% Senior Discount Notes due
2008 of the Company
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Record Holders
99.4 Form of Letter to Beneficial Holders
99.5 Form of Instruction from Owner of 9.80% Senior Discount Notes due
2008 of the Company
- ------------------
* Previously filed.
** Exhibits and schedules which have not been filed with Exhibit 10.13 will
be provided to the Commission by the Registrant upon request.
Item 22. Undertakings
(a) the undersigned Registrants hereby undertake:
(1) To file during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrants pursuant to the foregoing provisions, or otherwise,
the registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) To respond to requests for information that is incorporated
by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(d) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York, on this 23rd day of March, 1998.
RCN CORPORATION
By: /s/ Bruce Godrey
------------------------------------
Bruce Godfrey
Executive Vice President and Chief
Financial Officer
The registrant and each person whose signature appears below
constitutes and appoints Michael J. Mahoney and Bruce Godfrey his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign and file any and all amendments (including post-
effective amendments) to this registration statement, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof,
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David C. McCourt Director, Chairman and March 23, 1998
- ---------------------------- Chief Executive Officer
David C. McCourt
/s/ Michael J. Mahoney Director, President and March 23, 1998
- ---------------------------- Chief Operating Officer
Michael J. Mahoney
/s/ Bruce C. Godfrey Director, Executive Vice March 23, 1998
- ---------------------------- President and Chief
Bruce C. Godfrey Financial Officer
/s/ James Q. Crowe Director March 23, 1998
- ----------------------------
James Q. Crowe
/s/ Thomas May Director March 23, 1998
- ----------------------------
Thomas May
/s/ Walter Scott, Jr. Director March 23, 1998
- ----------------------------
Walter Scott, Jr.
/s/ Michael B. Yanney Director March 23, 1998
- ----------------------------
Michael B. Yanney
/s/ Alfred Fasola Director March 23, 1998
- ----------------------------
Alfred Fasola
/s/ Thomas P. O'Neill, III Director March 23, 1998
- ----------------------------
Thomas P. O'Neill, III
/s/ Richard R. Jaros Director March 23, 1998
- ----------------------------
Richard R. Jaros
/s/ Eugene Roth Director March 23, 1998
- ----------------------------
Eugene Roth
/s/ Stuart E. Graham Director March 23, 1998
- ----------------------------
Stuart E. Graham
/s/ Ralph Hromisin Vice President and Chief March 23, 1998
- ---------------------------- Accounting Officer
Ralph Hromisin
No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
EXHIBITS
TO
FORM S-4
-------------------------
RCN CORPORATION
(Exact name of registrant as specified in its charter)
-------------------------
==============================================================================
EXHIBIT INDEX
Exhibit No. Document
- ---------- --------
2.1* Agreement and Plan of Merger dated as of January 21, 1998 among
Erols Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A.,
RCN Corporation and ENET Holding, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K ("Form 8-K") filed on March 6, 1998)
2.2* Amendment No. 1 to Agreement and Plan of Merger dated as of
January 21, 1998 among Erols Internet, Inc., Erol Onaran, Gold
& Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to the Company's Form
8-K)
3.1* Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
the Company's Information Statement on Form 10/A ("Form 10A")
filed on August 22, 1997)
3.2* By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Form 10A)
4.1 Indenture dated as of February 6, 1998 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 9.80% Senior Discount Notes due 2008
4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B
(included in Exhibit 4.1)
4.3 Registration Rights Agreement dated as of February 6, 1998 by and
among the Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers
4.4* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-4
("Form S-4") filed on November 26, 1997)
4.5* Form of the 10% Senior Exchange Notes due 2007 (included in
Exhibit 4.4) (incorporated by reference to Exhibit 4.2 to the
Company's Form S-4)
4.6* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect
to the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to the Company's Form S-4)
4.7* Form of the 11 1/8% Senior Discount Exchange Notes due 2007
(included in Exhibit 4.6) (incorporated by reference to
Exhibit 4.4 to the Company's Form S-4)
4.8* Registration Rights Agreement dated as of October 17, 1997 by and
among the Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers (incorporated by
reference to Exhibit 4.5 to the Company's Form S-4)
4.9* Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as
Trustee under the Indenture (as defined therein), and the
Company (incorporated by reference to Exhibit 4.6 to the
Company's Form S-4)
5.1 Opinion of Davis Polk & Wardwell
10.1* Tax Sharing Agreement by and among C-TEC Corporation, Cable
Michigan, Inc. and the Registrant (incorporated by reference to
Exhibit 10.1 to the Company's Form 10A)
10.2* Dark Fiber IRU Agreement dated as of May 8, 1997 among
Metropolitan Fiber Systems/McCourt, Inc. and RCN Telecom
Services of Massachusetts, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's Form 10A)
10.3* Dark Fiber IRU Agreement dated as of May 8, 1997 among
Metropolitan Fiber Systems of New York, Inc. and RCN Telecom
Services of New York, Inc. (incorporated by reference to
Exhibit 10.3 to the Company's Form 10A)
10.4* Telephone Service to Reseller Agreement for Boston among
Metropolitan Fiber Systems/McCourt, Inc. and RCN Telecom
Services of Massachusetts, Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Form 10A)
10.5* Telephone Service to Reseller Agreement for New York among
Metropolitan Fiber Systems of New York, Inc. and RCN Telecom
Services of New York, Inc. (incorporated by reference to
Exhibit 10.5 to the Company's Form 10A)
10.6* OVS Agreement dated May 8, 1997 between RCN Telecom Services,
Inc. and MFS Communication Company, Inc. (incorporated by
reference to Exhibit 10.6 of the Company's Form 10A)
10.7* Joint Venture Agreement dated as of December 23, 1996 between RCN
Telecom Services, Inc. and Boston Energy Technology Group, Inc.
(incorporated by reference to Exhibit 10.7 to the Company's
Form 10A)
10.8* Amended and Restated Operating Agreement of RCN-BECOCOM, LLC
dated as of June 17, 1997 (incorporated by reference to Exhibit
10.8 to the Company's Form 10A)
10.9* Management Agreement dated as of June 17, 1997 among RCN
Operating Services, Inc. and BECOCOM, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Form 10A)
10.10* Construction and Indefeasible Right of Use Agreement dated as of
June 17, 1997 between BECOCOM, Inc. and RCN-BECOCOM, LLC
(incorporated by reference to Exhibit 10.10 to the Company's
Form 10A)
10.11* License Agreement dated as of June 17, 1997 between Boston Edison
Company and BECOCOM, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Form 10A)
10.12* Joint Investment and Non-Competition Agreement dated as of June
17, 1997 among RCN Telecom Services of Massachusetts, Inc.,
BECOCOM, Inc. and RCN-BECOCOM, LLC (incorporated by reference
to Exhibit 10.12 to the Company's Form 10A)
10.13* 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**
(incorporated by reference to Exhibit 4.1 to the Company's
Information Statement on Form 10 ("Form 10") filed on July 9,
1997)
12.1 Statement regarding Computation of Earnings Ratio to Fixed Charges
21.1* Subsidiaries (incorporated by reference to Exhibit 21.1 to the
Company's Form 10)
23.1 Consent of Coopers & Lybrand L.L.P. with respect to RCN
Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect
to Erols Internet, Inc.
24.1 Power of Attorney (included on the signature page of the
Registration Statement)
25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal to 9.80% Senior Discount Notes due
2008 of the Company
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Record Holders
99.4 Form of Letter to Beneficial Holders
99.5 Form of Instruction from Owner of 9.80% Senior Discount Notes due
2008 of the Company
- --------------------
* Previously filed.
** Exhibits and schedules which have not been filed with Exhibit 10.13 will be
provided to the Commission by the Registrant upon request.
===============================================================================
RCN CORPORATION, as Issuer
and
THE CHASE MANHATTAN BANK, as Trustee
---------------------
INDENTURE
Dated as of February 6, 1998
--------------------
$567,000,000 Principal Amount at Maturity
9.80% Senior Discount Notes due 2008, Series A
9.80% Senior Discount Notes due 2008, Series B
==============================================================================
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of February 6, 1998
Trust Indenture Indenture
Act Section Section
- --------------- ---------
ss.310 (a)(1)......................................... 6.05, 6.09
(a)(2)......................................... 6.05, 6.09
(a)(3)......................................... 6.05
(a)(4)......................................... 6.05
(b)............................................ 6.05, 6.08, 6.10
ss.311 (a)............................................ 6.07
(b)............................................ 6.07
(c)............................................ Not Applicable
ss.312 (a)............................................ 3.05, 7.01
(b)............................................ 7.02
(c)............................................ 7.02
ss.313 (a)............................................ 7.03
(b)............................................ 7.03
(c)............................................ 7.03
(d)............................................ 7.03
ss.314 (a)............................................ 7.04, 10.09
(b)............................................ Not Applicable
(c)(1)......................................... 1.04, 4.04, 12.01(c)
(c)(2)......................................... 1.04, 4.04, 12.01(c)
(c)(3)......................................... 13.03, 13.04
(d)............................................ Not Applicable
(e)............................................ 1.04
ss.315 (a)............................................ 6.01(a)
(b)............................................ 6.02
(c)............................................ 6.01(b)
(d)............................................ 6.01(c)
(e)............................................ 5.14
ss.316 (a) (last sentence) ........................... 3.14
(a)(1)(A)...................................... 5.12
(a)(1)(B)...................................... 5.13
(a)(2)......................................... Not Applicable
(b)............................................ 5.08
ss.317 (a)(1)......................................... 5.03
(a)(2)......................................... 5.04
(b)............................................ 10.03
ss.318 (a)............................................ 1.08
TABLE OF CONTENTS
Page
----
PARTIES.....................................................................1
RECITALS....................................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions....................................................1
Section 1.02. Other Definitions.............................................30
Section 1.03. Rules of Construction.........................................31
Section 1.04. Form of Documents Delivered to Trustee........................31
Section 1.05. Acts of Holders...............................................32
Section 1.06. Notices, etc., to the Trustee and the Company.................33
Section 1.07. Notice to Holders; Waiver.....................................33
Section 1.08. Conflict with Trust Indenture Act.............................34
Section 1.09. Effect of Headings and Table of Contents......................34
Section 1.10. Successors and Assigns........................................34
Section 1.11. Separability Clause...........................................34
Section 1.12. Benefits of Indenture.........................................35
Section 1.13. GOVERNING LAW.................................................35
Section 1.14. No Recourse Against Others....................................35
Section 1.15. Independence of Covenants.....................................35
Section 1.16. Exhibits......................................................35
Section 1.17. Counterparts..................................................35
Section 1.18. Duplicate Originals...........................................36
ARTICLE TWO
NOTE FORMS
Section 2.01. Form and Dating...............................................36
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms...............................................37
Section 3.02. Registrar and Paying Agent....................................37
Section 3.03. Execution and Authentication..................................38
Section 3.04. Temporary Notes...............................................40
Section 3.05. Transfer and Exchange.........................................40
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes...................41
Section 3.07. Payment of Interest; Interest Rights Preserved................42
Section 3.08. Persons Deemed Owners.........................................44
Section 3.09. Cancellation..................................................44
Section 3.10. Computation of Interest.......................................44
Section 3.11. Legal Holidays................................................44
Section 3.12. CUSIP and CINS Numbers........................................45
Section 3.13. Paying Agent To Hold Money in Trust...........................45
Section 3.14. Treasury Notes................................................46
Section 3.15. Deposits of Monies............................................46
Section 3.16. Book-Entry Provisions for Global Notes........................46
Section 3.17. Special Transfer Provisions...................................48
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance...................................................52
Section 4.02. Defeasance and Discharge......................................52
Section 4.03. Covenant Defeasance...........................................53
Section 4.04. Conditions to Defeasance or Covenant Defeasance...............54
Section 4.05. Deposited Money and U.S. Government Obligations To
Be Held in Trust; Other Miscellaneous Provisions.............56
Section 4.06. Reinstatement.................................................57
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.............................................58
Section 5.02. Acceleration of Maturity Rescission and Annulment.............60
Section 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee...................................................61
Section 5.04. Trustee May File Proofs of Claims.............................62
Section 5.05. Trustee May Enforce Claims Without Possession of Notes........63
Section 5.06. Application of Money Collected................................63
Section 5.07. Limitation on Suits...........................................64
Section 5.08. Unconditional Right of Holders To Re- ceive Principal,
Premium and Interest.........................................64
Section 5.09. Restoration of Rights and Remedies............................65
Section 5.10. Rights and Remedies Cumulative................................65
Section 5.11. Delay or Omission Not Waiver..................................65
Section 5.12. Control by Majority...........................................66
Section 5.13. Waiver of Past Defaults.......................................66
Section 5.14. Undertaking for Costs.........................................66
Section 5.15. Waiver of Stay, Extension or Usury Laws.......................67
Section 5.16. Unconditional Right of Holders To Receive Payment.............67
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities...........................68
Section 6.02. Notice of Defaults............................................69
Section 6.03. Certain Rights of Trustee.....................................69
Section 6.04. Trustee Not Responsible for Recitals, Dispositions
of Notes or Application of Proceeds Thereof..................71
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc...........71
Section 6.06. Money Held in Trust...........................................71
Section 6.07. Compensation and Indemnification of Trustee and Its Prior
Claim........................................................72
Section 6.08. Conflicting Interests.........................................73
Section 6.09. Corporate Trustee Required; Eligibility.......................73
Section 6.10. Resignation and Removal; Appointment of Successor
Trustee......................................................73
Section 6.11. Acceptance of Appointment by Successor........................75
Section 6.12. Merger, Conversion, Amalgamation, Consolidation
or Succession to Business....................................76
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders.......................77
Section 7.02. Communications of Holders.....................................77
Section 7.03. Reports by Trustee............................................78
Section 7.04. Reports by Company............................................78
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms..........79
Section 8.02. Successor Substituted.........................................80
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders...................................81
Section 9.02. Supplemental Indentures, Agreements and Waivers with
Consent of Holders...........................................82
Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers..83
Section 9.04. Effect of Supplemental Indentures.............................84
Section 9.05. Conformity with Trust Indenture Act...........................84
Section 9.06. Reference in Notes to Supplemental Indentures.................84
Section 9.07. Record Date...................................................84
Section 9.08. Revocation and Effect of Consents.............................85
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest...................85
Section 10.02. Maintenance of Office or Agency..............................85
Section 10.03. Money for Note Payments To Be Held in Trust.................86
Section 10.04. Corporate Existence..........................................88
Section 10.05. Payment of Taxes and Other Claims............................88
Section 10.06. Maintenance of Properties....................................88
Section 10.07. Insurance....................................................89
Section 10.08. Books and Records............................................89
Section 10.09. Provision of Financial Statements............................89
Section 10.10. Change of Control............................................89
Section 10.11. Limitation on Additional Indebtedness........................92
Section 10.12. Statement by Officers as to Default..........................93
Section 10.13. Limitation on Restricted Payments............................94
Section 10.14. Limitation on Transactions with Affiliates..................97
Section 10.15. Disposition of Proceeds of Asset Sales.......................98
Section 10.16. Limitation on Liens Securing Certain Indebtedness..........102
Section 10.17. Limitation on Business......................................103
Section 10.18. Limitation on Certain Guarantees and Indebtedness
of Restricted Subsidiaries and Restricted Affiliates......103
Section 10.19. Limitation on Issuances and Sales of Preferred Stock
by Restricted Subsidiaries and Restricted Affiliates.......104
Section 10.20. Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries or Restricted Affiliates.104
Section 10.21. Designations of Unrestricted Subsidiaries...................105
Section 10.22. Designations of Restricted Affiliates.......................107
Section 10.23. Compliance Certificates and Opinions........................108
Section 10.24. Reports.....................................................109
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.....................109
Section 11.02. Application of Trust Money..................................110
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee......................................111
Section 12.02. Selection of Notes To Be Redeemed...........................111
Section 12.03. Notice of Redemption........................................111
Section 12.04. Effect of Notice of Redemption..............................112
Section 12.05. Deposit of Redemption Price.................................113
Section 12.06. Notes Redeemed or Purchased in Part.........................113
Exhibit A-1 - Form of Series A Note
Exhibit A-2 - Form of Series B Note
Exhibit B - Form of Legend for Book-Entry Securities
Exhibit C - Form of Certificate To Be Delivered in Connection
with Transfers to Non-QIB Accredited Investors
Exhibit D - Form of Certificate To Be Delivered in Connection
with Transfers Pursuant to Regulation S
INDENTURE, dated as of February 6, 1998, between RCN
CORPORATION, a corporation incorporated under the laws of the State of Delaware
(the "Company"), as issuer, and The Chase Manhattan Bank, a New York banking
Corporation as trustee (the "Trustee").
RECITALS
The Company has duly authorized the creation of an issue of
(i) 9.80% Senior Discount Notes due 2008, Series A (the "Initial Notes"), and
(ii) 9.80% Senior Discount Notes due 2008, Series B, to be issued in exchange
for the Initial Notes pursuant to the Registration Rights Agreement (the
"Exchange Notes" and, together with the Initial Notes, the "Notes", treated as a
single class of securities under this Indenture), of substantially the tenor and
amount hereinafter set forth, and to provide therefor the Company has duly
authorized the execution and delivery of this Indenture.
All things necessary have been done to make the Notes, when
executed by the Company, and authenticated and delivered hereunder and duly
issued by the Company, the valid obligations of the Company and to make this
Indenture a valid agreement of each of the Company and the Trustee in accordance
with the terms hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Notes by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders (as hereinafter defined) of the
Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.
"Accreted Value" means, as of any date (the "Specified Date")
with respect to each $1,000 principal amount at maturity of the Notes:
(i) if the Specified Date is one of the following dates
(each a "Semi-Annual Accrual Date"), the amount set forth opposite such
date below:
Semi-Annual
Accrual Date
------------
Issue Date...................................... $ 618.32
February 15, 1998............................... $ 619.83
August 15, 1998................................. $ 650.21
February 15, 1999............................... $ 682.07
August 15, 1999................................. $ 715.49
February 15, 2000............................... $ 750.55
August 15, 2000................................. $ 787.32
February 15, 2001............................... $ 825.90
August 15, 2001................................. $ 866.37
February 15, 2002............................... $ 908.88
August 15, 2002................................. $ 953.36
February 15, 2003............................... $1,000.00
(ii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the sum of (A) the Accreted Value for the Semi-Annual
Accrual Date immediately preceding the Specified Date and (B) an amount
equal to the product of (i) the Accreted Value for the immediately
following Semi-Annual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date and (ii) a fraction, the numerator
of which is the number of days actually elapsed from the immediately
preceding Semi-Annual Accrual Date to the Specified Date and the
denominator of which is 180 days; and
(iii) if the Specified Date is on or after February 15, 2003,
$1,000.
"Acquired Indebtedness" means Indebtedness of a person
existing at the time such person becomes a Restricted Subsidiary or Restricted
Affiliate or assumed in connection with an Asset Acquisition by such person and
not incurred in connection with, or in anticipation of, such person becoming a
Restricted Subsidiary or Restricted Affiliate or such Asset Acquisition;
provided that Indebtedness of such person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such person becomes a Restricted Subsidiary or Restricted
Affiliate or such Asset Acquisition shall not constitute Acquired Indebtedness.
"Affiliate" of any specified person means any other person
which, directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, such specified person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Affiliate Income Tax Expense" means, with respect to any
period and any Restricted Affiliate, the aggregate provision for United States
corporation, local, foreign and other income taxes of such Restricted Affiliate
for such period as determined in accordance with GAAP.
"Affiliate Interest Expense" means, with respect to any period
and any Restricted Affiliate, without duplication, the sum of (i) the interest
expense of such Restricted Affiliate and its Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, including, without
limitation, (a) any amortization of debt discount, (b) the net cost under
Interest Rate Obligations (including any amortization of discounts), (c) the
interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and similar transactions and (e) all accrued
interest, (ii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued during such period as determined
on a consolidated basis in accordance with GAAP and (iii) the amount of
dividends in respect of Disqualified Stock paid during such period.
"Affiliate Net Income" means, with respect to any period and
any Restricted Affiliate, the net income of such Restricted Affiliate and its
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, adjusted, to the extent included in calculating such net income of
such Restricted Affiliate and its Subsidiaries, by excluding, without
duplication, (i) all extraordinary, unusual or nonrecurring gains or losses of
such person (net of fees and expenses relating to the transaction giving rise
thereto) for such period, (ii) income of such Restricted Affiliate and its
Subsidiaries derived from or in respect of all unconsolidated Investments,
except to the extent of any dividends or distributions actually received by such
Restricted Affiliate or any of its Subsidiaries, (iii) net income (or loss) of
any other person combined with such Restricted Affiliate or any of its
Subsidiaries on a "pooling of interests" basis attributable to any period prior
to the date of combination, (iv) any gain or loss, net of taxes, realized by
such person upon the termination of any employee pension benefit plan during
such period, and (v) gains or losses in respect of any Asset Sales (net of fees
and expenses relating to the transaction giving rise thereto) during such
period.
"Affiliate Operating Cash Flow" means, with respect to any
period and any Restricted Affiliate, the Affiliate Net Income of such Restricted
Affiliate and its Subsidiaries on a consolidated basis for such period
increased, only to the extent deducted in arriving at Affiliate Net Income for
such period, by the sum of (i) the Affiliate Income Tax Expense accrued
according to GAAP for such period (other than taxes attributable to
extraordinary gains or losses and gains and losses from Asset Sales); (ii)
Affiliate Interest Expense for such period; (iii) depreciation of such
Restricted Affiliate for such period; (iv) amortization of such Restricted
Affiliate and its Subsidiaries for such period including, without limitation,
amortization of capitalized debt issuance costs for such period, all determined
in accordance with GAAP; and (v) other non-cash charges decreasing Affiliate Net
Income.
"Affiliate Pro Forma Operating Cash Flow" means Affiliate
Operating Cash Flow for the latest four fiscal quarters for which consolidated
financial statements of the applicable Restricted Affiliate are available. For
purposes of this definition, "Affiliate Operating Cash Flow" shall be calculated
after giving effect on a pro forma basis for the applicable four fiscal quarter
period to, without duplication, any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Restricted Affiliate or any of its
Subsidiaries incurring Acquired Indebtedness) occurring during the period
commencing on the first day of such four fiscal quarter period to and including
the date of the transaction giving rise to the need to calculate "Affiliate Pro
Forma Operating Cash Flow" as if such Asset Sale or Asset Acquisition occurred
on the first day of such period.
"Asset Acquisition" means (i) any capital contribution (by
means of transfers of cash or other property to others or payments for property
or services for the account or use of others, or otherwise) by the Company or
any Restricted Subsidiary or Restricted Affiliate to any other person, or any
acquisition or purchase of Capital Stock of any other person by the Company or
any Restricted Subsidiary or Restricted Affiliate, in either case pursuant to
which such person shall (a) become a Restricted Subsidiary or Restricted
Affiliate or (b) shall be merged with or into the Company or any Restricted
Subsidiary or Restricted Affiliate or (ii) any acquisition by the Company or any
Restricted Subsidiary or Restricted Affiliate of the assets of any person which
constitute substantially all of an operating unit or line of business of such
person or which is otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance,
transfer or lease (that has the effect of a disposition and is not for security
purposes) or other disposition (that is not for security purposes) to any person
other than the Company or a Restricted Subsidiary, in one transaction or a
series of related transactions, of (i) any Capital Stock of any Restricted
Subsidiary (other than customary stock option programs) or any Restricted
Affiliate, (ii) any assets of the Company or any Restricted Subsidiary or any
Restricted Affiliate which constitute substantially all of an operating unit or
line of business of the Company and the Restricted Subsidiaries and the
Restricted Affiliates or (iii) any other property or asset of the Company or any
Restricted Subsidiary or any Restricted Affiliates outside of the ordinary
course of business. For the purposes of this definition, the term "Asset Sale"
shall not include (i) any disposition of properties and assets of the Company
and/or the Restricted Subsidiaries that is governed under Section 8.01, (ii)
sales of property or equipment that have become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Restricted Subsidiary or Restricted Affiliate, as the case may be, and (iii)
for purposes of Section 10.15 any sale, conveyance, transfer, lease or other
disposition of any property or asset, whether in one transaction or a series of
related transactions occurring within one year, either (x) involving assets with
a Fair Market Value not in excess of $500,000 or (y) which constitutes the
incurrence of a Capitalized Lease Obligation.
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a) the number of years from such date to the
date or dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments; provided that, in the case of any Capitalized Lease
Obligation, all calculations hereunder shall give effect to any applicable
options to renew in favor of the Company or any Restricted Subsidiary or
Restricted Affiliate.
"Bankruptcy Law" means Title 11, United States Code or any
similar federal or state law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization or relief of debtors or the law of any
other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization or relief of debtors or any amendment to, succession
to or change in any such law.
"Bankruptcy Order" means any court order made in a proceeding
pursuant to or within the meaning of any Bankruptcy Law, containing an
adjudication of bankruptcy or insolvency, or providing for liquidation,
receivership, winding-up, dissolution, "concordate" or reorganization, or
appointing a Custodian of a debtor or of all or any substantial part of a
debtor's property, or providing for the staying, arrangement, adjustment or
composition of indebtedness or other relief of a debtor.
"BECO Joint Venture" means RCN-BECOCOM, LLC, a Massachusetts
limited liability company formed under the terms of a Joint Venture Agreement
dated as of December 23, 1996 between RCN Telecom Services, Inc. and Boston
Energy Technology Group, Inc.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Buildout Costs" means the cost of the construction,
expansion, development or acquisition (other than an Asset Acquisition of any
person that is not a Restricted Affiliate on the Issue Date) of properties or
assets (tangible or intangible) to be utilized, directly or indirectly, for the
design, development, construction, installation, integration, management or
provision of a Permitted Business.
"Buildout Indebtedness" means Indebtedness incurred by the
Company and/or any Restricted Subsidiary and/or any Restricted Affiliate to the
extent the proceeds thereof are used to finance or support Buildout Costs in
respect of a Permitted Business of the Company and/or any Restricted Subsidiary
and/or Restricted Affiliate.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in The City of New
York, New York are authorized or obligated by law, regulation or executive order
to close.
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of, such person's capital
stock, whether outstanding on the Issue Date or issued after the Issue Date, and
any and all rights (other than any evidence of Indebtedness), warrants or
options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay
rent or other amounts under a lease of (or other agreement conveying the right
to use) any property (whether real, personal or mixed, immovable or movable)
that is required to be classified and accounted for as a capitalized lease
obligation under GAAP, and, for the purpose of this Indenture, the amount of
such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness
(with, for purposes of Section 10.15 hereof only, a maturity of 365 days or
less) issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof or such Indebtedness
constitutes a general obligation of such country); (ii) deposits, certificates
of deposit or acceptances (with, for purposes of Section 10.15 hereof only, a
maturity of 365 days or less) of any financial institution that is a member of
the Federal Reserve System, in each case having combined capital and surplus and
undivided profits (or any similar capital concept) of not less than $500.0
million and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1"
by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by
a corporation (other than an Affiliate of the Company) organized under the laws
of the United States or any State thereof and rated at least "A-1" by S&P or
"P-1" by Moody's; (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States Government maturing within 365
days from the date of acquisition; and (v) money market funds which invest
substantially all of their assets in securities of the type described in the
preceding clauses (i) through (iv).
"Cedel" means Cedel Bank, Societe Anonyme.
"Change of Control" is defined to mean the occurrence of any
of the following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding the Kiewit Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Company; or (b) the Company consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
securities and other property in an amount which could be paid by the Company as
a Restricted Payment under this Indenture and (ii) immediately after such
transaction no "person" or "group" (as such terms are used in Section 13(d) and
14(d) of the Exchange Act), excluding the Kiewit Holders, is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all securities that
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total Voting Stock of the surviving or transferee corporation or
its parent corporation, as applicable; or (c) during any consecutive two-year
period, individuals who at the beginning of such period constituted the Board
(together with any new directors whose election by the Board or whose nomination
for election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason (other than by action of the Kiewit
Holders) to constitute a majority of the Board then in office.
"Common Stock" means, with respect to any person, any and all
shares, interests or other participations in, and other equivalents (however
designated and whether voting or non-voting) of such person's common stock
whether outstanding at the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means the person named as the "Company" in the first
paragraph of this Indenture, until a successor person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor person.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by any one of its Chairman of the
Board, its Vice-Chairman, its Chief Executive Officer, its President or a Vice
President, and by its Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and delivered to the Trustee.
"Consolidated Income Tax Expense" means, with respect to any
period, the aggregate provision for United States corporation, local, foreign
and other income taxes of the Company and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP and of each
of the Restricted Affiliates for such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries and the Restricted Affiliates for such period as
determined on a consolidated basis in accordance with GAAP, including, without
limitation, (a) any amortization of debt discount, (b) the net cost under
Interest Rate Obligations (including any amortization of discounts), (c) the
interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and similar transactions and (e) all accrued
interest, (ii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued during such period as determined
on a consolidated basis in accordance with GAAP and (iii) the amount of
dividends in respect of Disqualified Stock paid during such period.
"Consolidated Net Income" means, with respect to any period,
the consolidated net income of the Company and the Restricted Subsidiaries for
such period in accordance with GAAP, adjusted, without duplication, (A) to
include the consolidated net income of the Restricted Affiliates only to the
extent of the equity interest of the Company and the Restricted Subsidiaries and
(B) adjusted, to the extent included in calculating such adjusted consolidated
net income of the Company and the Restricted Subsidiaries, by excluding, without
duplication, (i) all extraordinary, unusual or nonrecurring gains or losses of
such person (net of fees and expenses relating to the transaction giving rise
thereto) for such period, (ii) subject to clause (A) above, income of the
Company and the Restricted Subsidiaries and the Restricted Affiliates derived
from or in respect of all unconsolidated Investments, except to the extent of
any dividends or distributions actually received by the Company or any
Restricted Subsidiary, (iii) the portion of net income (or loss) of such person
allocable to minority interests in Restricted Subsidiaries and Restricted
Affiliates for such period, (iv) net income (or loss) of any other person
combined with the Company or any Restricted Subsidiary or Restricted Affiliate
on a "pooling of interests" basis attributable to any period prior to the date
of combination, (v) any gain or loss, net of taxes, realized by such person upon
the termination of any employee pension benefit plan during such period, (vi)
gains or losses in respect of any Asset Sales (net of fees and expenses relating
to the transaction giving rise thereto) during such period and (vii) except to
the extent permitted by clause (vii) of Section 10.20 hereof, the net income of
any Restricted Subsidiary or Restricted Affiliate for such period to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary or Restricted Affiliate of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Restricted subsidiary or Restricted Affiliate or
its stockholders.
"Consolidated Operating Cash Flow" means, with respect to any
period, the Consolidated Net Income for such period increased, only to the
extent (which, in the case of the Restricted Affiliates, means to the extent of
the equity interest of the Company and the Restricted Subsidiaries) deducted in
arriving at Consolidated Net Income for such period, by the sum of (i) the
Consolidated Income Tax Expense accrued according to GAAP for such period (other
than taxes attributable to extraordinary gains or losses and gains and losses
from Asset Sales); (ii) Consolidated Interest Expense for such period; (iii)
depreciation of the Company and the Restricted Subsidiaries and the Restricted
Affiliates for such period; (iv) amortization of the Company and the Restricted
Subsidiaries and the Restricted Affiliates for such period, including, without
limitation, amortization of capitalized debt issuance costs for such period, all
determined on a consolidated basis in accordance with GAAP, and (v) other
non-cash charges decreasing Consolidated Net Income.
"Consolidated Pro Forma Operating Cash Flow" means
Consolidated Operating Cash Flow for the latest four fiscal quarters for which
consolidated financial statements of the Company are available. For purposes of
calculating "Consolidated Operating Cash Flow" for any four fiscal quarters for
purposes of this definition, (i) any Subsidiary of the Company that is a
Restricted Subsidiary on the date of the transaction giving rise to the need to
calculate "Consolidated Pro Forma Operating Cash Flow" (the "Transaction Date")
(or would become a Restricted Subsidiary in connection with the transaction that
requires determination of such amount) shall be deemed to have been a Restricted
Subsidiary at all times during such four fiscal quarters, (ii) any Joint Venture
that is a Restricted Affiliate on the Transaction Date (or would become a
Restricted Affiliate in connection with the transaction that requires the
determination of such amount) shall be deemed to have been a Restricted
Affiliate at all times during such four fiscal quarters, (iii) any Subsidiary of
the Company that is not a Restricted Subsidiary on the Transaction Date (or
would cease to be a Restricted Subsidiary in connection with the transaction
that requires the determination of such amount) shall be deemed not to have been
a Restricted Subsidiary at any time during such four fiscal quarters and (iv)
any Joint Venture that is not a Restricted Affiliate on the Transaction Date (or
would cease to be a Restricted Affiliate in connection with the transaction that
requires the determination of such amount) shall be deemed not to have been a
Restricted Affiliate at any time during such four fiscal quarters. In addition
to and without limitation of the foregoing, for purposes of this definition,
"Consolidated Operating Cash Flow" shall be calculated after giving effect on a
pro forma basis for the applicable four fiscal quarter period to, without
duplication, any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company's or one of the Restricted Subsidiaries'
or Restricted Affiliates' (including any person who becomes a Restricted
Subsidiary or Restricted Affiliate as a result of the Asset Acquisition)
incurring Acquired Indebtedness) occurring during the period commencing on the
first day of such four fiscal quarter period to and including the Transaction
Date, as if such Asset Sale or Asset Acquisition occurred on the first day of
such period.
"consolidation" means, (i) with respect to the Company, the
consolidation of the accounts of the Restricted Subsidiaries with those of the
Company all in accordance with GAAP; provided that "consolidation" will not
include consolidation of the accounts of any Unrestricted Subsidiary or
Restricted Affiliate with the accounts of the Company and (ii) with respect to
any Restricted Affiliate, the consolidation of the accounts of the Subsidiaries
of such Restricted Affiliate with those of such Restricted Affiliate, all in
accordance with GAAP. The term "consolidated" has a correlative meaning to the
foregoing.
"Corporate Trust Office" means the principal office of the
Trustee at which at any particular time its corporate trust business shall be
principally administered, which office at the date of execution of this
Indenture is located at 450 West 33rd Street, 15th Floor, New York, New York
10001-2697, Attention: Global Trust Services or at any other time at such other
address as the Trustee may designate from time to time by notice to the
Noteholders.
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other law respecting secured
creditors and the enforcement of their security or any other person with like
powers whether appointed judicially or out of court and whether pursuant to an
interim or final appointment.
"Default" means any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Default Amount" means the Accreted Value, premium, if any,
and accrued and unpaid interest in respect of the Notes.
"Depository" means The Depository Trust Company, its nominees
and successors.
"Designation Amounts" means, at any date of determination, the
sum of all US Designation Amounts and all JV Revocation Amounts.
"Designation" has the meaning set forth under Section 10.21
hereof.
"Disinterested Director" means, with respect to any
transaction or series of related transactions, a member of the Board of the
Company other than a director who (i) has any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions or (ii) is an employee or officer of the Company or an Affiliate
that is itself a party to such transaction or series of transactions or an
Affiliate of a party to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any
Capital Stock which, by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in Section 10.15 and Section 10.10
hereof and such Capital Stock specifically provides that such person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
Section 10.15 and Section 10.10 hereof and at all times subject to 10.13 hereof.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Exchange Notes" means the 9.80% Senior Discount Notes due
2008, Series B, to be issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement.
"Exchange Offer" shall have the meaning specified in the
Registration Rights Agreement.
"Fair Market Value" means, with respect to any asset or
property, the price that could be negotiated in an arms-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under pressure or compulsion to complete the transaction. Any Asset Sale
pursuant to the terms of the deadlock event "buy-sell" arrangements in Section
7.8 of the Amended and Restated Operating Agreement of RCN-BECOCOM, LLC, as in
effect on the Issue Date, or Section 7.15 of the Amended and Restated Operating
Agreement of Starpower Communications, LLC, as in effect on the Issue Date,
shall be deemed to have been made for Fair Market Value. Unless otherwise
specified in this Indenture, Fair Market Value shall be determined by the Board
acting in good faith and shall be evidenced by a Board Resolution.
"GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States and which are applicable as
of the date of determination and which are consistently applied for all
applicable periods.
"Global Notes" means one or more of the Regulation S Global
Notes and/or the 144A Global Notes.
"guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of any part
or all of such obligation and (ii) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Holder" or "Noteholder" means a person in whose name a Note
is registered in the Note Register.
"Indebtedness" means, with respect to any person, without
duplication, (i) any liability, contingent or otherwise, of such person (A) for
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such person or only to a portion thereof) or (B) evidenced by a note,
debenture or similar instrument or letter of credit (including a purchase money
obligation) or (C) for the payment of money relating to a Capitalized Lease
Obligation or other obligation relating to the deferred purchase price of
property or (D) in respect of an Interest Rate Obligation or currency agreement;
or (ii) any liability of others of the kind described in the preceding clause
(i) which the person has guaranteed or which is otherwise its legal liability;
or (iii) any obligation secured by a Lien (other than Liens on Capital Stock or
Indebtedness of any Unrestricted Subsidiary) to which the property or assets of
such person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such person's legal liability (the
amount of such obligation being deemed to be the lesser of the value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends; and (v) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of Section 10.11 and
Section 10.13 hereof and the definition of "Events of Default," in determining
the principal amount of any Indebtedness to be incurred by the Company or a
Restricted Subsidiary or which is outstanding at any date, the principal amount
of any Indebtedness which provides that an amount less than the principal amount
at maturity thereof shall be due upon any declaration of acceleration thereof
shall be the accreted value thereof at the date of determination. Indebtedness
of any person that becomes a Restricted Subsidiary shall be deemed incurred at
the time that such a person becomes a Restricted Subsidiary.
"Indenture" means this instrument as originally executed
(including all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company
under this Indenture or under the Notes, to pay principal of, premium, if any,
and interest on the Notes when due and payable, whether at maturity, by
acceleration, call for redemption or repurchase or otherwise, and all other
amounts due or to become due under or in connection with this Indenture or the
Notes and the performance of all other obligations to the Trustee (including,
but not limited to, payment of all amounts due the Trustee under Section 6.07
hereof) and the Holders of the Notes under this Indenture and the Notes,
according to the terms thereof.
"Independent Financial Advisor" means a United States
investment banking, consulting or accounting firm of national standing in the
United States (i) which does not, and whose directors, officers and employees or
Affiliates do not, have a material direct or indirect financial interest in the
Company or any of its Subsidiaries or Affiliates and (ii) which, in the judgment
of the Board, is otherwise independent and qualified to perform the task for
which it is to be engaged.
"Initial Notes" means the 9.80% Senior Discount Notes due
2008, Series A, of the Company.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Salomon Brothers Inc and NationsBanc Montgomery Securities
LLC.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act.
"interest," when used with respect to any Note, means the
amount of all interest accruing on such Note, including all additional interest
payable on the Notes pursuant to the Registration Rights Agreement and all
interest accruing subsequent to the occurrence of any events specified in
Sections 5.01(viii), (ix) and (x) hereof or which would have accrued but for any
such event, whether or not such claims are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any
Note, the Stated Maturity of an installment of interest on such Note, as set
forth in such Note.
"Interest Rate Obligations" means the obligations of any
person pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount and shall include without limitation, interest rate
swaps, caps, floors, collars, forward interest rate agreements and similar
agreements.
"Investment" means, with respect to any person, any advance,
loan, account receivable (other than an account receivable arising in the
ordinary course of business), or other extension of credit (including, without
limitation, by means of any guarantee) or any capital contribution to (by means
of transfers of property to others, payments for property or services for the
account or use of others, or otherwise), or any purchase or ownership of any
stocks, bonds, notes, debentures or other securities of, any other person.
Notwithstanding the foregoing, in no event shall any issuance of Capital Stock
(other than Disqualified Stock) of the Company in exchange for Capital Stock,
property or assets of another person constitute an Investment by the Company in
such other person.
"Issue Date" means the original date of issuance of the Notes.
"Joint Venture" means any person engaged in a Permitted
Business in which the Company or one of the Restricted Subsidiaries (the "RCN
Partner") owns not less than 50% of the Voting Stock and not less than 50% of
each class of Capital Stock and in respect of which (a) there are no more than
five other beneficial holders of Capital Stock and Voting Stock (the "Other
Partners"), (b) all of its Subsidiaries are wholly owned by such person and (c)
the RCN Partner and the Other Partners have entered into contractual
arrangements that require their joint consent to take actions in respect of any
of the following: (1) the payment or distribution of any dividends, whether in
cash or other property, by such person or any of its Subsidiaries to the RCN
Partner; (2) the making of any advance or loan of any cash or other property by
such person or any of its Subsidiaries to the Company or any of the Restricted
Subsidiaries; (3) the incurrence of any Indebtedness by such person or any of
its Subsidiaries; or (4) any other material operating or financial decision with
respect to the business of such person or any of its Subsidiaries; provided that
customary financial and other restrictive covenants in any loan or advances made
by the RCN Partner and the Other Partners to such person or any of its
Subsidiaries and not entered into with purpose of influencing the management of
such person or any of its Subsidiaries shall not, by itself, cause such person
to not constitute a Joint Venture.
"Kiewit Holders" means Peter Kiewit Sons' Inc., Level 3
Communications, Inc. and Kiewit Telecom Holdings, Inc. and any of their
respective controlled Affiliates.
"Lien" means any mortgage, charge, pledge, lien (statutory or
other), security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind. A person shall be deemed to own subject to a Lien any property
which such person 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.
"Material Restricted Subsidiary" means any Restricted
Subsidiary of the Company, which, at any date of determination, is a
"Significant Subsidiary" (as that term is defined in Regulation S-X issued under
the Securities Act), but shall, in any event, include (x) any Guarantor or (y)
any Restricted Subsidiary of the Company which, at any date of determination, is
an obligor under any Indebtedness in an aggregate principal amount equal to or
exceeding $10.0 million.
"Maturity Date" means, with respect to any Note, the date
specified in such Note as the fixed date on which the principal of such Note is
due and payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash (including assumed liabilities and other
items deemed to be cash under the proviso to the first sentence of Section 10.15
hereof) or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary or any Restricted Affiliate) net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel, accountants, consultants and investment bankers) related to such Asset
Sale, (ii) provisions for all taxes payable as a result of such Asset Sale,
(iii) amounts required to be paid to any person (other than the Company or any
Restricted Subsidiary or any Restricted Affiliate) owning a beneficial interest
in or having a Permitted Lien on the assets subject to the Asset Sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
or any Restricted Affiliate, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary or any Restricted
Affiliate, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an Officers'
Certificate delivered to the Trustee.
"New Joint Venture" means any Joint Venture (excluding in any
event the BECO Joint Venture and the Starpower Joint Venture) formed after the
Issue Date and in which no Investment has been made on or prior to the Issue
Date.
"Non-U.S. Person" has the meaning assigned to such term in
Regulation S.
"Notes" shall have the meaning specified in the recitals of
this Indenture.
"Offering Memorandum" means the Offering Memorandum dated
January 30, 1998 pursuant to which the Notes were offered.
"Officer" means, with respect to the Company, the Chairman of
the Board, a Vice Chairman, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, a Vice Chairman, the President or a Vice President, and
by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer, of the Company and delivered to the Trustee.
"144A Global Note" means a permanent global note in registered
form representing the aggregate principal amount of Notes sold in reliance on
Rule 144A under the Securities Act.
"Opinion of Counsel" means a written opinion of counsel who
may be counsel for the Company or the Trustee, and who shall be reasonably
acceptable to the Trustee.
"Other Partners" has the meaning set forth in the definition
of "Joint Venture."
"Other Senior Debt Pro Rata Share" means the amount of the
applicable Excess Proceeds obtained by multiplying the amount of such Excess
Proceeds by a fraction, (i) the numerator of which is the aggregate accreted
value and/or principal amount, as the case may be, of all Indebtedness (other
than (x) the Notes and (y) Subordinated Indebtedness) of the Company outstanding
at the time of the applicable Asset Sale with respect to which the Company is
required to use Excess Proceeds to repay or make an offer to purchase or repay
and (ii) the denominator of which is the sum of (a) the aggregate principal
amount of all Notes outstanding at the time of the offer to purchase or repay
with respect to the applicable Asset Sale and (b) the aggregate principal amount
or the aggregate accreted value, as the case may be, of all other Indebtedness
(other than Subordinated Indebtedness) of the Company outstanding at the time of
the applicable Asset Sale Offer with respect to which the Company is required to
use the applicable Excess Proceeds to offer to repay or make an offer to
purchase or repay.
"Outstanding" means, as of the date of determination, all
Notes theretofore authenticated and delivered under this Indenture, except:
(a) Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Notes, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Company or any
Affiliate thereof) in trust or set aside and segregated in trust by the
Company or any Affiliate thereof (if the Company or such Affiliate
shall act as Paying Agent) for the Holders of such Notes; provided,
however, that if such Notes are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made;
(c) Notes with respect to which the Company has effected
defeasance or covenant defeasance as provided in Article Four, to the
extent provided in Sections 4.02 and 4.03 hereof; and
(d) Notes in exchange for or in lieu of which other Notes have
been authenticated and delivered pursuant to this Indenture, other than
any such Notes in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Notes are held by a bona
fide purchaser in whose hands the Notes are valid obligations of the
Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Notes that a Responsible Officer of the Trustee actually knows to
be so owned shall be so disregarded. The Company shall notify the Trustee, in
writing, when it repurchases or otherwise acquires Notes, of the aggregate
principal amount of such Notes so repurchased or otherwise acquired. Notes so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Notes and that the pledgee is not the Company or
any other obligor upon the Notes or any Affiliate of the Company or such other
obligor. If the Paying Agent holds, in its capacity as such, on any Maturity
Date or on any optional redemption date money sufficient to pay all accrued
interest and principal with respect to such Notes payable on that date and is
not prohibited from paying such money to the Holders thereof pursuant to the
terms of this Indenture, then on and after that date such Notes cease to be
Outstanding and interest on them ceases to accrue. Notes may also cease to be
Outstanding to the extent expressly provided in Article Four.
"Permitted Business" means any telecommunications business
(including, without limitation, the development and provision of voice, video
and data transmission products, services and systems), and any business
reasonably related to the foregoing.
"Permitted Credit Facility" means (i) any senior commercial
term loan and/or revolving credit facility (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions typically party to commercial loan agreements and (ii)
any senior credit facility entered into with any vendor or supplier (or any
financial institution acting on behalf of or for the purpose of directly
financing purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is incurred for the purpose of financing the cost (including the cost
of design, development, construction, manufacture or acquisition) of personal
property or fixtures, used, or to be used, in a Permitted Business.
"Permitted Indebtedness" means the following Indebtedness
(each of which shall be given independent effect):
(a) Indebtedness under the Notes and this Indenture;
(b) Indebtedness of the Company and/or any Restricted
Subsidiary and/or any Restricted Affiliate outstanding on the Issue
Date;
(c) (i) Indebtedness of any Restricted Subsidiary or
Restricted Affiliate owed to and held by the Company or a Restricted
Subsidiary or Restricted Affiliate and (ii) Indebtedness of the
Company, not secured by any Lien, owed to and held by any Restricted
Subsidiary or Restricted Affiliate; provided that an incurrence of
Indebtedness shall be deemed to have occurred upon (x) any sale or
other disposition (excluding assignments as security to financial
institutions) of any Indebtedness of the Company or a Restricted
Subsidiary or Restricted Affiliate referred to in this clause (c) to a
person (other than the Company or a Restricted Subsidiary or Restricted
Affiliate) or (y) any sale or other disposition by the Company or any
Restricted Subsidiary of Capital Stock of a Restricted Subsidiary or
Restricted Affiliate, or Designation of an Unrestricted Subsidiary or
JV Revocation of a Restricted Affiliate, which holds Indebtedness of
the Company or Restricted Subsidiary or Restricted Affiliate such that
such Restricted Subsidiary or Restricted Affiliate, in any such case,
ceases to be a Restricted Subsidiary or Restricted Affiliate, as the
case may be;
(d) Interest Rate Obligations of the Company and/or any
Restricted Subsidiary and/or any Restricted Affiliate relating to
Indebtedness of the Company and/or such Restricted Subsidiary and/or
Restricted Affiliate, as the case may be (which Indebtedness (x) bears
interest at fluctuating interest rates and (y) is otherwise permitted
to be incurred under Section 10.11 hereof), but only to the extent that
the notional principal amount of such Interest Rate Obligations does
not exceed the principal amount of the Indebtedness (and/or
Indebtedness subject to commitments) to which such Interest Rate
Obligations relate;
(e) Indebtedness of the Company and/or any Restricted
Subsidiary and/or any Restricted Affiliate in respect of performance
bonds of the Company or any Restricted Subsidiary or Restricted
Affiliate or surety bonds provided by the Company or any Restricted
Subsidiary or Restricted Affiliate incurred in the ordinary course of
business;
(f) Indebtedness of the Company and/or any Restricted
Subsidiary and/or any Restricted Affiliate to the extent it represents
a replacement, renewal, refinancing or extension (a "Refinancing") of
outstanding Indebtedness of the Company and/or any Restricted
Subsidiary and/or any Restricted Affiliate incurred or outstanding
pursuant to clause (a), (b), (g), or (h) of this definition or the
proviso of Section 10.11 hereof, provided that (1) Indebtedness of the
Company may not be Refinanced to such extent under this clause (f) with
Indebtedness of any Restricted Subsidiary or Restricted Affiliate, (2)
Indebtedness of a Restricted Affiliate may not be Refinanced with
Indebtedness of the Company or a Restricted Subsidiary in an amount
exceeding the RCN Share of such Indebtedness and (3) any such
Refinancing shall only be permitted under this clause (f) to the extent
that (x) it does not result in a lower Average Life to Stated Maturity
of such Indebtedness as compared with the Indebtedness being Refinanced
and (y) it does not exceed the sum of the principal amount (or, if such
Indebtedness provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof, an amount no greater than such
lesser amount) of the Indebtedness being Refinanced plus the amount of
accrued interest thereon and the amount of any reasonably determined
prepayment premium necessary to accomplish such Refinancing and such
reasonable fees and expenses incurred in connection therewith;
(g) Buildout Indebtedness (including under one or more
Permitted Credit Facilities); provided that no Indebtedness may be
incurred under this clause (g) on any date on or after October 15,
2002;
(h) Indebtedness of the Company and/or any Restricted
Subsidiary and/or any Restricted Affiliate incurred under one or more
Permitted Credit Facilities, and any Refinancings (whether an initial
Refinancing or one or more successive Refinancings) of the foregoing
otherwise incurred in compliance with clause (f), such that the
aggregate principal amount of the Indebtedness of the Company and the
Restricted Subsidiaries and the RCN Share of any Indebtedness of a
Restricted Affiliate does not exceed $150 million at any time
outstanding; provided, however, such amount shall be increased to $200
million if the Company shall designate as a Restricted Affiliate
pursuant to Section 10.22 a Joint Venture formed to develop a Permitted
Business in a Metropolitan Statistical Area which contains greater than
400,000 households;
(i) Subordinated Indebtedness of any Restricted Affiliate owed
to and held by any of the Other Partners in such Restricted Affiliate
to the extent (x) such Indebtedness is incurred to fund the
proportionate share (based upon equity ownership) of the Company or any
Restricted Subsidiary of any mandatory capital call made by such
Restricted Affiliate and in respect to which the Company or such
Restricted Subsidiary has defaulted and (y) such Indebtedness is not
secured by any Lien; and
(j) in addition to the items referred to in clauses (a)
through (i) above, Indebtedness of the Company and/or the Restricted
Subsidiaries having an aggregate principal amount not to exceed $10
million at any time outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (c) Interest Rate Obligations incurred in compliance with Section
10.11 hereof; and (d) Investments in the Company or any Restricted Subsidiary or
Investments made in any person as a result of which such person becomes a
Restricted Subsidiary.
"person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any person, any and
all shares, interests, participations or other equivalents (however designated)
of such person's preferred or preference stock whether now outstanding, or
issued after the Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such person.
"Private Exchange Notes" shall have the meaning specified in
the Registration Rights Agreement.
"Private Placement Legend" shall mean the first paragraph of
the legend initially set forth in the Notes in the form set forth on Exhibit
A-1.
"Qualified Institutional Buyer" or "QIB" shall have the
meaning specified in Rule 144A under the Securities Act.
"RCN Share" means, with respect to the Indebtedness of any
Restricted Affiliate, an amount of such Indebtedness determined by reference to
the percentage common equity interest of the Company and the Restricted
Subsidiaries in such Restricted Affiliate.
"Redemption Date" means, with respect to any Note to be
redeemed, the date fixed by the Company for such redemption pursuant to this
Indenture and the Notes.
"Redemption Price" means, with respect to any Note to be
redeemed, the price fixed for such redemption pursuant to the terms of this
Indenture and the Notes.
"Refinancing" has the meaning set forth in clause (f) of the
definition of "Permitted Indebtedness."
"Registrable Securities" shall have the meaning specified in
the Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of February 6, 1998 by and among the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified
in the Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in
registered form representing the aggregate principal amount of Notes sold in
reliance on Regulation S under the Securities Act.
"Responsible Officer" means, when used with respect to the
Trustee, any officer within the Corporate Trust Office including any Vice
President, Managing Director, Assistant Vice President, Secretary, Assistant
Secretary or Assistant Treasurer or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also, with respect to a particular matter, any other officer to
whom such matter is referred because of such officer's knowledge and familiarity
with the particular subject.
"Restricted Affiliate" means any Joint Venture designated as
such pursuant to and in compliance with Section 10.22 hereof until an effective
JV Revocation in respect thereof has been made.
"Restricted Affiliate Group" means, collectively, any
Restricted Affiliate whose Capital Stock is owned directly by the Company or a
Restricted Subsidiary and all of its Subsidiaries.
"Restricted Note" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
provided, however, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
"Restricted Payment" means any of the following: (i) the
declaration or payment of any dividend or any other distribution on Capital
Stock of the Company or any payment made to the direct or indirect holders (in
their capacities as such) of Capital Stock of the Company other than dividends
or distributions payable solely in Capital Stock (other than Disqualified Stock)
of the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company; (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Company
(other than any such Capital Stock owned by the Company or a Wholly Owned
Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other
acquisition or retirement for value prior to any scheduled repayment, sinking
fund or maturity of any Subordinated Indebtedness (other than any Subordinated
Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the making
by the Company or any Restricted Subsidiary or any Restricted Affiliate of any
Investment (other than a Permitted Investment) in any person.
"Restricted Subsidiary" means any Subsidiary of the Company
that has not been designated by the Board, by a Board Resolution delivered to
the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
Section 10.21 hereof. Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any
Restricted Subsidiary (i) which is not subordinated to any other Indebtedness of
such Restricted Subsidiary and (ii) in respect of which the Company is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facilities.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Corporation.
"SEC" means the Securities and Exchange Commission, as from
time to time constituted, or if at any time after the execution of this
Indenture such Commission is not existing and performing the applicable duties
now assigned to it, then the body or bodies performing such duties at such time.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"Senior Debt Securities" means any unsubordinated debt
securities (including any guarantee of such securities) issued by the Company
and/or any Restricted Subsidiary and/or any Restricted Affiliate, whether in a
public offering or a private placement; it being understood that the term
"Senior Debt Securities" shall not include any Permitted Credit Facility or
other commercial bank borrowings or similar borrowings, recourse transfers of
financial assets, capital leases or other types of borrowings issued in a manner
not customarily viewed as a "securities offering."
"Senior Notes" means the 10% Senior Notes due 2007 of the
Company.
"Special Record Date" means, with respect to the payment of
any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07
hereof.
"Stated Maturity" means, with respect to any Note or any
installment of interest thereon, the dates specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest, is
due and payable.
"Subordinated Indebtedness" means any Indebtedness of the
Company or any Guarantor which is expressly subordinated in right of payment to
any other Indebtedness of the Company or such Guarantor; provided that, for
purposes of Section 10.16 and Section 10.18, "Subordinated Indebtedness" means
any Indebtedness of the Company or any Restricted Subsidiary or Restricted
Affiliate that is expressly subordinated in right of payment to any other
Indebtedness of such person.
"Subsidiary" means, with respect to any person, (i) any
corporation of which the outstanding Capital Stock having at least a majority of
the votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such person, or (ii) any other person of which
at least a majority of voting interest is at the time, directly or indirectly,
owned by such person. In no event shall "Subsidiary" include any Joint Venture.
"Total Affiliate Indebtedness" means, at any date of
determination, with respect to any Restricted Affiliate, the aggregate
consolidated amount of all Indebtedness of such Restricted Affiliate and its
Subsidiaries outstanding as of the date of determination.
"Total Consolidated Indebtedness" means, at any date of
determination, an amount equal to the sum of (i) the aggregate amount of all
Indebtedness of the Company and the Restricted Subsidiaries and (ii) the sum of
the RCN Share of the Indebtedness of each of the Restricted Affiliates, in each
case outstanding as of the date of determination and determined on a
consolidated basis.
"Total Invested Equity Capital" means, at any time of
determination, the sum of, without duplication, (i) $216.6 million plus (ii) the
aggregate cash proceeds received by the Company from capital contributions in
respect of existing Capital Stock (other than Disqualified Stock) or the
issuance or sale of Capital Stock (other than Disqualified Stock but including
Capital Stock issued upon conversion of convertible Indebtedness or from the
exercise of options, warrants or rights to purchase Capital Stock (other than
Disqualified Stock)) on or subsequent to the Issue Date, other than to a
Restricted Subsidiary or to a Restricted Affiliate; plus (iii) the aggregate
cash proceeds received by the Company or any Restricted Subsidiary from the
sale, disposition or repayment of any Investment made after the Issue Date and
constituting a Restricted Payment (other than any Investments made pursuant to
clause (d) of the second paragraph of Section 10.13 in an amount equal to the
lesser of (a) the return of capital with respect to such Investment and (b) the
initial amount of such Investment, in either case, less the cost of the
disposition of such Investment, plus (iv) in the case of the Revocation of the
Designation of a Subsidiary as an Unrestricted Subsidiary, an amount equal to
the consolidated net Investment in such Subsidiary on the date of Revocation but
not in an amount exceeding the net amount of any Investments constituting
Restricted Payments made (or deemed made) in such Subsidiary after the Issue
Date plus (v) in the case of the JV Designation after the Issue Date of a New
Joint Venture as a Restricted Affiliate, an amount equal to the consolidated net
Investment in such New Joint Venture on the date of such JV Designation but not
in an amount exceeding the net amount of any Investments constituting Restricted
Payments made (or deemed made) in such New Joint Venture after the Issue Date
minus (vi) the aggregate amount of all Restricted Payments (other than
Restricted Payments referred to in clause (d) or clause (c)(B) of the second
paragraph of Section 10.13) declared or made on and after the Issue Date.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act
of 1939, as amended.
"Trustee" means the person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Unrestricted Notes" means one or more Notes that do not and
are not required to bear the Private Placement Legend in the form set forth in
Exhibit A, including, without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 10.21 hereof. Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"U.S. Government Securities" means securities that are direct
non-callable obligations of the United States of America or securities the
timely payment of whose principal and interest is unconditionally guaranteed by
the full faith and credit of the United States of America.
"Voting Stock" means, with respect to any person, the Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary of which all of the outstanding Capital Stock is owned by the Company
or another Wholly Owned Restricted Subsidiary. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
Section 1.02. Other Definitions.
Defined in
Term Section
---- -------
"Act" 1.05
"Affiliate Transaction" 10.14
"Agent Member" 3.16
"Asset Sale Offer" 10.15
"Asset Sale Offer Purchase Date" 10.15
"assumed liabilities" 10.15
"Change of Control Date" 10.10
"Change of Control Offer" 10.11
"Change of Control Payment Date" 10.11
"covenant defeasance" 4.03
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Notes" 4.01
"Designation" 10.21
"Event of Default" 5.01
"Excess Proceeds" 10.15
"incur" 10.11
"insolvent person" 4.04
"JV Designation" 10.22
"JV Revocation" 10.22
"JV Revocation Amount" 10.22
"Note Register" 3.05
"Offer Excess Proceeds" 10.15
"Paying Agent" or "Agent" 3.02
"Physical Notes" 3.03
"Registrar" 3.02
"Replacement Assets" 10.15
"Restricted Period" 3.17
"Revocation" 10.21
"surviving entity" 8.01
"US Designation Amount" 10.21
Section 1.03. Rules of Construction.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(d) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful
currency of the United States of America; and
(f) the words "include," "included" and "including" as used
herein are deemed in each case to be followed by the phrase "without
limitation."
Section 1.04. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
person, or that they be so certified or covered by only one document, but one
such person may certify or give an opinion with respect to some matters and one
or more other persons as to other matters, and any such person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion may be based, insofar as it relates
to factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Company stating that the information with respect to
such factual matters is in the possession of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated,
with proper identification of each matter covered therein, and form one
instrument.
Section 1.05. Acts of Holders.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution (as provided below in
subsection (b) of this Section 1.05) of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.01 hereof) conclusive in favor of the Trustee and the
Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any
such instrument or writing may be proved in any reasonable manner which the
Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note
Register.
(d) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Note shall bind every
future Holder of the same Note or the Holder of every Note issued upon the
transfer thereof or in exchange therefor or in lieu thereof to the same extent
as the original Holder, in respect of anything done, suffered or omitted to be
done by the Trustee, any Paying Agent or the Company in reliance thereon,
whether or not notation of such action is made upon such Note.
Section 1.06. Notices, etc., to the Trustee and the Company.
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed, in
writing, to or with the Trustee at the Corporate Trust Office, 450 West 33rd
Street, 15th Floor, New York, New York 10001, Attention: Global Trust Services
or at any other address previously furnished in writing to the Holders and the
Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be
sufficient for every purpose (except as otherwise expressly provided herein)
hereunder if in writing and mailed, first-class postage prepaid, to the Company
addressed to it at RCN Corporation, 105 Carnegie Center, Princeton, New Jersey,
08540-6215, Attention: Chief Executive Officer, or at any other address
previously furnished in writing to the Trustee by the Company.
Section 1.07. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise expressly
provided herein) if in writing and mailed, first-class postage prepaid, to each
Holder affected by such event, at the address of such Holder as it appears in
the Note Register, not later than the latest date, and not earlier than the
earliest date, prescribed for the giving of such notice. In any case where
notice to Holders is given by mail, neither the failure to mail such notice, nor
any defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Any notice when mailed
to a Holder in the aforesaid manner shall be conclusively deemed to have been
received by such Holder whether or not actually received by such Holder. Where
this Indenture provides for notice in any manner, such notice may be waived in
writing by the person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause, it shall be impracticable to mail notice of any
event as required by any provision of this Indenture, then any method of giving
such notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with
any provision of the Trust Indenture Act or another provision which is required
or deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
Section 1.09. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture or in the Notes issued
pursuant hereto shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
Section 1.12. Benefits of Indenture.
Nothing in this Indenture or in the Notes issued pursuant
hereto, express or implied, shall give to any person (other than the parties
hereto and their successors hereunder, any Paying Agent and the Holders) any
benefit or any legal or equitable right, remedy or claim under this Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the
Company shall not have any liability for any obligations of the Company under
the Notes or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation.
Section 1.15. Independence of Covenants.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
Section 1.16. Exhibits.
All exhibits attached hereto are by this reference made a part
hereof with the same effect as if herein set forth in full.
Section 1.17. Counterparts.
This Indenture may be executed in any number of counterparts
and by telecopier, each of which shall be an original; but such counterparts
shall together constitute but one and the same instrument.
Section 1.18. Duplicate Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
ARTICLE TWO
NOTE FORMS
Section 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication with
respect thereto shall be in substantially the forms set forth, or referenced, in
Exhibit A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with any applicable law or with the rules of the Depository,
any clearing agency or any securities exchange or as may, consistently herewith,
be determined by the officers executing such Notes, as evidenced by their
execution thereof.
The definitive Notes shall be printed, typewritten,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other manner permitted by the rules of any securities
exchange on which the Notes may be listed, all as determined by the officers
executing such Notes, as evidenced by their execution of such Notes.
Each Note shall be dated the date of its issuance and shall
show the date of its authentication. The terms and provisions contained in the
Notes shall constitute, and are expressly made, a part of this Indenture.
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms.
The aggregate principal amount at maturity of the Notes which
may be authenticated and delivered under this Indenture is limited to
$567,000,000, except for Notes authenticated and delivered upon registration of
transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section
3.03, 3.04, 3.05, 3.06, 9.06, 10.10 or 10.15 hereof.
The Notes will mature on February 15, 2008. The Notes shall be
issued at a discount to yield gross proceeds of $350,587,440. The Notes shall
not bear cash interest prior to February 15, 2003. Commencing on August 15,
2003, interest on the Notes will be payable in cash at a rate of 9.80% per
annum, semi-annually in arrears from the most recent Interest Payment Date to
which interest has been paid or, if no interest has been paid from February 15,
2003. Interest on any overdue principal, interest (to the extent lawful) or
premium, if any, shall be payable on demand.
Section 3.02. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be
located in the Borough of Manhattan in The City of New York, State of New York)
where Notes may be presented for registration of transfer or for exchange (the
"Registrar"), an office or agency (which shall be located in the Borough of
Manhattan in The City of New York, State of New York) where Notes may be
presented for payment (the "Paying Agent" or "Agent") and an office or agency
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Registrar shall keep a register of the Notes
and of their transfer and exchange. The Company may have one or more
co-registrars and one or more additional paying agents. The term "Paying Agent"
or "Agent" includes any additional paying agent. The Company may act as its own
Paying Agent, except for the purposes of payments on account of principal on the
Notes pursuant to Sections 10.10 and 10.15 hereof.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture, which shall incorporate the
provisions of the Trust Indenture Act. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall notify
the Trustee of the name and address of any such Agent. If the Company fails to
maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the
Trustee shall act as such and shall be entitled to appropriate compensation in
accordance with Section 6.07 hereof.
The Company initially appoints the Trustee as the Registrar
and Paying Agent and agent for service of notices and demands in connection with
the Notes.
Section 3.03. Execution and Authentication.
The Initial Notes and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A-1 hereto. The
Exchange Notes and the Trustee's certificate of authentication relating thereto
shall be substantially in the form of Exhibit A-2 hereto. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
usage. The Company shall approve the form of the Notes and any notation, legend
or endorsement thereon. Each Note shall be dated the date of issuance and shall
show the date of its authentication.
The terms and provisions contained in the Notes annexed hereto
as Exhibits A-1 and A-2 shall constitute, and are hereby expressly made, a part
of this Indenture and, to the extent applicable, the Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A and Notes
offered and sold in reliance on Regulation S shall be issued initially in the
form of one or more Global Notes, substantially in the form set forth in Exhibit
A-1, deposited with the Trustee, as custodian for the Depository, duly executed
by the Company and authenticated by the Trustee as hereinafter provided and
shall bear the legend set forth in Exhibit B. The aggregate principal amount of
the Global Notes may from time to time be increased or decreased by adjustments
made on the records of the Trustee, as custodian for the Depository, as
hereinafter provided.
Notes issued in exchange for interests in a Global Note
pursuant to Section 3.17 hereof may be issued in the form of permanent
certificated Notes in registered form in substantially the form set forth in
Exhibit A-1 (the "Physical Notes").
Two Officers, or an Officer and an Assistant Secretary, shall
sign, or one Officer shall sign, and one Officer or an Assistant Secretary (each
of whom shall, in each case, have been duly authorized by all requisite
corporate actions) shall attest to, the Notes for the Company by manual or
facsimile signature.
If an Officer or Assistant Secretary whose signature is on a
Note was an Officer or Assistant Secretary at the time of such execution but no
longer holds that office or position at the time the Trustee authenticates the
Note, the Note shall nevertheless be valid.
The Trustee shall authenticate (i) Initial Notes for aggregate
principal amount of the Notes at maturity not to exceed $567,000,000 at any
time, (ii) Private Exchange Notes from time to time only in exchange for a like
principal amount of Initial Notes and (iii) Unrestricted Notes from time to time
only in exchange for (A) a like principal amount of Initial Notes or (B) a like
principal amount of Private Exchange Notes, in each case upon a written order of
the Company in the form of an Officers' Certificate of the Company. Each such
written order shall specify the amount of Notes to be authenticated and the date
on which the Notes are to be authenticated, whether the Notes are to be Initial
Notes, Private Exchange Notes or Unrestricted Notes and whether (subject to this
Section 3.03) the Notes are to be issued as Physical Notes or Global Notes and
such other information as the Trustee may reasonably request. The aggregate
principal amount of the Notes at maturity outstanding at any time may not exceed
$567,000,000, except as provided in Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this
Indenture shall vote and consent together on all matters (as to which any of
such Notes may vote or consent) as one class and no series of Notes will have
the right to vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Notes. Unless otherwise provided in
the appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only,
without coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.04. Temporary Notes.
Until definitive Notes are prepared and ready for delivery,
the Company may execute and upon a Company Order the Trustee shall authenticate
and deliver temporary Notes. Temporary Notes shall be substantially in the form
of definitive Notes, in any authorized denominations, but may have variations
that the Company reasonably considers appropriate for temporary Notes as
conclusively evidenced by the Company's execution of such temporary Notes.
If temporary Notes are issued, the Company will cause
definitive Notes to be prepared without unreasonable delay but in no event later
than the date that the Exchange Offer is consummated. After the preparation of
definitive Notes, the temporary Notes shall be exchangeable for definitive Notes
upon surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 10.02 hereof, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary Notes,
the Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Notes of like tenor and
of authorized denominations. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.05. Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency designated pursuant to Section 10.02 hereof being
sometimes referred to herein as the "Note Register") in which, subject to such
reasonable regulations as the Registrar may prescribe, the Company shall provide
for the registration of Notes and of transfers and exchanges of Notes. The
Trustee is hereby initially appointed Registrar for the purpose of registering
Notes and transfers of Notes as herein provided.
When Notes are presented to the Registrar or a co-Registrar
with a request from the Holder of such Notes to register the transfer or
exchange for an equal principal amount of Notes of other authorized
denominations, the Registrar shall register the transfer or make the exchange as
requested; provided, however, that every Note presented or surrendered for
registration of transfer or exchange shall be duly endorsed or be accompanied by
a written instrument of transfer or exchange in form satisfactory to the Company
and the Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing. Whenever any Notes are so presented for exchange, the
Company shall execute, and the Trustee shall authenticate and deliver, the Notes
which the Holder making the exchange is entitled to receive. No service charge
shall be made to the Noteholder for any registration of transfer or exchange.
The Company may require from the Noteholder payment of a sum sufficient to cover
any transfer taxes or other governmental charge that may be imposed in relation
to a transfer or exchange, but this provision shall not apply to any exchange
pursuant to Section 10.10, 10.15 or 9.06 hereof (in which events the Company
will be responsible for the payment of all such taxes which arise solely as a
result of the transfer or exchange and do not depend on the tax status of the
Holder). The Trustee shall not be required to exchange or register the transfer
of any Note for a period of 15 days immediately preceding the first mailing of
notice of redemption of Notes to be redeemed or of any Note selected, called or
being called for redemption except, in the case of any Note where public notice
has been given that such Note is to be redeemed in part, the portion thereof not
to be redeemed.
All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
Indebtedness, and entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Notes may be effected only through a book-entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a
book-entry system.
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.
If a mutilated Note is surrendered to the Trustee or if the
Holder of a Note of any series claims that the Note has been lost, destroyed or
wrongfully taken, the Company shall execute and upon a Company Order, the
Trustee shall authenticate and deliver a replacement Note of like tenor and
principal amount, bearing a number not contemporaneously outstanding if the
Holder of such Note furnishes to the Company and to the Trustee evidence
reasonably acceptable to them of the ownership and the destruction, loss or
theft of such Note and an indemnity bond shall be posted by such Holder,
sufficient in the judgment of the Company or the Trustee, as the case may be, to
protect the Company, the Trustee or any Agent from any loss that any of them may
suffer if such Note is replaced. The Company may charge such Holder for the
Company's expenses in replacing such Note (including (i) expenses of the Trustee
charged to the Company and (ii) any tax or other governmental charge that may be
imposed) and the Trustee may charge the Company for the Trustee's expenses in
replacing such Note.
Every replacement Note issued pursuant to this Section in lieu
of any destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.07. Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the person
in whose name that Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date and interest
on such defaulted interest at the then applicable interest rate borne by the
Notes, to the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Notes (or their respective
Predecessor Notes) are registered at the close of business on a Special Record
Date for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the amount
of Defaulted Interest proposed to be paid on each Note and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit on or prior to the date of the proposed payment,
such money when deposited to be held in trust for the benefit of the persons
entitled to such Defaulted Interest as provided in this subsection (a).
Thereupon the Trustee shall fix a Special Record Date for the payment of such
Defaulted Interest which shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10 days after
the receipt by the Trustee of the notice of the proposed payment. The Trustee
shall promptly notify the Company in writing of such Special Record Date. In the
name and at the expense of the Company, the Trustee shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date therefor
to be mailed, first-class postage prepaid, to each Holder at its address as it
appears in the Note Register, not less than 10 days prior to such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been so mailed, such Defaulted Interest shall be
paid to the persons in whose names the Notes (or their respective Predecessor
Notes) are registered on such Special Record Date and shall no longer be payable
pursuant to the following subsection (b).
(b) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after written notice given by the Company to the
Trustee of the proposed payment pursuant to this subsection (b), such payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.08. Persons Deemed Owners.
Prior to and at the time of due presentment for registration
of transfer, the Company, the Trustee and any agent of the Company or the
Trustee may treat the person in whose name any Note is registered in the Note
Register as the owner of such Note for the purpose of receiving payment of
principal of, premium, if any, and (subject to Section 3.07 hereof) interest on
such Note and for all other purposes whatsoever, whether or not such Note shall
be overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
Section 3.09. Cancellation.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Company may at any time deliver
to the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Notes so delivered shall be promptly canceled by the Trustee. The Registrar and
the Paying Agent shall forward to the Trustee any Notes surrendered to them for
registration of transfer or exchange, redemption or payment. The Trustee and no
one else shall cancel all Notes surrendered for registration of transfer,
exchange, payment, replacement or cancellation. No Notes shall be authenticated
in lieu of or in exchange for any Notes canceled as provided in this Section
3.09 hereof, except as expressly permitted by this Indenture. All canceled Notes
held by the Trustee shall be destroyed and certification of their destruction
delivered to the Company unless by a Company Order the Company shall timely
direct that the canceled Notes be returned to it. The Trustee shall provide the
Company a list of all Notes that have been canceled from time to time as
requested by the Company.
Section 3.10. Computation of Interest.
Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months.
Section 3.11. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date,
date established for the payment of Defaulted Interest or Stated Maturity of any
Note shall not be a Business Day, then (notwithstanding any other provision of
this Indenture or of the Notes) payment of principal, premium, if any, or
interest need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date, Redemption Date, date established for the payment of Defaulted Interest or
at the Stated Maturity, as the case may be. In such event, no interest shall
accrue with respect to such payment for the period from and after such Interest
Payment Date, Redemption Date, date established for the payment of Defaulted
Interest or Stated Maturity, as the case may be, to the next succeeding Business
Day and, with respect to any Interest Payment Date, interest for the period from
and after such Interest Payment Date shall accrue with respect to the next
succeeding Interest Payment Date.
Section 3.12. CUSIP and CINS Numbers.
The Company in issuing the Notes may use "CUSIP" and "CINS"
numbers (if then generally in use), and if so, the Trustee shall use the CUSIP
or CINS numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; provided, however, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on the Notes, and that
reliance may be placed only on the other identification numbers printed on the
Notes. The Company shall promptly notify the Trustee in writing of any change in
the CUSIP or CINS number of any type of Notes.
Section 3.13. Paying Agent To Hold Money in Trust.
Each Paying Agent shall hold in trust for the benefit of the
Noteholders or the Trustee all money held by the Paying Agent for the payment of
principal of, premium, if any, or interest on the Notes, and shall notify the
Trustee of any default by the Company in making any such payment. Money held in
trust by the Paying Agent need not be segregated except as required by law and
in no event shall the Paying Agent be liable for any interest on any money
received by it hereunder. The Company at any time may require the Paying Agent
to pay all money held by it to the Trustee and account for any funds disbursed
and the Trustee may at any time during the continuance of any Event of Default,
upon a Company Order to the Paying Agent, require such Paying Agent to pay
forthwith all money so held by it to the Trustee and to account for any funds
disbursed. Upon making such payment, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
Section 3.14. Treasury Notes.
In determining whether the Holders of the required aggregate
principal amount of Notes have concurred in any direction, waiver, consent or
notice, Notes owned by the Company or an Affiliate of the Company shall be
considered as though they are not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes which a Responsible Officer of the
Trustee actually knows are so owned shall be so considered. The Company shall
notify the Trustee, in writing, when it or any of its Affiliates repurchases or
otherwise acquires Notes, of the aggregate principal amount of such Notes so
repurchased or otherwise acquired.
Section 3.15. Deposits of Monies.
Prior to 1:00 p.m. New York City time on each Interest Payment
Date, maturity date, Change of Control Payment Date and Asset Sale Offer
Purchase Date, the Company shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date, maturity date, Change of Control Payment Date and
Asset Sale Offer Purchase Date, as the case may be, in a timely manner which
permits the Paying Agent to remit payment to the Holders on such Interest
Payment Date, maturity date, Change of Control Payment Date and Asset Sale Offer
Purchase Date, as the case may be.
Section 3.16. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the
name of the Depository or the nominee of such Depository, (ii) be delivered to
the Trustee as custodian for such Depository and (iii) bear legends as set forth
in Exhibit B.
Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depository, or the Trustee as its custodian, or
under the Global Note, and the Depository may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner of the
Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or any agent of the Company or the
Trustee from giving effect to any written certification, proxy or other
authorization furnished by the Depository or impair, as between the Depository
and its Agent Members, the operation of customary practices governing the
exercise of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in
whole, but not in part, to the Depository, its successors or their respective
nominees. Interests of beneficial owners in the Global Notes may be transferred
or exchanged for Physical Notes in accordance with the rules and procedures of
the Depository and the provisions of Sections 3.03 and 3.17 hereof. In addition,
Physical Notes shall be transferred to all beneficial owners, in exchange for
their beneficial interests in Global Notes if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for any Global
Note, or that it will cease to be a "Clearing Agency" under the Exchange Act,
and in either case a successor Depository is not appointed by the Company within
90 days of such notice or (ii) an Event of Default has occurred and is
continuing and the Registrar has received a written request from the Depository
to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion
of the beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b), the Registrar shall (if one or more Physical Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount at maturity of the Global Note in an amount equal to the
principal amount at maturity of the beneficial interest in the Global Note to be
transferred, and the Company shall execute, and the Trustee shall authenticate
and deliver, one or more Physical Notes of like tenor and principal amount of
authorized denominations.
(d) In connection with the transfer of Global Notes as an
entirety to beneficial owners pursuant to paragraph (b), the Global Notes shall
be deemed to be surrendered to the Trustee for cancellation, and the Company
shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depository in exchange for its beneficial
interest in the Global Notes, an equal aggregate principal amount at maturity of
Physical Notes of like tenor of authorized denominations.
(e) Any Physical Note constituting a Restricted Note delivered
in exchange for an interest in a Global Note pursuant to subparagraph (b), (c)
or (d) of this Section 3.16 shall, except as otherwise provided by Section 3.17
hereof, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
Section 3.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors.
The following additional provisions shall apply with respect to the registration
of any proposed transfer of an Initial Note to any Institutional Accredited
Investor which is not a QIB:
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement
Legend, if (x) the requested transfer is after the second anniversary
of the Issue Date; provided, however, that neither the Company nor any
Affiliate of the Company has held any beneficial interest in such Note,
or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made
under the Securities Act without registering such Initial Notes
thereunder or (y) the proposed transferee has delivered to the
Registrar a certificate substantially in the form of Exhibit C hereto
and any legal opinions and certifications required thereby;
(ii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar
of (x) written instructions given in accordance with the Depository's
and the Registrar's procedures and (y) the appropriate certificate, if
any, required by clause (y) of paragraph (i) above, together with any
required legal opinions and certifications, the Registrar shall
register the transfer and reflect on its books and records the date and
a decrease in the principal amount at maturity of the Global Note from
which such interests are to be transferred in an amount equal to the
principal amount at maturity of the Notes to be transferred and the
Company shall execute and upon a Company Order, the Trustee shall
authenticate Physical Notes in a principal amount equal to the
principal amount of the Global Note to be transferred.
(b) Transfers to Non-U.S. Persons. The following
additional provisions shall apply with respect to the registration of any
proposed transfer of an Initial Note to any Non-U.S. Person:
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement
Legend, if (x) the requested transfer is after the second anniversary
of the Issue Date; provided, however, that neither the Company nor any
Affiliate of the Company has held any beneficial interest in such Note,
or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made
under the Securities Act without registering such Initial Notes
thereunder or (y) the proposed transferor has delivered to the
Registrar a certificate substantially in the form of Exhibit C hereto;
(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer
are to be evidenced by an interest in a Regulation S Global Note upon
receipt by the Registrar of (x) written instructions given in
accordance with the Depository's and the Registrar's procedures and (y)
the appropriate certificate, if any, required by clause (y) of
paragraph (i) above, together with any required legal opinions and
certifications, the Registrar shall register the transfer and reflect
on its books and records the date and an increase in the principal
amount at maturity of the Regulation S Global Note in an amount equal
to the principal amount at maturity of Physical Notes to be
transferred, and the Trustee shall cancel the Physical Notes so
transferred;
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar
of (x) written instructions given in accordance with the Depository's
and the Registrar's procedures and (y) the appropriate certificate, if
any, required by clause (y) of paragraph (i) above, together with any
required legal opinions and certifications, the Registrar shall
register the transfer and reflect on its books and records the date and
(A) a decrease in the principal amount of the Global Note from which
such interests are to be transferred in an amount equal to the
principal amount of the Notes to be transferred and (B) an increase in
the principal amount of the Regulation S Global Note in an amount equal
to the principal amount of the Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the
"Restricted Period"), an owner of a beneficial interest in the
Regulation S Global Note may not transfer such interest to a transferee
that is a U.S. person or for the account or benefit of a U.S. person
within the meaning of Rule 902(o) of the Securities Act. During the
Restricted Period, all beneficial interests in the Regulation S Global
Note shall be transferred only through Cedel or Euroclear, either
directly if the transferor and transferee are participants in such
systems, or indirectly through organizations that are participants.
(c) Transfers to QIBs. The following provisions shall apply
with respect to the registration of any proposed transfer of an Initial Note to
a QIB (excluding Non-U.S. Persons):
(i) the Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement
Legend, if (x) the requested transfer is after the second anniversary
of the Issue Date; provided, however, that neither the Company nor any
Affiliate of the Company has held any beneficial interest in such Note,
or portion thereof, at any time on or prior to the second anniversary
of the Issue Date and such transfer can otherwise be lawfully made
under the Securities Act without registering such Initial Note
thereunder or (y) such transfer is being made by a proposed transferor
who has checked the box provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar in writing, that
the sale has been made in compliance with the provisions of Rule 144A
to a transferee who has signed the certification provided for on the
form of Note stating, or has otherwise advised the Company and the
Registrar in writing, that it is purchasing the Note for its own
account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within
the meaning of Rule 144A, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received
such information regarding the Company as it has requested pursuant to
Rule 144A or has determined not to request such information and that it
is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the
Notes to be transferred consist of Physical Notes which after transfer
are to be evidenced by an interest in the 144A Global Note, upon
receipt by the Registrar of written instructions given in accordance
with the Depository's and the Registrar's procedures, the Registrar
shall register the transfer and reflect on its book and records the
date and an increase in the principal amount at maturity of the 144A
Global Note in an amount equal to the principal amount at maturity of
Physical Notes to be transferred, and the Trustee shall cancel the
Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking
to transfer an interest in a Global Note, upon receipt by the Registrar
of written instructions given in accordance with the Depository's and
the Registrar's procedures, the Registrar shall register the transfer
and reflect on its books and records the date and (A) a decrease in the
principal amount of the Global Note from which interests are to be
transferred in an amount equal to the principal amount of the Notes to
be transferred and (B) an increase in the principal amount of the 144A
Global Note in an amount equal to the principal amount of the Global
Note to be transferred.
(d) Private Placement Legend. Upon the registration of
transfer, exchange or replacement of Notes not bearing the Private Placement
Legend, the Registrar shall deliver Notes that do not bear the Private Placement
Legend. Upon the registration of transfer, exchange or replacement of Notes
bearing the Private Placement Legend, the Registrar shall deliver only Notes
that bear the Private Placement Legend unless (i) the circumstances contemplated
by paragraphs (a)(i)(x) or (b)(i)(x) of this Section 3.17 exist, (ii) there is
delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the
Company and the Trustee to the effect that neither such legend nor the related
restrictions on transfer are required in order to maintain compliance with the
provisions of the Securities Act or (iii) such Note has been sold pursuant to an
effective registration statement under the Securities Act.
(e) Other Transfers. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section 3.17(a)
and (b) hereof, the Registrar shall only register such transfer or exchange if
such transferor delivers an Opinion of Counsel satisfactory to the Company and
the Registrar that such transfer is in compliance with the Securities Act and
the terms of this Indenture; provided, however, that the Company may, based upon
the opinion of its counsel, instruct the Registrar by a Company Order not to
register such transfer in any case where the proposed transferee is not a QIB,
or a Non-U.S. person or Institutional Accredited Investor.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 3.16 hereof or this
Section 3.17. The Company shall have the right to inspect and make copies of all
such letters, notices or other written communications at any reasonable time
upon the giving of reasonable prior written notice to the Registrar.
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or
Covenant Defeasance.
The Company may, at its option by Board Resolution, at any
time, with respect to the Notes, elect to have either Section 4.02 or Section
4.03 hereof be applied to all of the Outstanding Notes (the "Defeased Notes"),
upon compliance with the conditions set forth below in this Article Four.
Section 4.02. Defeasance and Discharge.
Upon the Company's exercise under Section 4.01 hereof of the
option applicable to this Section 4.02, the Company shall be deemed to have been
discharged from its obligations with respect to the Defeased Notes on the date
the conditions set forth below are satisfied (hereinafter, "defeasance"). For
this purpose, such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the Defeased Notes,
which shall thereafter be deemed to be "Outstanding" only for the purposes of
Section 4.05 and the other Sections of this Indenture referred to in (a) and (b)
below, and to have satisfied all its other obligations under such Notes and this
Indenture insofar as such Notes are concerned (and the Trustee, at the expense
of the Company, and, upon Company Request, shall execute proper instruments
acknowledging the same), except for the following, which shall survive until
otherwise terminated or discharged hereunder: (a) the rights of Holders of
Defeased Notes to receive, solely from the trust fund described in Section 4.04
hereof and as more fully set forth in such Section, payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due, (b) the Company's obligations with respect to such Defeased Notes under
Sections 3.04, 3.05, 3.06, 10.02 and 10.03 hereof, (c) the rights, powers,
trusts, duties and immunities of the Trustee hereunder, including, without
limitation, the Trustee's rights under Sections 4.05 and 6.07 hereof, and (d)
this Article Four. Subject to compliance with this Article Four, the Company may
exercise its option under this Section 4.02 notwithstanding the prior exercise
of its option under Section 4.03 hereof with respect to the Notes.
Section 4.03. Covenant Defeasance.
Upon the Company's exercise under Section 4.01 hereof of the
option applicable to this Section 4.03, the Company shall be released from its
obligations under any covenant or provision contained in Sections 10.06 through
10.23 hereof and the provisions of clause (c) of Section 8.01 shall not apply,
with respect to the Defeased Notes, on and after the date the conditions set
forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased
Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any
direction, waiver, consent or declaration or Act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder. For this
purpose, such covenant defeasance means that, with respect to the Defeased
Notes, the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such Section or
Article, whether directly or indirectly, by reason of any reference elsewhere
herein to any such Section or Article or by reason of any reference in any such
Section or Article to any other provision herein or in any other document and
such omission to comply shall not constitute a Default or an Event of Default
under Section 5.01(iii) or (iv) hereof, but, except as specified above, the
remainder of this Indenture and such Defeased Notes shall be unaffected thereby.
Section 4.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either
Section 4.02 or Section 4.03 hereof to the Defeased Notes:
(1) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee satisfying
the requirements of Section 6.09 hereof who shall agree to comply with
the provisions of this Article Four applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Notes, (a) money in an amount, or (b) U.S. Government
Obligations which through the scheduled payment of principal, premium,
if any, and interest in respect thereof in accordance with their terms
will provide, not later than the due date of any payment, money in an
amount, or (c) a combination thereof, in any such case, sufficient
without reinvestment, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge the entire
Indebtedness in respect of, and which shall be applied by the Trustee
(or other qualifying trustee) to pay and discharge, the principal of,
premium, if any, and interest on the Defeased Notes at the Stated
Maturity of such principal or installment of principal, premium, if
any, or interest or (if the Company has made irrevocable arrangements
satisfactory to such Trustee for the giving of notice of redemption by
such Trustee in the name and at the expense of the Company) the
redemption date thereof, as the case may be, in accordance with the
terms of the Indenture and the Notes; provided, however, that the
Trustee shall have been irrevocably instructed to apply such cash or
the proceeds of such U.S. Government Obligations to said payments with
respect to the Notes;
(2) No Default with respect to the Outstanding Notes
shall have occurred and be continuing on the date of such deposit or,
insofar as Section 4.02 hereof is concerned, at any time during the
period ending on the ninety-first day after the date of such deposit
(it being understood that this condition shall not be deemed satisfied
until the expiration of such period) no Default relating to Section
5.01(viii), (ix) or (x) hereof;
(3) Neither the Company nor any Subsidiary of the
Company is an "insolvent person" within the meaning of any applicable
Bankruptcy Law on the date of such deposit or at any time during the
period ending on the ninety-first day after the date of such deposit
(it being understood that this condition shall not be deemed satisfied
until the expiration of such period);
(4) Such defeasance or covenant defeasance shall not
cause the Trustee for the Notes to have a conflicting interest in
violation of Section 6.08 hereof and for purposes of the Trust
Indenture Act with respect to any securities of the Company;
(5) Such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default under, this
Indenture or any other material agreement or instrument to which the
Company is a party or by which it is bound;
(6) In the case of an election under Section 4.02
hereof, the Company shall have delivered to the Trustee an Opinion of
Counsel stating that (x) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (y) since
the date hereof, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon
such opinion shall confirm that, the Holders of the Outstanding Notes
will not recognize income, gain or loss for federal income tax purposes
as a result of such deposit, defeasance and discharge to be effected
with respect to the Notes and will be subject to federal income tax on
the same amount, in the same manner and at the same times as would have
been the case if such deposit, defeasance and discharge had not
occurred;
(7) In the case of an election under Section 4.03
hereof, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the Outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a
result of the deposit and covenant defeasance to be effected with
respect to the Notes and will be subject to Federal income tax on the
same amount, in the same manner and at the same times as would have
been the case if such deposit and covenant defeasance had not occurred;
(8) The Company shall have delivered to the Trustee, an
Opinion of Counsel to the effect that, immediately following the
ninety-first day after the deposit, the trust funds established
pursuant to this Article will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally under any applicable U.S. Federal
or state law;
(9) The Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit made by the Company
pursuant to its election under Section 4.02 or 4.03 hereof was not made
by the Company with the intent of preferring the Holders over the other
creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others;
(10) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that (i)
all conditions precedent (other than conditions requiring the passage
of time) provided for relating to either the defeasance under Section
4.02 or the covenant defeasance under Section 4.03 (as the case may be)
have been complied with as contemplated by this Section 4.04 and (ii)
if any other Indebtedness of the Company shall then be outstanding or
committed, such defeasance or covenant defeasance will not violate the
provisions of the agreements or instruments evidencing such
Indebtedness; and
(11) Such defeasance or covenant defeasance shall not
result in a trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as
amended, unless such trust shall be registered under the Act or exempt
from registration thereunder.
Opinions required to be delivered under this Section may have
such qualifications as are customary for opinions of the type required and
reasonably acceptable to the Trustee.
Section 4.05. Deposited Money and U.S. Government Obligations
To Be Held in Trust; Other Miscellaneous
Provisions.
Subject to the proviso of the last paragraph of Section 10.03,
all money and U.S. Government Obligations (including the proceeds thereof)
deposited with the Trustee (or other qualifying trustee, collectively for
purposes of this Section 4.05, the "Trustee") pursuant to Section 4.04 in
respect of the Defeased Notes shall be held in trust and applied by the Trustee,
in accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (other than the Company) as
the Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium, if any, and interest, but
such money need not be segregated from other funds except to the extent required
by law.
The Company shall pay and indemnify the Trustee, its officers,
directors and agents and hold such harmless against any tax, fee or other charge
imposed on or assessed against the U.S. Government Obligations deposited
pursuant to Section 4.04 or the principal, premium, if any, and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of the Defeased Notes.
Anything in this Article Four to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 4.04 which, in the opinion of an internationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance.
Section 4.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with Section 4.02 or 4.03 hereof, as
the case may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the obligations of the Company under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Section
4.02 or 4.03 hereof, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such money and U.S. Government
Obligations in accordance with Section 4.02 or 4.03 hereof, as the case may be;
provided, however, that if the Company makes any payment of principal, premium,
if any, or interest on any Note following the reinstatement of its obligations,
the Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money and U.S. Government Obligations held by the
Trustee or Paying Agent.
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) default in the payment of interest on the Notes when it
becomes due and payable and continuance of such default for a period of
30-days or more; or
(ii) default in the payment of the principal of, or premium,
if any, on the Notes when due; or
(iii) default in the performance, or breach, of any covenant
described under Section 10.10, Section 10.15 or Article Eight; or
(iv) default in the performance, or breach, of any covenant
in this Indenture (other than defaults specified in clause (i), (ii) or
(iii) above), and continuance of such default or breach for a period of
30 days or more after written notice to the Company by the Trustee or
to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes (in each case, when
such notice is deemed received in accordance with this Indenture); or
(v) failure to perform any term, covenant, condition or
provision of one or more classes or issues of Indebtedness in an
aggregate principal amount of $10.0 million or more under which the
Company or a Material Restricted Subsidiary is obligated, and either
(a) such Indebtedness is already due and payable in full or (b) such
failure results in the acceleration of the maturity of such
Indebtedness; or
(vi) any holder of at least $10.0 million in aggregate
principal amount of Indebtedness of the Company or any Material
Restricted Subsidiary shall commence judicial proceedings or take any
other action to foreclose upon or dispose of assets of the Company or
any Material Restricted Subsidiary having an aggregate Fair Market
Value, individually or in the aggregate, of $10.0 million or more or
shall have exercised any right under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure; provided that, in any such case, the Company or any
Material Restricted Subsidiary shall not have obtained, prior to any
such foreclosure or disposition of assets, a stay of all such actions
that remains in effect; or
(vii) one or more non-appealable judgments, orders or decrees
for the payment of money of $10.0 million or more, either individually
or in the aggregate, shall be entered into against the Company or any
Material Restricted Subsidiary or any of their respective properties
and shall not be discharged and there shall have been a period of 60
days or more during which a stay of enforcement of such judgment or
order, by reason of pending appeal or otherwise, shall not be in
effect; or
(viii) the Company or any Material Restricted Subsidiary of
the Company pursuant to or under or within the meaning of any
Bankruptcy Law;
(a) commences a voluntary case or proceeding;
(b) consents to the making of a Bankruptcy Order in
an involuntary case or proceeding or the commencement of any
case against it;
(c) consents to the appointment of a Custodian of it
or for any substantial part of its property;
(d) makes a general assignment for the benefit of its
creditors;
(e) files an answer or consent seeking reorganization
or relief;
(f) shall admit in writing its inability to pay its
debts generally; or
(g) consents to the filing of a petition in
bankruptcy.
(ix) a court of competent jurisdiction in any involuntary
case or proceeding enters a Bankruptcy Order against the Company or any
Material Restricted Subsidiary, and such Bankruptcy Order remains
unstayed and in effect for 60 consecutive days; or
(x) a Custodian shall be appointed out of court with
respect to the Company or any Material Restricted Subsidiary or with
respect to all or any substantial part of the assets or properties of
the Company or any Material Restricted Subsidiary.
Section 5.02. Acceleration of Maturity Rescission and
Annulment.
If an Event of Default (other than an Event of Default
specified in clause (viii), (ix) or (x) of Section 5.01 hereof with respect to
the Company) occurs and is continuing, then the Trustee or the holders of at
least 25% in Accreted Value of the Outstanding Notes may, by written notice, and
the Trustee upon the request of the holders of not less than 25% in Accreted
Value of the Outstanding Notes shall, declare the Default Amount of all
Outstanding Notes to be immediately due and payable and upon any such
declaration such amounts shall become immediately due and payable. If an Event
of Default specified in clause (viii), (ix) or (x) above with respect to the
Company occurs and is continuing, then the Default Amount of all Outstanding
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
After a declaration of acceleration or any ipso facto
acceleration as related to clause (viii), (ix) or (ix) of Section 5.01, the
holders of a majority in Accreted Value of the Outstanding Notes may, by notice
to the Trustee, rescind such declaration of acceleration and its consequences if
all existing Events of Default, other than nonpayment of the principal of and
accrued and unpaid interest on, the Notes that has become due solely as a result
of such acceleration, have been cured or waived and if the rescission of
acceleration would not conflict with any judgment or decree.
Section 5.03. Collection of Indebtedness and Suits for
Enforcement by Trustee.
The Company covenants that if an Event of Default specified in
Section 5.01(i), 5.01(ii) or 5.01(iii) (to the extent relating to a payment
required by Section 10.10 or Section 10.15) shall have occurred and be
continuing, the Company will, upon demand of the Trustee, pay to the Trustee,
for the benefit of the Holders of such Notes, the whole amount then due and
payable on such Notes for principal, premium, if any, and interest, with
interest upon the overdue principal, premium, if any, and, to the extent that
payment of such interest shall be legally enforceable, upon overdue installments
of interest, at the rate then borne by the Notes; and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may,
but is not obligated under this paragraph to, institute a judicial proceeding
for the collection of the sums so due and unpaid and may, but is not obligated
under this paragraph to, prosecute such proceeding to judgment or final decree,
and may, but is not obligated under this paragraph to, enforce the same against
the Company or any other obligor upon the Notes and collect the moneys adjudged
or decreed to be payable in the manner provided by law out of the property of
the Company or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion, but is not obligated under this paragraph to, (i) proceed
to protect and enforce its rights and the rights of the Holders under this
Indenture by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce such rights, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or
in aid of the exercise of any power granted herein or (ii) proceed to protect
and enforce any other proper remedy. No recovery of any such judgment upon any
property of the Company shall affect or impair any rights, powers or remedies of
the Trustee or the Holders.
Section 5.04. Trustee May File Proofs of Claims.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Notes or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Notes shall
then be due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the Company
for the payment of overdue principal or interest) shall be entitled and
empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect of the
Notes and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, fees, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any Custodian, in any such judicial proceeding, is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee as administrative expenses associated with any such proceeding, and in
the event that the Trustee shall consent to the making of such payments directly
to Holders, any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof.
To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 6.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting the
Notes or the rights of any Holder thereof, or to authorize the Trustee to vote
in respect of the claim of any Holder in any such proceeding.
Section 5.05. Trustee May Enforce Claims Without Possession of
Notes.
All rights of action and claims under this Indenture, or the
Notes may be prosecuted and enforced by the Trustee without the possession of
any of the Notes or the production thereof in any proceeding relating thereto,
and any such proceeding instituted by the Trustee shall be brought in its own
name and as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes in respect of which such judgment
has been recovered.
Section 5.06. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal,
premium, if any, or interest, upon presentation of the Notes and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Notes for interest;
Third: to Holders of principal and premium, if any, owing
under the Notes, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for principal;
and
Fourth: the balance, if any, to the Company.
The Trustee, upon prior written notice to the Company, may fix
a record date and payment date for any payment to Noteholders pursuant to this
Section 5.06.
Section 5.07. Limitation on Suits.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(b) the Holders of not less than 25% in Accreted Value of the
Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in aggregate principal amount of the Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture or any Note to affect, disturb or prejudice the rights of any
other Holders, or to obtain or to seek to obtain priority or preference over any
other Holders or to enforce any right under this Indenture or any Note, except
in the manner provided in this Indenture and for the equal and ratable benefit
of all the Holders.
Section 5.08. Unconditional Right of Holders To Re-
ceive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the
Holder of any Note shall have the right, which is absolute and unconditional, to
receive cash payment of the principal of, premium, if any, and (subject to
Section 3.07 hereof) interest on such Note on the respective Stated Maturities
expressed in such Note (or, in the case of redemption, on the respective
Redemption Date) and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such Holder.
Section 5.09. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture or any Note and such proceeding
has been discontinued or abandoned for any reason, or has been determined
adversely to the Trustee or to such Holder, then and in every such case the
Company, the Trustee and the Holders shall, subject to any determination in such
proceeding, be restored severally and respectively to their former positions
hereunder, and thereafter all rights and remedies of the Trustee and the Holders
shall continue as though no such proceeding had been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as provided in Section 3.06, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any
Note to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this Article
Five or by law to the Trustee or to the Holders may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee or by the Holders,
as the case may be.
Section 5.12. Control by Majority.
The Holders of a majority in Accreted Value of the Outstanding
Notes shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee, provided, however, that:
(a) such direction shall not be in conflict with any rule of
law or with this Indenture or any Note or expose the Trustee to personal
liability; and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in Accreted Value of
the Outstanding Notes may on behalf of the Holders of all the Notes waive any
past Default hereunder and its consequences, except a Default
(a) in the payment of the principal of, or interest on any
Outstanding Note or
(b) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right consequent
thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any
Note by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees, against any party litigant in such suit, having due regard to the merits
and good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in Accreted Value of the Outstanding Notes, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of, premium, if any, or interest on any Note on or after the
respective Stated Maturities expressed in such Note (or, in the case of
redemption, on or after the respective Redemption Dates).
Section 5.15. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury or other law wherever enacted, now or at any time hereafter in
force, which would prohibit or forgive the Company from paying all or any
portion of the principal of, premium, if any, or interest on the Notes
contemplated herein or in the Notes or which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
Section 5.16. Unconditional Right of Holders To
Receive Payment.
Notwithstanding any other provision in this Indenture and any
other provision of any Note, the right of any Holder of any Note to receive
payment of the principal of, premium, if any, and interest on such Note on or
after the respective Stated Maturities (or the respective Redemption Dates, in
the case of redemption) expressed in such Note, or after such respective dates,
shall not be impaired or affected without the consent of such Holder.
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture, and
no implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions
which by provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this
Indenture.
(b) During the existence of an Event of Default, the Trustee
is required to exercise such rights and powers vested in it under this Indenture
use the same degree of care and skill in its exercise thereof as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section 6.01.
Section 6.02. Notice of Defaults.
Within 45 days after the occurrence of any Default, the
Trustee shall transmit by mail to all Holders, as their names and addresses
appear in the Note Register, notice of such Default hereunder actually known to
a Responsible Officer, the Trustee, unless such Default shall have been cured or
waived; provided, however, that, except in the case of a Default in the payment
of the principal of, premium, if any, or interest on any Note or in the case of
any Default arising from the occurrence of a Change of Control, the Trustee
shall be protected in withholding such notice if and so long as a trust
committee of Responsible Officers of the Trustee in good faith determines that
the withholding of such notice is in the interest of the Holders.
Section 6.03. Certain Rights of Trustee.
Subject to Section 6.01 hereof and the provisions of Section
315 of the Trust Indenture Act:
(a) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board may be sufficiently evidenced by a Board Resolution
thereof;
(c) the Trustee may consult with counsel and any advice of
such counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon in accordance with such advice
or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such Holders
shall have offered to the Trustee reasonable security or indemnity satisfactory
to it against the costs, expenses and liabilities which might be incurred by the
Trustee in compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or
omitted by it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture other than any
liabilities arising out of its own negligence;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, appraisal, bond, debenture, note, coupon, security, other evidence of
indebtedness or other paper or document unless requested in writing so to do by
the Holders of not less than a majority in aggregate principal amount of the
Notes then Outstanding; provided, however, that, if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely to
be incurred by it in the making of such investigation is, in the opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require indemnity satisfactory to
it against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such investigation shall be paid by the Company or,
if paid by the Trustee or any predecessor Trustee, shall be repaid by the
Company upon demand; provided, further, the Trustee in its discretion may make
such further inquiry or investigation into such facts or matters as it may deem
fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents, attorneys, custodian or nominees and the Trustee shall not be
responsible for any misconduct or negligence on the part of any agent, attorney,
custodian or nominee appointed with due care by it hereunder;
(h) except with respect to Section 10.01, the Trustee
shall have no duty to inquire as to the performance of the Company's covenants
in Article Ten. In addition, the Trustee shall not be deemed to have knowledge
of any Default or Event of Default except (i) any Event of Default occurring
pursuant to Sections 5.01(i), 5.01(ii) and 10.01 or (ii) any Default or Event of
Default of which the Trustee shall have received written notification or a
Responsible Officer obtained actual knowledge; and
(i) if the Trustee is acting in the capacity of Registrar
and/or Paying Agent, then the rights afforded to the Trustee under this Section
6.03 shall also be afforded to such Registrar and/or Paying Agent.
Section 6.04. Trustee Not Responsible for Recitals,
Dispositions of Notes or Application of
Proceeds Thereof.
The recitals contained herein and in the Notes, except the
Trustee's certificate of authentication, shall be taken as the statements of the
Company, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Notes and
perform its obligations hereunder and that the statements made by it in a
Statement of Eligibility and Qualification on Form T-1, if any, to be supplied
to the Company are true and accurate subject to the qualifications set forth
therein. The Trustee shall not be accountable for the use or application by the
Company of Notes or the proceeds thereof.
Section 6.05. Trustee and Agents May Hold
Notes; Collections; Etc.
The Trustee, any Paying Agent, Registrar or any other agent of
the Company, in its individual or any other capacity, may become the owner or
pledgee of Notes, with the same rights it would have if it were not the Trustee,
Paying Agent, Registrar or such other agent and, subject to Section 6.08 hereof
and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the
Company and receive, collect, hold and retain collections from the Company with
the same rights it would have if it were not the Trustee, Paying Agent,
Registrar or such other agent.
Section 6.06. Money Held in Trust.
All moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the extent
required herein or by law. The Trustee shall not be under any liability for
interest on any moneys received by it hereunder.
Section 6.07. Compensation and Indemnification of Trustee and
Its Prior Claim.
The Company covenants and agrees: (a) to pay to the Trustee
from time to time, and the Trustee shall be entitled to, reasonable compensation
for all services rendered by it hereunder (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust); (b) to reimburse the Trustee and each predecessor Trustee upon its
request for all reasonable expenses, fees, disbursements and advances incurred
or made by or on behalf of it in accordance with any of the provisions of this
Indenture (including the reasonable compensation, fees, and the expenses and
disbursements of its counsel and of all agents and other persons not regularly
in its employ), except any such expense, disbursement or advance as may arise
from its negligence or bad faith; and (c) to indemnify the Trustee and any of
its officers, directors, employees and agents and each predecessor Trustee for,
and to hold it harmless against any loss, liability or expense (including
attorneys' fees and expenses incurred in defending themselves) incurred without
negligence or bad faith on its part, arising out of or in connection with the
acceptance or administration of this Indenture or the trusts hereunder and its
duties hereunder, including enforcement of this Section 6.07.
To secure the Company's payment obligations in this Section
6.07, the Trustee shall have a Lien prior to the Notes on all money or property
held or collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
The obligations of the Company under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, disbursements
and advances shall constitute an additional obligation hereunder and shall
survive the satisfaction and discharge of this Indenture or the rejection or
termination of this Indenture under bankruptcy law. Such additional indebtedness
shall be a senior claim to that of the Notes upon all property and funds held or
collected by the Trustee as such, except funds held in trust for the benefit of
the Holders of particular Notes, and the Notes are hereby subordinated to such
senior claim. If the Trustee renders services and incurs expenses following an
Event of Default under Section 5.01(viii), Section 5.01(ix) or Section 5.01(x)
hereof, the parties hereto and the Holders by their acceptance of the Notes
hereby agree that such expenses are intended to constitute expenses of
administration under any bankruptcy law.
Section 6.08. Conflicting Interests.
The Trustee shall be subject to and comply with the provisions
of Section 310(b) of the Trust Indenture Act.
Section 6.09. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have a combined capital and surplus of at least $50,000,000. If
such corporation publishes reports of condition at least annually, pursuant to
law or to the requirements of any Federal, state, territorial or District of
Columbia supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, the Trustee shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 6.10. Resignation and Removal; Appointment of
Successor Trustee.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee under
Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter
appointed, may at any time resign by giving written notice thereof to the
Company at least 20 Business Days prior to the date of such proposed
resignation. Upon receiving such notice of resignation, the Company shall, after
all monies due and owing have been paid to the Trustee, promptly appoint a
successor trustee by written instrument executed by authority of the Board, a
copy of which shall be delivered to the resigning Trustee and a copy to the
successor Trustee. If an instrument of acceptance by a successor Trustee shall
not have been delivered to the Trustee within 20 Business Days after the giving
of such notice of resignation, the resigning Trustee may, or any Holder who has
been a bona fide Holder of a Note for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee. Such court may
thereupon, after such notice, if any, as it may deem proper, appoint a successor
Trustee.
(c) The Trustee may be removed at any time by an Act of the
Holders of a majority in principal amount of the Outstanding Notes, delivered to
the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the
provisions of Section 310(b) of the Trust Indenture Act in accordance
with Section 6.08 hereof after written request therefor by the Company
or by any Holder who has been a bona fide Holder of a Note for at least
six months, or
(2) the Trustee shall cease to be eligible under
Section 6.09 hereof and shall fail to resign after written request
therefor by the Company or by any Holder who has been a bona fide
Holder of a Note for at least six months, or
(3) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee
or of its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose or rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 5.14, the Holder of any Note who has been a bona fide
Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Notes delivered to the Company and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment, become the successor Trustee and supersede the successor Trustee
appointed by the Company. If no successor Trustee shall have been so appointed
by the Company or the Holders of the Notes and accepted appointment in the
manner hereinafter provided, the Holder of any Note who has been a bona fide
Holder for at least six months may, subject to Section 5.14, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Notes as their names and addresses appear in the Note Register. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Section 6.11. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee as if originally named as
Trustee hereunder; but, nevertheless, on the written request of the Company or
the successor Trustee, upon payment of amounts due to it pursuant to Section
6.07, such retiring Trustee shall duly assign, transfer and deliver to the
successor Trustee all moneys and property at the time held by it hereunder and
shall execute and deliver an instrument transferring to such successor Trustee
all the rights, powers, duties and obligations of the retiring Trustee. Upon
request of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights and powers. Any Trustee ceasing to act shall,
nevertheless, retain a prior claim upon all property or funds held or collected
by such Trustee to secure any amounts then due it pursuant to the provisions of
Section 6.07.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as
provided in this Section 6.11, the successor shall give notice thereof to the
Holders of the Notes, by mailing such notice to such Holders at their addresses
as they shall appear on the Note Register. If the acceptance of appointment is
substantially contemporaneous with the resignation, then the notice called for
by the preceding sentence may be combined with the notice called for by Section
6.10. If the Company fails to give such notice within 10 days after acceptance
of appointment by the successor Trustee, the successor Trustee shall cause such
notice to be given at the expense of the Company.
Section 6.12. Merger, Conversion, Amalgamation, Consolidation
or Succession to Business.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated or amalgamated, or any
corporation resulting from any merger, conversion, amalgamation or consolidation
to which the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder without the execution or filing of any paper
or any further act on the part of any of the parties hereto, provided such
corporation shall be eligible under this Article Six to serve as Trustee
hereunder.
In case at the time such successor to the Trustee under this
Section 6.12 shall succeed to the trusts created by this Indenture any of the
Notes shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor Trustee
and deliver such Notes so authenticated; and, in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee under this
Section 6.12 may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have been
authenticated.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders.
(a) The Trustee shall preserve the names and addresses of the
Noteholders and otherwise comply with TIA Section 312(a). If the Trustee is not
the Registrar, the Company shall furnish or cause the Registrar to furnish to
the Trustee before each Interest Payment Date, and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Noteholders.
Neither the Company nor the Trustee shall be under any responsibility with
regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the
Trustee
(i) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date; and
(ii) at such other times as the Trustee may reasonably
request in writing, within 30 days after receipt by the Company of any
such request, a list of similar form and content as of a date not more
than 15 days prior to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Registrar, no
such list need be furnished pursuant to this Subsection 7.01(b).
Section 7.02. Communications of Holders.
Holders may communicate with other Holders with respect to
their rights under this Indenture or under the Notes pursuant to Section 312(b)
of the Trust Indenture Act. The Company and the Trustee and any and all other
persons benefited by this Indenture shall have the protection afforded by
Section 312(c) of the Trust Indenture Act.
Section 7.03. Reports by Trustee.
Within 60 days after May 15 of each year commencing with the
first May 15 following the date of this Indenture, the Trustee shall mail to all
Holders, as their names and addresses appear in the Note Register, a brief
report dated as of such May 15, in accordance with, and to the extent required
under Section 313 of the Trust Indenture Act. At the time of its mailing to
Holders, a copy of each such report shall be filed by the Trustee with the
Company, the SEC and with each stock exchange on which the Notes are listed. The
Company shall notify the Trustee when the Notes are listed on any stock
exchange.
Section 7.04. Reports by Company.
The Company shall:
(a) file with the SEC the copies of annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the SEC may from time to time by rules and regulations
prescribe) required to be filed with the SEC pursuant to Section 13 or Section
15 of the Exchange Act, whether or not the Company has a class of securities
registered under the Exchange Act;
(b) file with the Trustee within 15 days after it files or
would be required to file the information specified in subsection (a) of this
Section 7.04 reports and documents with the SEC copies of such information;
(c) file with the Trustee and the SEC in accordance with rules
and regulations prescribed from time to time by the SEC, such additional
information, documents and reports with respect to compliance by the Company
with the conditions and covenants of this Indenture as may be required from time
to time by such rules and regulations; and
(d) transmit by mail to all Holders, as their names and
addresses appear in the Note Register, within 30 days after the filing thereof
with the Trustee, such summaries of any information, documents and reports
required to be filed by the Company pursuant to subsections (a) and (c) of this
Section as may be required by rules and regulations prescribed from time to time
by the SEC.
Notwithstanding anything to the contrary herein, the Trustee
shall have no duty to review information provided pursuant to subsection (b) of
this Section 7.04 for purposes of determining compliance with any provisions of
this Indenture.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain
Terms.
The Company will not (i) consolidate or combine with or merge
with or into or, directly or indirectly, sell, assign, convey, lease, transfer
or otherwise dispose of all or substantially all of its properties and assets to
any person or persons in a single transaction or through a series of
transactions, or (ii) permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if it would result in the
disposition of all or substantially all of the properties or assets of the
Company and the Restricted Subsidiaries on a consolidated basis, unless, in the
case of either (i) or (ii), (a) the Company shall be the continuing person or,
if the Company is not the continuing person, the resulting, surviving or
transferee person (the "surviving entity") shall be a company organized and
existing under the laws of the United States or any State or territory thereof;
(b) the surviving entity shall expressly assume all of the obligations of the
Company under the Notes and this Indenture, and shall, if required by law to
effectuate such assumption, execute a supplemental indenture to effect such
assumption which supplemental indenture shall be delivered to the Trustee and
shall be in form and substance reasonably satisfactory to the Trustee; (c)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), the Company or the surviving entity (assuming such
surviving entity's assumption of the Company's obligations under the Notes and
this Indenture), as the case may be, would be able to incur $1.00 of
Indebtedness under clause (A)(X) of the proviso of Section 10.11; (d)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), no Default shall have occurred and be continuing;
and (e) the Company or the surviving entity, as the case may be, shall have
delivered to the Trustee an Officers' Certificate and Opinion of Counsel stating
that such transaction or series of transactions, and, if a supplemental
indenture is required in connection with such transaction or series of
transactions to effectuate such assumption, such supplemental indenture,
complies with this covenant and that all conditions precedent in this Indenture
relating to the transaction or series of transactions have been satisfied.
Section 8.02. Successor Substituted.
Upon any consolidation or merger or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all of
the assets of the Company in accordance with the foregoing in which the Company
or the Restricted Subsidiary, as the case may be, is not the continuing
corporation, the successor corporation formed by such a consolidation or into
which the Company or such Restricted Subsidiary is merged or to which such
transfer is made will succeed to, and be substituted for, and may exercise every
right and power of, the Company or such Restricted Subsidiary, as the case may
be, under this Indenture and the Notes with the same effect as if such successor
corporation had been named as the Company or such Restricted Subsidiary therein;
and thereafter, except in the case of (i) any lease or (ii) any sale,
assignment, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary of the Company, the Company shall be discharged from all obligations
and covenants under this Indenture and the Notes.
For all purposes of this Indenture and the Notes (including
the provision of this Article Eight and Section 10.11, Section 10.13 and Section
10.16), Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to Section 10.21 and all Indebtedness, and all
Liens on property or assets, of the Company and the Restricted Subsidiaries in
existence immediately prior to such transaction or series of related
transactions will be deemed to have been incurred upon such transaction or
series of related transactions.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements
and Waivers Without Consent of Holders.
Without the consent of any Holders, the Company, when
authorized by a Board Resolution of the Board, and the Trustee, at any time and
from time to time, may amend, waive, modify or supplement this Indenture or the
Notes for any of the following purposes:
(a) to evidence the succession of another person to the
Company, and the assumption by any such successor of the covenants of the
Company in the Notes;
(b) to add to the covenants of the Company for the benefit of
the Holders, or to surrender any right or power herein conferred upon the
Company, herein, in the Notes;
(c) to cure any ambiguity, to correct or supplement any
provision herein, in the Notes which may be defective or inconsistent with any
other provision herein or to make any other provisions with respect to matters
or questions arising under this Indenture or the Notes; provided, however, that,
in each case, such provisions shall not materially adversely affect the legal
rights of the Holders;
(d) to comply with the requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the Trust Indenture
Act, as contemplated by Section 9.05 hereof or otherwise;
(e) to mortgage, pledge, hypothecate or grant a security
interest in any property or assets in favor of the Trustee for the benefit of
the Holders as security for the payment and performance of this Indenture
Obligations;
(f) to make any other change that does not materially
adversely affect the legal rights of any Holder; or
(g) to add Guarantors with respect to the Notes;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such change, agreement or waiver does not materially
adversely affect the legal rights of any Holder.
Section 9.02. Supplemental Indentures, Agreements and Waivers
with Consent of Holders.
With the written consent of the Holders of not less than a
majority of Accreted Value of the Outstanding Notes delivered to the Company and
the Trustee, the Company when authorized by a Board Resolution, together with
the Trustee, may amend, waive, modify or supplement any other provision of this
Indenture or the Notes; provided, however, that no such amendment, waiver,
modification or supplement may, without the written consent of the Holder of
each Outstanding Note affected thereby:
(i) reduce the principal amount of, or extend the fixed
maturity of, or alter the redemption provisions of, the Notes, (other
than, subject to clause (vii) below, provisions relating to repurchase
of Notes upon the occurrence of an Asset Sale or a Change at Control)
or change the calculation of "Accreted Value",
(ii) change the currency in which any Notes or amounts owing
thereon is payable,
(iii) reduce the percentage of Accreted Value outstanding of
Notes which must consent to an amendment, supplement or waiver or
consent to take any action under this Indenture or the Notes,
(iv) impair the right to institute suit for the enforcement
of any payment on or with respect to the Notes,
(v) waive a default in payment with respect to the Notes or
any Guarantee,
(vi) reduce the rate or extend the time for payment of
interest on the Notes,
(vii) following the occurrence of a Change of Control or an
Asset Sale, alter the Company's obligation to purchase Notes as a
result thereof in accordance with this Indenture or waive any default
in the performance thereof,
(viii) affect the ranking of the Notes in a manner adverse to
the holder of the Notes,
(ix) release any Guarantor from any of its obligations under
its Guarantee or this Indenture except in compliance with the terms of
this Indenture, or
(x) permit the creation of any Lien (other than the Lien as
the Pledgee) created by the Escrow Agreement or terminate the Lien
created by the Escrow Agreement.
Upon the written request of the Company accompanied by a copy
of a Board Resolution of the Board authorizing the execution of any such
supplemental indenture or other agreement, instrument or waiver, and an
Officers' Certificate and an Opinion of Counsel upon which the Trustee shall be
fully protected in relying upon as conclusive evidence that such change,
agreement, supplement or waiver is permitted by this Indenture and upon the
filing with the Trustee of evidence of the consent of Holders as aforesaid, the
Trustee shall join with the Company in the execution of such supplemental
indenture or other agreement, instrument or waiver.
It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture or
other agreement, instrument or waiver, but it shall be sufficient if such Act
shall approve the substance thereof.
Section 9.03. Execution of Supplemental Indentures, Agreements
and Waivers.
In executing, or accepting the additional trusts created by,
any supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel and an Officers' Certificate
from each obligor under the Notes entering into such supplemental indenture,
agreement, instrument or waiver, each stating that the execution of such
supplemental indenture, agreement, instrument or waiver (a) is authorized or
permitted by this Indenture and (b) does not violate the provisions of any
agreement or instrument evidencing any other Indebtedness of the Company or any
other Subsidiary of the Company. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture, agreement, instrument or waiver
which affects the Trustee's own rights, duties or immunities under this
Indenture, the Notes or otherwise.
Section 9.04. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this
Article Nine, this Indenture and/or the Notes, if applicable, shall be modified
in accordance therewith, and such supplemental indenture shall form a part of
this Indenture and/or the Notes, if applicable, as the case may be, for all
purposes; and every Holder of Notes theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby.
Section 9.05. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article
Nine shall conform to the requirements of the Trust Indenture Act as then in
effect.
Section 9.06. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Board, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee upon a Company Order in
exchange for Outstanding Notes.
Section 9.07. Record Date.
The Company may, but shall not be obligated to, fix, a record
date for the purpose of determining the Holders entitled to consent to any
supplemental indenture, agreement or instrument or any waiver, and shall
promptly notify the Trustee of any such record date. If a record date is fixed
those persons who were Holders at such record date (or their duly designated
proxies), and only those persons, shall be entitled to consent to such
supplemental indenture, agreement or instrument or waiver or to revoke any
consent previously given, whether or not such persons continue to be Holders
after such record date. No such consent shall be valid or effective for more
than 90 days after such record date.
Section 9.08. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to
it by a Holder of a Note is a continuing consent by the Holder and every
subsequent Holder of a Note or portion of a Note that evidences the same debt as
the consenting Holder's Note, even if a notation of the consent is not made on
any Note. However, any such Holder, or subsequent Holder, may revoke the consent
as to his Note or portion of a Note if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver shall become effective in accordance with its terms and
thereafter bind every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.
The Company shall duly and punctually pay the principal of,
premium, if any, and interest on the Notes in accordance with the terms of the
Notes and this Indenture.
Section 10.02. Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan in The
City of New York, State of New York, an office or agency where Notes may be
presented or surrendered for payment, where Notes may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Notes and this Indenture may be served. The office
of the Trustee at its Corporate Trust Office will be such office or agency of
the Company, unless the Company shall designate and maintain some other office
or agency for one or more of such purposes. The Company will give prompt written
notice to the Trustee of any change in the location of any such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside of The City of New York, State of New
York) where the Notes may be presented or surrendered for any or all such
purposes, and may from time to time rescind such designation; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in The City of New York, State
of New York for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and any change in the location
of any such other office or agency.
Section 10.03. Money for Note Payments To Be Held in Trust.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of, premium, if any, or
interest on any of the Notes, segregate and hold in trust for the benefit of the
Holders entitled thereto a sum sufficient to pay the principal, premium, if any,
or interest so becoming due until such sums shall be paid to such persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
If the Company is not acting as Paying Agent, the Company
will, on or before each due date of the principal of, premium, if any, or
interest on, any Notes, deposit with a Paying Agent a sum in same day funds
sufficient to pay the principal, premium, if any, or interest so becoming due,
such sum to be held in trust for the benefit of the Holders entitled to such
principal, premium or interest, and (unless such Paying Agent is the Trustee)
the Company will promptly notify the Trustee of such action or any failure so to
act.
If the Company is not acting as Paying Agent, the Company will
cause each Paying Agent other than the Trustee to execute and deliver to the
Trustee an instrument in which such Paying Agent will agree with the Trustee,
subject to the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal
of, premium, if any, or interest on Notes in trust for the benefit of the
Holders entitled thereto until such sums shall be paid to such Holders or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company (or
any other obligor upon the Notes) in the making of any payment of principal of,
premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such Default,
upon the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects
with the provisions of this Indenture relating to the duties, rights and
liabilities of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon receipt of a Company Request therefor, or (if then held by
the Company) will be discharged from such trust; and the Holder of such Note
will thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, at the option of the Company
in the New York Times or the Wall Street Journal (national edition), notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining shall be repaid to the Company.
Section 10.04. Corporate Existence.
Subject to Article Eight, the Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory), licenses and franchises of
the Company and each of the Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or franchise if
the Board shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and the Restricted Subsidiaries as
a whole and that the loss thereof is not adverse in any material respect to the
Holders; provided, further, that the foregoing will not prohibit a sale,
transfer or conveyance of a Subsidiary of the Company or any of its assets in
compliance with the terms of this Indenture.
Section 10.05. Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (a) all material taxes,
assessments and governmental charges levied or imposed (i) upon the Company or
any of its Restricted Subsidiaries or (ii) upon the income, profits or property
of the Company or any of the Restricted Subsidiaries and (b) all material lawful
claims for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; provided, however, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (x) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to be
paid or discharged could not reasonably be expected to have a Material Adverse
Effect (as defined in the Purchase Agreement).
Section 10.06. Maintenance of Properties.
The Company shall cause all material properties owned by the
Company or any of the Restricted Subsidiaries or used or held for use in the
conduct of their respective businesses to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section 10.06 will prevent the Company from discontinuing the
maintenance of any of such properties if such discontinuance is, in the judgment
of the Company, desirable in the conduct of its business or the business of any
of the Restricted Subsidiaries and is not disadvantageous in any material
respect to the Holders.
Section 10.07. Insurance.
The Company shall at all times keep all of its and the
Restricted Subsidiaries' properties which are of an insurable nature insured
with insurers, believed by the Company in good faith to be financially sound and
responsible, against loss or damage to the extent that property of similar
character is usually and customarily so insured by corporations similarly
situated and owning like properties.
Section 10.08. Books and Records.
The Company shall keep proper books of record and account, in
which full and correct entries will be made of all financial transactions and
the assets and business of the Company and each Restricted Subsidiary and each
Restricted Affiliate of the Company in material compliance with GAAP.
Section 10.09. Provision of Financial Statements.
The Company shall file with the SEC (so long as the SEC will
accept any such filings), the Trustee and the Initial Purchasers the annual
reports, quarterly reports and other documents required to be filed with the SEC
pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company
has a class of securities registered under the Exchange Act. The Company will
also comply with the other provisions of Section 314(a) of the Trust Indenture
Act.
Section 10.10. Change of Control.
Upon the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall make an offer
to purchase (the "Change of Control Offer"), on a business day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price equal to 101% of the
Accreted Value thereof on any Change of Control Payment Date, plus accrued and
unpaid interest, if any, to any Change of Control Payment Date. Notice of a
Change of Control Offer shall be given to Holders and the Trustee not less than
25 days nor more than 45 days before the Change of Control Payment Date. The
Change of Control Offer is required to remain open for at least 20 business days
and until the close of business on the Change of Control Payment Date. Failure
to mail the notice of a Change of Control Offer on the date specified below or
to have satisfied the foregoing condition precedent by the date that such notice
is required to be mailed will constitute a Default under Section 5.01(iv).
Notice of a Change of Control Offer shall be mailed by the
Company not more than 20 Business Days after the Change of Control Date to the
Holders of Notes at their last registered addresses with a copy to the Trustee
and the Paying Agent. The Change of Control Offer shall remain open from the
time of mailing for at least 20 Business Days and until 5:00 p.m., New York City
time, on the Change of Control Payment Date. The notice, which shall govern the
terms of the Change of Control Offer, shall include such disclosures as are
required by law and shall state:
(a) that the Change of Control Offer is being made pursuant to
this Section 10.10 and that all Notes tendered into the Change of Control Offer
will be accepted for payment;
(b) the purchase price (including the amount of accrued
interest, if any) for each Note, the Change of Control Payment Date and the date
on which the Change of Control Offer expires;
(c) that any Note not tendered for payment will continue to
accrete Accreted Value or accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of
the purchase price, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrete Accrued Interest or accrue interest after
the Change of Control Payment Date;
(e) that Holders electing to have Notes purchased pursuant to
a Change of Control Offer will be required to surrender their Notes to the
Paying Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Change of Control Payment Date and must complete any form
letter of transmittal proposed by the Company and acceptable to the Trustee and
the Paying Agent;
(f) that Holders of Notes will be entitled to withdraw their
election if the Paying Agent receives, not later than 5:00 p.m., New York City
time, on the Change of Control Payment Date, a facsimile transmission or letter
setting forth the name of the Holders, the principal amount of Notes the Holders
delivered for purchase, the Note certificate number (if any) and a statement
that such Holder is withdrawing his election to have such Notes purchased;
(g) that Holders whose Notes are purchased only in part will
be issued Notes of like tenor equal in principal amount to the unpurchased
portion of the Notes surrendered;
(h) the instructions that Holders must follow in order to
tender their Notes; and
(i) information concerning the business of the Company, the
most recent annual and quarterly reports of the Company filed with the SEC
pursuant to the Exchange Act (or, if the Company is not required to file any
such reports with the SEC, the comparable reports prepared pursuant to Section
10.09), a description of material developments in the Company's business,
information with respect to pro forma historical financial information after
giving effect to such Change of Control and such other information concerning
the circumstances and relevant facts regarding such Change of Control and Change
of Control Offer as would, in the good faith judgment of the Company, be
material to a Holder of Notes in connection with the decision of such Holder as
to whether or not it should tender Notes pursuant to the Change of Control
Offer.
On the Change of Control Payment Date, the Company will (i)
accept for payment Notes or portions thereof tendered pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent money, in immediately
available funds, sufficient to pay the purchase price of all Notes or portions
thereof so tendered and accepted and (iii) deliver to the Trustee the Notes so
accepted together with an Officers' Certificate setting forth the Notes or
portions thereof tendered to and accepted for payment by the Company. The Paying
Agent will promptly mail or deliver to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Note of like tenor equal
in principal amount to any unpurchased portion of the Note surrendered. Any
Notes not so accepted shall be promptly mailed or delivered by the Company to
the Holder thereof. The Company will publicly announce the results of the Change
of Control Offer not later than the first Business Day following the Change of
Control Payment Date. Except as described above with respect to a Change of
Control, this Indenture does not contain provisions that permit the Holders to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction which may be highly leveraged.
If a Change of Control Offer is made, there can be no assurance that the Company
will have available funds sufficient to pay for all of the Notes that might be
delivered by holders of Notes seeking to accept the Change of Control Offer. The
Company shall not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
If the Company is required to make a Change of Control Offer,
the Company will comply with all applicable tender offer laws and regulations,
including, to the extent applicable, Section 14(e) and Rule 14e-1 under the
Exchange Act, and any other applicable securities laws and regulations. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this Section 10.10, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section 10.10 by virtue thereof.
Section 10.11. Limitation on Additional Indebtedness.
The Company shall not, and shall not permit any Restricted
Subsidiary or Restricted Affiliate to, directly or indirectly, create, incur,
assume, issue, guarantee or in any manner become directly or indirectly liable
for or with respect to, contingently or otherwise, the payment of (collectively
to "incur") any Indebtedness (including any Acquired Indebtedness), except for
Permitted Indebtedness; provided, that (A)(i) the Company will be permitted to
incur Indebtedness (including Acquired Indebtedness and Buildout Indebtedness)
and (ii) a Restricted Subsidiary or Restricted Affiliate will be permitted to
incur Acquired Indebtedness or Buildout Indebtedness, if, in either case,
immediately after giving pro forma effect to such incurrence (including the
application of the net proceeds therefrom), either (X) the ratio of Total
Consolidated Indebtedness to Consolidated Pro Forma Operating Cash Flow would
not be greater than or equal to 5.5 to 1.0 if such Indebtedness is incurred
prior to October 15, 2000 or 5.0 to 1.0 if such Indebtedness is incurred on or
after October 15, 2000 or (Y) the ratio of Total Consolidated Indebtedness to
Total Invested Equity Capital would not exceed 2.0 to 1.0 and (B) on or after
October 15, 2002, a Restricted Affiliate will be permitted to incur Acquired
Indebtedness or Buildout Indebtedness, if, after giving pro forma effect to such
incurrence (including the application of the net proceeds therefrom), the ratio
of Total Affiliate Indebtedness to Affiliate Pro Forma Operating Cash Flow of
such Restricted Affiliate would not be greater than or equal to 4.0 to 1.0.
For purposes of determining compliance with this Section
10.11, in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness permitted by this covenant, the Company in its
sole discretion shall classify such item of Indebtedness and only be required to
include the amount of such Indebtedness as one of such types.
Section 10.12. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, a
written statement signed by the chairman or a chief executive officer, the
principal financial officer or principal accounting officer of the Company,
stating (i) that a review of the activities of the Company during the preceding
fiscal year has been made under the supervision of the signing officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations under this Indenture, and (ii) that, to the knowledge
of each officer signing such certificate, the Company has kept, observed,
performed and fulfilled each and every covenant and condition contained in this
Indenture and is not in default in the performance or observance of any of the
terms, provisions, conditions and covenants hereof (or, if a Default shall have
occurred, describing all such Defaults of which such officers may have
knowledge, their status and what action the Company is taking or proposes to
take with respect thereto). When any Default under this Indenture has occurred
and is continuing, or if the Trustee or any Holder or the trustee for or the
holder of any other evidence of Indebtedness of the Company or any Restricted
Subsidiary gives any notice or takes any other action with respect to a claimed
default (other than with respect to Indebtedness (other than Indebtedness
evidenced by the Notes) in the principal amount of less than $1.0 million), the
Company will promptly notify the Trustee of such Default, notice or action and
will deliver to the Trustee by registered or certified mail or by telegram, or
facsimile transmission followed by hard copy by registered or certified mail an
Officers' Certificate specifying such event, notice or other action within five
Business Days after the Company becomes aware of such occurrence and what action
the Company is taking or proposes to take with respect thereto.
Section 10.13. Limitation on Restricted Payments.
The Company shall not, and shall not permit any of the
Restricted Subsidiaries or Restricted Affiliates to, make, directly or
indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the
time of or upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted
Payment, the Company would be able to incur $1.00 of Indebtedness under
clause (A)(X) of the proviso of Section 10.11 hereof; and
(iii) immediately after giving effect to such Restricted
Payment, the aggregate amount of all Restricted Payments declared or
made on or after the Issue Date and all Designation Amounts does not
exceed an amount equal to the sum of, without duplication, (a) 50% of
the cumulative Consolidated Net Income accrued on a cumulative basis
during the period beginning on January 1, 1998 and ending on the last
day of the fiscal quarter of the Company immediately preceding the date
of such proposed Restricted Payment (or, if such cumulative
Consolidated Net Income for such period is a deficit, minus 100% of
such deficit), plus (b) the aggregate net cash proceeds received by the
Company from the issue or sale (other than to a Restricted Subsidiary
or Restricted Affiliate of the Company) of its Capital Stock (other
than Disqualified Stock) on or after the Issue Date (including, without
duplication, upon exercise of warrants, options or rights), plus (c)
the aggregate net proceeds received by the Company from the issuance
(other than to a Restricted Subsidiary or to a Restricted Affiliate of
the Company) on or after the Issue Date of its Capital Stock (other
than Disqualified Stock) upon the conversion of, or exchange for,
Indebtedness of the Company or a Restricted Subsidiary, plus (d) in the
case of the disposition or repayment of any Investment constituting a
Restricted Payment made other than an Investment made pursuant to
clause (c), (f) or (g) of the following paragraph made after the Issue
Date, an amount equal to the lesser of the return of capital with
respect to such Investment and the cost of such Investment, in either
case, less the cost of the disposition of such Investment, plus (e) in
the case of any Revocation of the Designation of a Subsidiary as an
Unrestricted Subsidiary, an amount equal to the consolidated net
Investment in such Subsidiary on the date of Revocation but not in an
amount exceeding the net amount of any Investments constituting
Restricted Payments made (or deemed made) in such Subsidiary after the
Issue Date plus (f) in the case of the JV Designation after the Issue
Date of a New Joint Venture as a Restricted Affiliate, an amount equal
to the consolidated net Investment in such New Joint Venture on the
date of such JV Designation but not in an amount exceeding the net
amount of any Investments constituting Restricted Payments made (or
deemed made) in such New Joint Venture after the Issue Date. For
purposes of the preceding clauses (b) and (c) and without duplication,
the value of the aggregate net cash proceeds received by the Company
upon the issuance of Capital Stock either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or
upon the exercise of options, warrants or rights will be the net cash
proceeds received upon the issuance of such Indebtedness, options,
warrants or rights plus the incremental amount received by the Company
upon the conversion, exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property other than
cash shall be valued at its Fair Market Value.
The provisions of this Section 10.13 shall not prohibit (each
of which shall be given independent effect):
(a) the payment of any dividend or other distribution within
60 days after the date of declaration thereof, if at such date of
declaration such payment would comply with the provisions of this
Indenture;
(b) so long as no Default shall have occurred and be
continuing, the purchase, redemption, retirement or other acquisition
of any shares of Capital Stock of the Company (A) in exchange for or
conversion into or (B) out of the net cash proceeds of the
substantially concurrent issue and sale (other than to a Restricted
Subsidiary or to a Restricted Affiliate) of shares of Capital Stock of
the Company (other than Disqualified Stock); provided that any such net
cash proceeds pursuant to the immediately preceding subclause (B) are
excluded from clause (iii)(b) of the preceding paragraph;
(c) so long as no Default shall have occurred and be
continuing, the purchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Indebtedness made by exchange
for (including any such exchange pursuant to the exercise of a
conversion right or privilege in which cash is paid in lieu of
fractional shares or scrip), or out of the net cash proceeds of, a
substantially concurrent issue or sale (other than to a Restricted
Subsidiary or to a Restricted Affiliate) of (A) Capital Stock (other
than Disqualified Stock) of the Company; provided that any such net
cash proceeds, to the extent so used, are excluded from clause (iii)(b)
of the preceding paragraph, and/or (B) other Subordinated Indebtedness,
having an Average Life to Stated Maturity that is equal to or greater
than the Average Life to Stated Maturity of the Subordinated
Indebtedness being purchased, redeemed, defeased or otherwise acquired
or retired;
(d) so long as no Default shall have occurred and be
continuing, any Investment constituting a Restricted Payment made by
the Company or any Restricted Subsidiary in any Restricted Affiliate to
fund the capital requirements for financing or supporting a Permitted
Business of such Restricted Affiliate;
(e) so long as no Default shall have occurred and be
continuing, Investments constituting a Restricted Payment made by the
Company or any Restricted Subsidiary in any person (including any
Unrestricted Subsidiary or a Restricted Affiliate) in an amount not to
exceed $10 million in the aggregate at any time outstanding;
(f) so long as no Default shall have occurred and be
continuing, the making of a direct or indirect Investment constituting
a Restricted Payment out of the proceeds of the issue or sale (other
than to a Subsidiary or to a Restricted Affiliate) of Capital Stock
(other than Disqualified Stock) of the Company; provided that any such
net cash proceeds are excluded from clause (iii)(b) of the preceding
paragraph; or
(g) so long as no Default shall have occurred and be
continuing, any Investment constituting a Restricted Payment made in
Megacable S.A. de C.V. not to exceed $20 million in the aggregate at
any time outstanding.
Restricted Payments of the type set forth in the preceding
clauses (e) and (g) shall be included in making the determination of available
amounts under clause (iii) of the preceding paragraph to the extent they are
outstanding.
In no event shall a Restricted Payment made on the basis of
consolidated financial statements prepared in good faith in accordance with GAAP
be subject to rescission or constitute a Default by reason of any requisite
subsequent restatement of such financial statements which would have made such
Restricted Payment prohibited at the time that it was made.
Section 10.14. Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit, cause or suffer
any Restricted Subsidiary to, conduct any business or enter into any transaction
(or series of related transactions which are similar or part of a common plan)
with or for the benefit of any of their respective Affiliates or any beneficial
holder of 10% or more of the Common Stock of the Company or any officer or
director of the Company (each, an "Affiliate Transaction"), unless the terms of
the Affiliate Transaction are set forth in writing, and are fair and reasonable
to the Company or such Restricted Subsidiary, as the case may be. Each Affiliate
Transaction involving aggregate payments or other Fair Market Value in excess of
$5 million shall be approved by a majority of the Board, such approval to be
evidenced by a Board Resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions. In addition to
the foregoing, each Affiliate Transaction involving aggregate consideration of
$10 million or more shall be approved by a majority of the Disinterested
Directors; provided that, in lieu of such approval by the Disinterested
Directors, the Company may obtain a written opinion from an Independent
Financial Advisor stating that the terms of such Affiliate Transaction to the
Company or the Restricted Subsidiary, as the case may be, are fair from a
financial point of view. In addition, a Restricted Affiliate shall not enter
into any transaction (or series of related transactions which are similar or
part of a common plan) with or for the benefit of the Other Partner, unless the
terms of such transaction or transactions are in writing, and are fair and
reasonable to such Restricted Affiliate. For purposes of this covenant, any
Affiliate Transaction approved by a majority of the Disinterested Directors or
as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to be
on terms that are fair and reasonable to the Company and the Restricted
Subsidiaries, as the case may be, and therefore shall be permitted under this
covenant.
Notwithstanding the foregoing, the restrictions set forth in
this covenant shall not apply to (i) transactions with or among, or solely for
the benefit of, the Company and/or any of the Restricted Subsidiaries, (ii)
transactions pursuant to agreements and arrangements existing on the Issue Date,
(iii) transactions among any of the Company or the Restricted Subsidiaries, on
the one hand, and any of the Restricted Affiliates, on the other hand, provided
that such transactions are in the ordinary course of business and are related to
or in furtherance of a Permitted Business, (iv) dividends paid by the Company
pursuant to and in compliance with this Section 10.13, (v) customary directors'
fees, indemnification and similar arrangements, consulting fees, employee
salaries bonuses, employment agreements and arrangements, compensation or
employee benefit arrangements or legal fees and (vi) grants of customary
registration rights with respect to securities of the Company.
Section 10.15. Disposition of Proceeds of Asset Sales.
The Company shall not, and shall not permit any Restricted
Subsidiary or Restricted Affiliate to, make any Asset Sale unless (a) the
Company or such Restricted Subsidiary or such Restricted Affiliate, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the Fair Market Value of the shares or assets sold or otherwise disposed of and
(b) at least 75% of such consideration consists of cash or Cash Equivalents;
provided that the amount of any liabilities (other than Subordinated
Indebtedness or Indebtedness of a Restricted Subsidiary that would not
constitute Restricted Subsidiary Indebtedness) that are assumed by the
transferee of any such assets pursuant to an agreement that unconditionally
releases the Company or such Restricted Subsidiary or Restricted Affiliate, as
the case may be, from further liability shall be treated as cash for purposes of
this Section 10.15. The Company or the applicable Restricted Subsidiary, as the
case may be, may (i) apply the Net Cash Proceeds from any such Asset Sale by the
Company or a Restricted Subsidiary and the Net Cash Proceeds of any Asset Sale
by a Restricted Affiliate to the extent distributed to the Company or a
Restricted Subsidiary within 365 days of the receipt thereof to repay an amount
of Indebtedness (other than Subordinated Indebtedness) of the Company in an
amount not exceeding the Other Senior Debt Pro Rata Share and elect to
permanently reduce the amount of the commitments thereunder by the amount of the
Indebtedness so repaid, (ii) apply the Net Cash Proceeds from such Asset Sale by
the Company or a Restricted Subsidiary and the Net Cash Proceeds of any Asset
Sale by a Restricted Affiliate to the extent distributed to the Company or a
Restricted Subsidiary to repay any Restricted Subsidiary Indebtedness and elect
to permanently reduce the commitments thereunder by the amount of the
Indebtedness so repaid or (iii) apply the Net Cash Proceeds from any Asset Sale
by the Company or a Restricted Subsidiary and the Net Cash Proceeds of any Asset
Sale by a Restricted Affiliate to the extent distributed to the Company or a
Restricted Subsidiary within 365 days thereof, to an investment in properties
and assets that will be used in a Permitted Business (or in Capital Stock and
other securities of any person that will become a Restricted Subsidiary or
Restricted Affiliate as a result of such investment to the extent such person
owns properties and assets that will be used in a Permitted Business) of the
Company or any Restricted Subsidiary ("Replacement Assets"). Notwithstanding
anything herein to the contrary, in the event of any Asset Sale of all or
substantially all of the properties or assets of any Restricted Affiliate Group,
whether in a single transaction or series of related transactions, the
Restricted Affiliate Group shall be required to distribute the Net Cash Proceeds
therefrom, after providing for all Indebtedness and other liabilities of such
Restricted Affiliate Group, to the Company or a Restricted Subsidiary and the
Other Partner on a pro rata basis in accordance with their respective equity
interests. Any Net Cash Proceeds from any Asset Sale that are neither used to
repay, and permanently reduce the commitments under, any Restricted Subsidiary
Indebtedness as set forth in clause (ii) of the preceding sentence or invested
in Replacement Assets within the 365-day period as set forth in clause (iii)
shall constitute "Excess Proceeds." Any Excess Proceeds not used as set forth in
clause (i) of the second preceding sentence shall constitute "Offer Excess
Proceeds" subject to disposition as provided below.
When the aggregate amount of Offer Excess Proceeds equals or
exceeds $10.0 million, the Company shall make an offer to purchase (an "Asset
Sale Offer"), from all Holders issued under this Indenture, that aggregate
principal amount of Notes as can be purchased by application of such Offer
Excess Proceeds at a price in cash equal to 100% of the principal amount thereof
plus, in each case, accrued and unpaid interest, if any, to the purchase date.
Each Asset Sale Offer shall remain open for a period of 20 business days or such
longer period as may be required by law. To the extent that the aggregate
purchase price for the applicable issue of Notes tendered pursuant to an Asset
Sale Offer is less than the Offer Excess Proceeds, the Company or any Restricted
Subsidiary may use such deficiency for general corporate purposes. If the
aggregate purchase price for the Notes validly tendered and not withdrawn by
holders thereof exceeds the amount of Notes which can be purchased with the
Offer Excess Proceeds, Notes to be purchased will be selected on a pro rata
basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess
Proceeds shall be reset to zero.
Notwithstanding the two immediately preceding paragraphs, the
Company, the Restricted Subsidiaries and the Restricted Affiliates will be
permitted to consummate an Asset Sale without complying with such paragraphs to
the extent (i) at least 75% of the consideration of such Asset Sale constitutes
Replacement Assets, cash or Cash Equivalents (including obligations deemed to be
cash under this covenant) and (ii) such Asset Sale is for Fair Market Value;
provided that any consideration constituting (or deemed to constitute) cash or
Cash Equivalents received by the Company, any of the Restricted Subsidiaries or
any of the Restricted Affiliates in connection with any Asset Sale permitted to
be consummated under this paragraph shall constitute Net Cash Proceeds subject
to the provisions of the two preceding paragraphs.
Notice of an Asset Sale Offer shall be mailed by the Company
not more than 20 Business Days after the obligation to make such Asset Sale
Offer arises to the Holders of Notes at their last registered addresses with a
copy to the Trustee and the Paying Agent. The Asset Sale Offer shall remain open
from the time of mailing for at least 20 Business Days and until 5:00 p.m., New
York City time, on the date fixed for Purchase of Notes validly tendered and not
withdrawn, which date shall be not later than the 30th Business Day following
the mailing of such Asset Sale Offer (the "Asset Sale Offer Purchase Date"). The
notice, which shall govern the terms of the Asset Sale Offer, shall include such
disclosures as are required by law and shall state:
(a) that the Asset Sale Offer is being made pursuant to this
Section 10.15 and that the Asset Sale Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by
law;
(b) the purchase price (including the amount of accrued
interest, if any) for each Note, the Asset Sale Offer Purchase Date and
the date on which the Asset Sale Offer expires;
(c) that any Note not tendered for payment will continue to
accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of
the purchase price, any Note accepted for payment pursuant to the Asset
Sale Offer shall cease to accrue interest after the Asset Sale Offer
Purchase Date;
(e) that Holders electing to have Notes purchased pursuant to
an Asset Sale Offer will be required to surrender their Notes to the
Paying Agent at the address specified in the notice prior to 5:00 p.m.,
New York City time, on the Asset Sale Offer Purchase Date and must
complete any form letter of transmittal proposed by the Company and
acceptable to the Trustee and the Paying Agent;
(f) that Holders of Notes will be entitled to withdraw their
election if the Paying Agent receives, not later than 5:00 p.m., New
York City time, on the Asset Sale Offer Purchase Date, a facsimile
transmission or letter setting forth the name of the Holders, the
principal amount of Notes the Holders delivered for purchase, the Note
certificate number (if any) and a statement that such Holder is
withdrawing his election to have such Notes purchased;
(g) that Holders whose Notes are purchased only in part will
be issued Notes of like tenor equal in principal amount to the
unpurchased portion of the Notes surrendered;
(h) the instructions that Holders must follow in order to
tender their Notes; and
(i) information concerning the business of the Company, the
most recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not
required to file any such reports with the SEC, the comparable reports
prepared pursuant to Section 10.24), a description of material
developments in the Company's business, information with respect to pro
forma historical financial information after giving effect to such
Asset Sale and such other information concerning the circumstances and
relevant facts regarding such Asset Sale and Asset Sale Offer as would,
in the good faith judgment of the Company, be material to a Holder of
Notes in connection with the decision of such Holder as to whether or
not it should tender Notes pursuant to the Asset Sale Offer.
On the Asset Sale Offer Purchase Date, the Company will (i)
accept for payment Notes or portions thereof tendered pursuant to the Asset Sale
Offer, (ii) deposit with the Paying Agent money, in immediately available funds,
sufficient to pay the purchase price of all Notes or portions thereof so
tendered and accepted and (iii) deliver to the Trustee the Notes so accepted
together with an Officers' Certificate setting forth the Notes or portions
thereof tendered to and accepted for payment by the Company. The Paying Agent
will promptly mail or deliver to the Holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly authenticate
and mail or deliver to such Holders a new Note of like tenor equal in principal
amount to any unpurchased portion of the Note surrendered. Any Notes not so
accepted shall be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Sale Offer
not later than the first Business Day following the Asset Sale Offer Purchase
Date.
If the Company is required to make an Asset Sale Offer, the
Company shall comply with all applicable tender offer rules, including to the
extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable securities laws or regulations.
Section 10.16. Limitation on Liens Securing Certain
Indebtedness.
The Company shall not, and shall not permit any Restricted
Subsidiary or Restricted Affiliate to, create, incur, assume or suffer to exist
any Liens of any kind against or upon (i) any property or assets of the Company
or any Restricted Subsidiary or Restricted Affiliate, whether now owned or
hereafter acquired, or any proceeds therefrom, which secure either (x)
Subordinated Indebtedness, unless the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to the Liens securing
such Subordinated Indebtedness or (y) Senior Debt Securities, unless the Notes
are equally and ratably secured with the Liens securing the Senior Debt
Securities other than the Lien on the escrow account in favor of the escrow
agent and the trustee in respect of the Senior Notes and similar interest escrow
arrangements.
Section 10.17. Limitation on Business.
The Company shall not, and will not permit any of the
Restricted Subsidiaries or Restricted Affiliates to, engage in a business which
is not substantially a Permitted Business.
Section 10.18. Limitation on Certain Guarantees
and Indebtedness of Restricted Subsidiaries
and Restricted Affiliates.
The Company shall not permit any Restricted Subsidiary or
Restricted Affiliate, directly or indirectly, to assume, guarantee or in any
other manner become liable whether as issuer, guarantor or co-obligor, with
respect to (i) any Subordinated Indebtedness or (ii) any Senior Debt Securities
unless, in each case, such Restricted Subsidiary or Restricted Affiliate
simultaneously executes and delivers a supplemental indenture providing for the
guarantee of payment of the Notes by such Restricted Subsidiary or Restricted
Affiliate, as the case may be, on a basis senior to any such Subordinated
Indebtedness or pari passu with any such Senior Debt Securities, as the case may
be. Each guarantee of the Notes created pursuant to such provisions is referred
to as a "Guarantee" and the issuer of each such Guarantee, so long as the
Guarantee remains outstanding, is referred to as a "Guarantor."
Notwithstanding the foregoing, in the event of the
unconditional release of any Guarantor from its obligations in respect of the
Indebtedness which gave rise to the requirement that a Guarantee be given, such
Guarantor shall be released from all obligations under its Guarantee. In
addition, upon any sale or disposition (by merger or otherwise) of any Guarantor
by the Company or a Restricted Subsidiary to any person that is not an Affiliate
of the Company or any of the Restricted Subsidiaries which is otherwise in
compliance with the terms of this Indenture and as a result of which such
Guarantor ceases to be a Restricted Subsidiary of the Company, such Guarantor
will be deemed to be automatically and unconditionally released from all
obligations under its Guarantee; provided that each such Guarantor is sold or
disposed of in accordance with Section 10.15 hereof.
Section 10.19. Limitation on Issuances and Sales of Preferred
Stock by Restricted Subsidiaries and
Restricted Affiliates.
The Company (i) shall not permit any Restricted Subsidiary to
issue any Preferred Stock (other than to the Company or a Restricted Subsidiary)
and (ii) shall not permit any person (other than the Company or a Restricted
Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. In
addition, the Company (i) shall not permit any Restricted Affiliate to issue any
Preferred Stock (other than (x) to the Company or a Restricted Subsidiary or (y)
to the holders of Common Stock in such Restricted Affiliate on a pro rata basis
based upon their ownership of Common Stock) or (ii) will not permit any person
not referred to in the preceding parenthetical of clause (i) of this sentence to
own any Preferred Stock of any Restricted Affiliate.
Section 10.20. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted
Subsidiaries or Restricted Affiliates.
The Company shall not, and shall not permit any Restricted
Subsidiary or Restricted Affiliate to, directly or indirectly, create or
otherwise enter into or cause to become effective any consensual encumbrance or
consensual restriction of any kind on the ability of any Restricted Subsidiary
or Restricted Affiliate to (a) pay dividends, in cash or otherwise, or make any
other distributions on its Capital Stock or any other interest or participation
in, or measured by, its profits to the extent owned by the Company or any
Restricted Subsidiary or Restricted Affiliate, (b) pay any Indebtedness owed to
the Company or any Restricted Subsidiary or Restricted Affiliate, (c) make any
Investment in the Company or any other Restricted Subsidiary or Restricted
Affiliate or (d) transfer any of its properties or assets to the Company or to
any Restricted Subsidiary or Restricted Affiliate, except for (i) any
encumbrance or restriction in existence on the Issue Date, (ii) customary
non-assignment provisions, (iii) any encumbrance or restriction pertaining to an
asset subject to a Lien to the extent set forth in the security documentation
governing such Lien, (iv) any encumbrance or restriction applicable to a
Restricted Subsidiary or Restricted Affiliate at the time that it becomes a
Restricted Subsidiary or Restricted Affiliate that is not created in
contemplation thereof, (v) any encumbrance or restriction existing under any
agreement that refinances or replaces an agreement containing a restriction
permitted by clause (iv) above; provided that the terms and conditions of any
such encumbrance or restriction are not materially less favorable to the Holders
than those under or pursuant to the agreement being replaced or the agreement
evidencing the Indebtedness refinanced, (vi) any encumbrance or restriction
imposed upon a Restricted Subsidiary or Restricted Affiliate pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary
or Restricted Affiliate or any Asset Sale to the extent limited to the Capital
Stock or assets in question, and (vii) any customary encumbrance or restriction
applicable to a Restricted Subsidiary or Restricted Affiliate that is contained
in an agreement or instrument governing or relating to Indebtedness contained in
any Permitted Credit Facility; provided that (subject to customary net worth,
leverage, invested capital and other financial covenants) the provisions of such
agreement permit the payment of interest and principal and mandatory repurchases
pursuant to the terms of this Indenture and the Notes and other indebtedness
that is solely an obligation of the Company; provided further that such
agreement may contain customary covenants regarding the merger of or sale of all
or any substantial part of the assets of the Company or any Restricted
Subsidiary or Restricted Affiliate, customary restrictions on transactions with
affiliates, and customary subordination provisions governing indebtedness owed
to the Company or any Restricted Subsidiary or Restricted Affiliate.
Section 10.21. Designations of
Unrestricted Subsidiaries.
The Company shall not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under this Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the
time of or after giving effect to such Designation;
(b) except in the case of a Permitted Investment or an
Investment made pursuant to clause (iii) or (iv) of the second
paragraph of Section 10.13 hereof, immediately after giving effect to
such Designation, the Company would be able to incur $1.00 of
Indebtedness under clause (A)(X) of the proviso of Section 10.11
hereof; and
(c) the Company would not be prohibited under this Indenture
from making an Investment at the time of Designation (assuming the
effectiveness of such Designation) in an amount (the "US Designation
Amount") equal to the Fair Market Value of the net Investment of the
Company or any other Restricted Subsidiary in such Restricted
Subsidiary on such date.
In the event of any such Designation, the Company shall be
deemed to have made an Investment constituting a Restricted Payment pursuant to
Section 10.13 hereof for all purposes of this Indenture in the US Designation
Amount. Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide a guarantee of, or similar credit support to, any Indebtedness of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness); provided that the Company may pledge Capital
Stock or Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such
that the pledgee has no claim whatsoever against the Company other than to
obtain such pledged property, (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any other Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default thereon (or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity) upon the occurrence of a default with respect to any other
Indebtedness that is Indebtedness of an Unrestricted Subsidiary, including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary, except in the case of clause (x) or (y) to the extent permitted
under Section 10.13 and Section 10.14 hereof.
The Company will not revoke any Designation of a Subsidiary as
an Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the
time of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of this
Indenture.
All Designations and Revocations must be evidenced by Board
Resolutions delivered to the Trustee certifying compliance with the foregoing
provisions.
Section 10.22. Designations of Restricted Affiliates.
The Company shall not designate any Joint Venture (other than
a newly created Joint Venture in which no Investment has previously been made)
or any of its Subsidiaries as a "Restricted Affiliate" under this Indenture (a
"JV Designation") unless:
(a) no Default shall have occurred and be continuing at the
time of and after giving effect to such JV Designation; and
(b) all Liens and Indebtedness of such Joint Venture
outstanding immediately following such JV Designation would, if
incurred at such time, have been permitted to be incurred for all
purposes of this Indenture.
Notwithstanding the foregoing, the BECO Joint Venture and the
PEPCO Joint Venture shall initially constitute Restricted Affiliates at the
Issue Date. The Company and the Restricted Subsidiaries shall at all times
maintain a Restricted Affiliate so that it qualifies as a Joint Venture under
clauses (a) and (b) of the definition thereof, unless either (1) the Company is
able to, and does in fact, make an effective JV Revocation under the provisions
set forth below at the time of such event or (2) the Restricted Affiliate ceases
to qualify as a Joint Venture by reason of an Asset Sale by the Company or a
Restricted Subsidiary of all of the Company's or such Restricted Subsidiary's
interest in the Capital Stock of such Restricted Affiliate to any person other
than the Company or a Restricted Subsidiary or any of their respective
Affiliates, which, in the case of this clause (2), shall be deemed an effective
JV Revocation.
The Company will not revoke any JV Designation of a Joint
Venture as a Restricted Affiliate (a "JV Revocation") unless:
(1) no Default shall have occurred and be continuing at
the time of or after giving effect to such JV Revocation;
(2) except in the case of a Permitted Investment or an
Investment made pursuant to clause (e) or (f) of the second paragraph
of Section 10.13 hereof and except in the case in which the Restricted
Affiliate will become a Restricted Subsidiary, immediately after giving
effect to such JV Revocation, the Company would be able to incur $1.00
of Indebtedness under the proviso of clause (A)(X) of Section 10.11
hereof; and
(3) the Company would not be prohibited under the
Indenture from making an Investment at the time of such JV Revocation
(assuming the effectiveness of such JV Revocation) in an amount (the
"JV Revocation Amount") equal to the Fair Market Value of the net
Investment of the Company or any other Restricted Subsidiary in such
Restricted Subsidiary on such date.
In the event of any such JV Revocation, except in the case in
which the Restricted Affiliate will become a Restricted Subsidiary, the Company
shall be deemed to have made an Investment constituting a Restricted Payment
pursuant to Section 10.13 hereof for all purposes of this Indenture in the JV
Revocation Amount.
All JV Designations and JV Revocations must be evidenced by
Board Resolutions delivered to the applicable Trustee certifying compliance with
the foregoing provisions.
Section 10.23. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company will
furnish to the Trustee an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture (including any covenants
compliance with which constitutes a condition precedent) relating to the
proposed action have been complied with, and an Opinion of Counsel stating that
in the opinion of such counsel all such conditions precedent, if any, have been
complied with, except that, in the case of any such application or request as to
which the furnishing of such documents, certificates and/or opinions is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture will include:
(i) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether
such covenant or condition has been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 10.24. Reports.
The Company shall, whether or not it has a class of securities
registered under the Exchange Act, furnish without cost to each Holder (in
sufficient quantities for distribution to beneficial holders) and file with the
Trustee and the SEC, (i) within the applicable time period required under the
Exchange Act, after the end of each fiscal year of the Company, the information
required by Form 10-K (or any successor form thereto) under the Exchange Act
with respect to such period, (ii) within the applicable time period required
under the Exchange Act after the end of each of the first three fiscal quarters
of each fiscal year of the Company, the information required by Form 10-Q (or
any successor form thereto) under the Exchange Act with respect to such period
and (iii) any current reports on Form 8-K (or any successor forms) required to
be filed under the Exchange Act.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as
to surviving rights or registration of transfer or exchange of Notes herein
expressly provided for) and the Trustee, on written demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when:
(1) either (a) all Notes theretofore authenticated and
delivered (other than (i) Notes which have been destroyed, lost or
stolen and which have been replaced or paid as provided in Section 3.06
hereof and (ii) Notes for whose payment money has theretofore been
irrevocably deposited or caused to be deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust, as provided in Section 10.03) have been
delivered to the Trustee for cancellation; or (b) all such Notes not
theretofore delivered to the Trustee for cancellation have become due
and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee in trust an amount of money in dollars
sufficient to pay and discharge the entire Indebtedness on such issue
of Notes not theretofore delivered to the Trustee for cancellation, for
the principal of, premium, if any, and interest to the date of such
deposit or maturity date of redemption; and
(2) the Company has paid or caused to be paid all other
sums payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel each stating that all
conditions precedent herein provided for relating to the satisfaction
and discharge of this Indenture have been complied with; provided, that
such Opinion of Counsel may rely, as to matters of fact, upon an
Officers' Certificate.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Sections 4.05 and 6.07 and, if
money shall have been deposited with the Trustee pursuant to subclause (1)(b) of
this Section 11.01, the obligations of the Trustee under Section 11.02 and the
last paragraph of Section 10.03 shall survive.
Section 11.02. Application of Trust Money.
Subject to the provisions of the last paragraph of Section
10.03, all money deposited with the Trustee pursuant to Section 11.01 shall be
held in trust and applied by it, in accordance with the provisions of the Notes
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the persons entitled thereto, of the principal of, premium, if
any, and interest on the Notes for whose payment such money has been deposited
with the Trustee.
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee.
If the Company elects to redeem Notes pursuant to Paragraph 3
of the Initial Notes or Paragraph 2 of the Exchange Notes, it shall notify the
Trustee of the Redemption Date and principal amount of Notes to be redeemed.
The Company shall notify the Trustee of any redemption at
least 45 days before the Redemption Date by an Officers' Certificate, stating
that such redemption will comply with the provisions hereof and of the Notes.
Section 12.02. Selection of Notes To Be Redeemed.
In the event that less than all of the Notes are to be
redeemed at any time, selection of such Notes for redemption will be made by the
Trustee in compliance with any applicable requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange (or if the Notes are so listed
but the exchange does not impose requirements with respect to the selection of
debt securities for redemption), on a pro rata basis, by lot or by such method
as the Trustee in its sole discretion shall deem fair and appropriate; provided,
however, that no Notes of a principal amount at maturity of $1,000 or less shall
be redeemed in part.
The Trustee shall promptly notify the Company and the
Registrar in writing of the Notes selected for redemption and, in the case of
any Notes selected for partial redemption, the principal amount at maturity
thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Notes shall relate,
in the case of any Note redeemed or to be redeemed only in part, to the portion
of the principal amount of such Note which has been or is to be redeemed.
Section 12.03. Notice of Redemption.
Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Notes to be redeemed, at the address of such
Holder appearing in the Note register maintained by the Registrar.
All notices of redemption shall identify the Notes to be
redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price and the amount of accrued interest,
if any, to be paid;
(c) that, unless the Company defaults in making the redemption
payment, interest on Notes called for redemption ceases to accrue on
and after the Redemption Date, and the only remaining right of the
Holders of such Notes is to receive payment of the Redemption Price
plus unpaid interest on the Notes through the Redemption Date, upon
surrender to the Paying Agent of the Notes redeemed;
(d) if any Note is to be redeemed in part, the portion of the
principal amount at maturity (equal to $1,000 or any integral multiple
thereof) of such Note to be redeemed and that on and after the
Redemption Date, upon surrender for cancellation of such Note to the
Paying Agent, a new Note or Notes in the aggregate principal amount at
maturity equal to the unredeemed portion thereof will be issued without
charge to the Noteholder;
(e) that Notes called for redemption must be surrendered to
the Paying Agent to collect the Redemption Price and the name and
address of the Paying Agent; and
(f) the CUSIP or CINS number, if any, relating to such Notes.
Notice of redemption of Notes to be redeemed at the election
of the Company shall be given by the Company or, at the Company's written
request, by the Trustee in the name and at the expense of the Company.
Section 12.04. Effect of Notice of Redemption.
Once notice of redemption is mailed, Notes called for
redemption become due and payable on the Redemption Date and at the Redemption
Price. Upon surrender to the Paying Agent, such Notes called for redemption
shall be paid at the Redemption Price plus accrued interest, if any, to the
Redemption Date, but interest installments whose maturity is on or prior to such
Redemption Date will be payable on the relevant Interest Payment Dates to the
Holders of record at the close of business on the relevant record dates referred
to in the Notes.
Section 12.05. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit
with the Paying Agent an amount of money in same day funds sufficient to pay the
Redemption Price of, and any accrued interest on, all the Notes or portions
thereof which are to be redeemed on that date, other than Notes or portions
thereof called for redemption on that date which have been delivered by the
Company to the Trustee for cancellation.
If the Company complies with the preceding paragraph, then,
unless the Company defaults in the payment of such Redemption Price, interest on
the Notes to be redeemed will cease to accrue on and after the applicable
Redemption Date, whether or not such Notes are presented for payment, and the
Holders of such Notes shall have no further rights with respect to such Notes
except for the right to receive the Redemption Price plus unpaid interest on the
Notes through the Redemption Date, upon surrender of such Notes. If any Note
called for redemption shall not be so paid upon surrender thereof for
redemption, the principal, premium, if any, and, to the extent lawful, accrued
interest thereon shall, until paid, bear interest from the Redemption Date at
the rate provided in the Notes.
Section 12.06. Notes Redeemed or Purchased in Part.
Upon surrender to the Paying Agent of a Note which is to be
redeemed in part, the Company shall execute and the Trustee shall authenticate
and deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder in aggregate
principal amount equal to, and in exchange for, the unredeemed portion of the
principal of the Note so surrendered that is not redeemed.
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the day and year first written above.
RCN CORPORATION
By:
----------------------------------
Name: Bruce C. Godfrey
Title: Executive Vice President
and Chief FinancialOfficer
THE CHASE MANHATTAN BANK,
as Trustee
By:----------------------------------
Name:
Title:
EXHIBIT A-1
[FORM OF NOTE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 904 OF REGULATION S,
(2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH
SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR
ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY AND (Y)
SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE
RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS
BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE
SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO
NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3)
AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY,
THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO
ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE
THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO
REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE
OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE.
THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION",
"UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
RCN CORPORATION
-----------------
9.80% SENIOR DISCOUNT NOTES DUE 2008, SERIES A
CUSIP No. __________
No. ___________ $
This Note is issued with original issue discount for purposes of Section 1271 et
seq. of the Internal Revenue Code. For each $1,000 of principal amount of this
Note, the issue price is $618.32 and the amount of original issue discount is
$871.68. The issue date of this Note is February 6, 1998 and the yield to
maturity is 9.80.
RCN CORPORATION, a corporation incorporated under the laws of
the State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________ or registered assigns, the
principal sum of _______________ Dollars on February 15, 2008, at the office or
agency of the Company referred to below, and to pay interest thereon on February
15 and August 15 (each an "Interest Payment Date"), of each year, commencing on
August 15, 2003, accruing from February 15, 2003 or from the most recent
Interest Payment Date to which interest has been paid or duly provided for, at
the rate of 9.80% per annum, until the principal hereof is paid or duly provided
for. Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the February 1
and August 1 (each a "Regular Record Date"), whether or not a Business Day, as
the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture.
Payment of the principal of, premium, if any, and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as such
address shall appear on the Note Register.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture, or be valid
or obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: RCN CORPORATION
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 9.80% Senior Discount Notes due 2008,
Series A, referred to in the within-mentioned Indenture.
The Chase Manhattan Bank, as Trustee
By:
------------------------------
Authorized Signatory
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of
Notes of the Company designated as its 9.80% Senior Discount Notes due 2008,
Series A (herein called the "Initial Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount at maturity to $567,000,000, which may be issued under an indenture
(herein called the "Indenture") dated as of February 6, 1998, by and between the
Company and The Chase Manhattan Bank, as trustee (herein called the "Trustee,"
which term includes any successor Trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Trustee and the Holders of the
Notes, and of the terms upon which the Notes are, and are to be, authenticated
and delivered. The Notes include the Initial Notes, the Private Exchange Notes
and the Unrestricted Notes (including the Exchange Notes referred to below),
issued in exchange for the Initial Notes pursuant to the Registration Rights
Agreement. The Initial Notes and the Unrestricted Notes are treated as a single
class of securities under the Indenture.
All capitalized terms used in this Note which are defined in
the Indenture and not otherwise defined herein shall have the meanings assigned
to them in the Indenture.
The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of
the Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. Pursuant to the Registration Rights
Agreement by and among the Company and the Initial Purchasers, the Company will
be obligated to consummate an exchange offer pursuant to which the Holder of
this Note shall have the right to exchange this Note for 9.80% Senior Discount
Notes due 2008, Series B, of the Company (herein called the "Exchange Notes"),
which have been registered under the Securities Act, in like principal amount
and having identical terms as the Notes (other than as set forth in this
paragraph). The Holders of Notes shall be entitled to receive certain additional
interest payments in the event such exchange offer is not consummated and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement.
3. Redemption. The Notes will be redeemable, at the option of
the Company, in whole or in part, on or after February 15, 2003 upon not less
than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below, plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on February 15 of each of
the years indicated below:
Year Percentage
---- ----------
2003........................................... 104.900%
2004........................................... 103.267%
2005........................................... 101.633%
2006 and thereafter............................ 100.000%
Notwithstanding the foregoing, in the event that after the
Issue Date and prior to February 15, 2001 the Company issues, in one or more
Public Equity Offerings yielding gross cash proceeds of not less than $30.0
million, the Company may redeem, at its option, up to a maximum of 35% of the
aggregate principal amount at maturity of Notes from the net proceeds thereof at
a redemption price of 109.80% of the Accreted Value of the Notes; provided that
not less than 65% of the originally issued aggregate principal amount at
maturity of the Notes would remain outstanding immediately after such
redemption. To effect the foregoing redemption, the Company must mail a notice
of redemption not later than 60 days after the consummation of the Public Equity
Offering that resulted in the requisite gross proceeds. As used above, "Public
Equity Offering" means an underwritten public offering of Common Stock of the
Company effected on a primary basis and registered with the Commission under the
Securities Act.
4. Offers to Purchase. Sections 10.10 and 10.15 of the
Indenture provide that upon the occurrence of a Change of Control and following
certain Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
6. Defeasance. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Company on this Note and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance by the
Company with certain conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority of Accreted Value of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages of Accreted Value of the Notes at the time Outstanding, on
behalf of the Holders of all the Notes, to waive compliance by the Company with
certain provisions of this Indenture and certain past Defaults under the
Indenture and this Note and their consequences. Any such consent or waiver by or
on behalf of the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
8. Denominations, Transfer and Exchange. The Notes are
issuable only in registered form without coupons in denominations of $1,000
principal amount at maturity and any integral multiple thereof. As provided in
the Indenture and subject to certain limitations therein set forth, the Notes
are exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Note is registrable on the
Note Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
the Borough of Manhattan in The City of New York, State of New York, or at such
other office or agency of the Company as may be maintained for such purpose,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and for the same aggregate principal amount,
will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
9. Persons Deemed Owners. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE AND THIS NOTE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of this Indenture. Requests may be made to:
RCN CORPORATION, 105 Carnegie Center, Princeton, New Jersey 08540-6215.
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- ---------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
-----------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- ---------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior
to the date which is the earlier of (i) the date of the declaration by the SEC
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company was the owner of this Note (or any Predecessor
Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
[Check One]
[ ] (a) this Note is being transferred in
compliance with the exemption from registration under the
Securities Act provided by Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than
in accordance with (a) above and documents, including (i) a
transferee certificate substantially in the form of Exhibit C
to the Indenture in the case of a transfer to a non-QIB
Accredited Investor or (ii) a transfer certificate
substantially in the form of Exhibit D to the Indenture in
the case of a transfer pursuant to Regulation S, are being
furnished which comply with the conditions of transfer set
forth in this Note and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar shall not be obligated to register this Note in the name of
any person other than the Holder hereof unless and until the conditions to any
such transfer of registration set forth herein and in Section 3.16 and Section
3.17 of this Indenture shall have been satisfied.
- -----------------------------------------------------------------------------
Date: Your signature:
---------------- ------------------------------------
(Sign exactly as your name appears
on the other side of this Note)
By:
-------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
---------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A (including the information
specified in Rule 144A(d)(4)) or has determined not to request such information
and that it is aware that the transferor is relying upon the undersigned's
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
Dated:
-------------------- ------------------------------------
NOTICE: To be executed by
an executive officer
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the amount:
$
------------------------------------------------------------------------
------------------------------------------------------------------------
Date:
---------------- --------------------------------------
Your signature:
(Sign exactly as your name appears on
the other side of this Note)
By:
---------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee: ____________________
EXHIBIT A-2
RCN CORPORATION
-----------------
9.80% SENIOR DISCOUNT NOTES DUE 2008, SERIES B
CUSIP No. __________
No. ___________ $
This Note is issued with original issue discount for purposes
of Section 1271 et seq. of the Internal Revenue Code. For each $1,000 of
principal amount of this Note, the issue price is $618.32 and the amount of
original issue discount is $871.68. The issue date of this Note is February 6,
1998 and the yield to maturity is 9.80%.
RCN CORPORATION, a corporation incorporated under the laws of
the State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________ or registered assigns, the
principal sum of _______________ Dollars on February 15, 2008, at the office or
agency of the Company referred to below, and to pay interest thereon on February
15 and August 15 (each an "Interest Payment Date"), of each year, commencing on
August 15, 2003, accruing from February 15, 2003 or from the most recent
Interest Payment Date to which interest has been paid or duly provided for, at
the rate of 9.80% per annum, until the principal hereof is paid or duly provided
for. Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the February 1
and August 1 (each a "Regular Record Date"), whether or not a Business Day, as
the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture.
Payment of the principal of, premium, if any, and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as such
address shall appear on the Note Register.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture, or be valid
or obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: RCN CORPORATION
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 9.80% Senior Discount Notes due 2008,
Series B, referred to in the within-mentioned Indenture.
The Chase Manhattan Bank, as Trustee
By:________________________
Authorized Signatory
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of
Notes of the Company designated as its 9.80% Senior Discount Notes due 2008,
Series B (herein called the "Initial Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount at maturity to $567,000,000, which may be issued under an indenture
(herein called the "Indenture") dated as of February 6, 1998, by and between the
Company and The Chase Manhattan Bank, as trustee (herein called the "Trustee,"
which term includes any successor Trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties, obligations
and immunities thereunder of the Company, the Trustee, and the Holders of the
Notes, and of the terms upon which the Notes are, and are to be, authenticated
and delivered. The Notes include the Initial Notes, the Private Exchange Notes
and the Unrestricted Notes (including the Exchange Notes), issued in exchange
for the Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in
the Indenture and not otherwise defined herein shall have the meanings assigned
to them in the Indenture.
The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. ss.ss. 77aaa-77bbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, premium, if any,
and interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Redemption. The Notes will be redeemable, at the option of
the Company, in whole or in part, on or after February 15, 2003 upon not less
than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount at maturity) set forth below, plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on February 15 of each of
the years indicated below:
Year Percentage
---- ----------
2003........................................................ 104.900%
2004........................................................ 103.267%
2005........................................................ 101.633%
2006 and thereafter......................................... 100.000%
Notwithstanding the foregoing, in the event that after the
Issue Date and prior to February 15, 2001 the Company issues, in one or more
Public Equity Offerings yielding gross proceeds of not less than $30.0 million,
the Company may redeem, at its option, up to a maximum of 35% of the aggregate
principal amount at maturity of the Notes originally issued from the net
proceeds thereof at a redemption price of 109.80% of the Accreted Value of the
Notes provided that not less than 65% of the originally issued aggregate
principal amount at maturity of the Notes would remain outstanding immediately
after such redemption. To effect the foregoing redemption, the Company must mail
a notice of redemption not later than 60 days after the consummation of the
Public Equity Offering that resulted in the requisite gross proceeds. As used
above, "Public Equity Offering" means an underwritten public offering of Common
Stock of the Company effected on a primary basis and registered with the
Commission under the Securities Act.
3. Offers to Purchase. Sections 10.10 and 10.15 of the
Indenture provide that upon the occurrence of a Change of Control and following
certain Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
5. Defeasance. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Company on this Note and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance by the
Company with certain conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority of Accreted Value of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages of Accreted Value of the Notes at the time Outstanding, on
behalf of the Holders of all the Notes, to waive compliance by the Company with
certain provisions of the Indenture and certain past Defaults under the
Indenture and this Note and their consequences. Any such consent or waiver by or
on behalf of the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
7. Denominations, Transfer and Exchange. The Notes are
issuable only in registered form without coupons in denominations of $1,000
principal amount at maturity and any integral multiple thereof. As provided in
the Indenture and subject to certain limitations therein set forth, the Notes
are exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Note is registrable on the
Note Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
the Borough of Manhattan in The City of New York, State of New York, or at such
other office or agency of the Company as may be maintained for such purpose,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and for the same aggregate principal amount,
will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
8. Persons Deemed Owners. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE AND THIS NOTE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture. Requests may be made to: RCN
CORPORATION, 105 Carnegie Center, Princeton, New Jersey 08540-6215.
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to______________________________________
(Insert assignee's social security or tax ID number)__________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
______________________________________________________________________________
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
Date:______________ Your signature:_________________________________________
(Sign exactly as your name appears on the
other side of this Note)
By:_____________________________________
NOTICE: To be executed
by an executive officer
Signature Guarantee:____________________
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ]
Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the amount:
$____________________________________________________________
_______________________________________________________________________________
Date:______________ Your signature:___________________________________________
(Sign exactly as your name appears on the
other side of this Note)
By:_______________________________________
NOTICE: To be executed
by an executive officer
Signature Guarantee:____________________
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall
bear a legend (which would be in addition to any other legends required in the
case of a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THIS
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
NOTE IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE
(OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A
NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE
DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
EXHIBIT C
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540
Ladies and Gentlemen:
In connection with our proposed purchase of $567,000,000
aggregate principal amount of the 9.80% Senior Discount Notes due 2008 (the
"Notes") of RCN Corporation (the "Company"), we confirm that:
1. We understand that the Notes have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), and, unless so registered, may not be sold except as
permitted in the following sentence. We agree on our own behalf and on
behalf of any investor account for which we are purchasing Notes to
offer, sell or otherwise transfer such Notes prior to (x) the date
which is two years (or such shorter period of time as permitted by Rule
144 under the Securities Act) after the later of the date of original
issue of the Notes and (y) such later date, if any, as may be required
by any subsequent change in applicable law (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a
registration statement which has been declared effective under the
Securities Act, (c) so long as the Notes are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person we
reasonably believe is a "qualified institutional buyer" under Rule 144A
(a "QIB") that purchases for its own account or for the account of a
QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the United States to "foreign purchasers" (as defined below) in
offshore transactions meeting the requirements of Rule 904 of
Regulation S under the Securities Act, (e) to an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2),
(3) or (7) of Rule 501 under the Securities Act (an "Accredited
Investor") that is purchasing for its own account or for the account of
such an institutional "accredited investor," or (f) pursuant to any
other available exemption from the registration requirements of the
Securities Act, subject, in each of the foregoing cases, to any
requirement of law that the disposition of our property or the property
of such investor account or accounts be at all times within our or
their control and to compliance with any applicable state securities
laws. The foregoing restrictions on resale will not apply subsequent to
the Resale Restriction Termination Date. If any resale or other
transfer of the Notes is proposed to be made pursuant to clause (c)
above prior to the Resale Restriction Termination Date, the transferor
shall deliver a letter from the transferee substantially in the form of
this letter to the Trustee, which shall provide, among other things,
that the transferee is an Accredited Investor within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities
Act and that it is acquiring such Notes for investment purposes and not
for distribution in violation of the Securities Act. Each purchaser
acknowledges that the Company, the Trustee and the Transfer Agent and
Registrar reserve the right prior to any offer, sale or other transfer
prior to the Resale Restriction Termination Date of the Notes pursuant
to clause (d), (e) or (f) above to require the delivery of an opinion
of counsel, certification and/or other information satisfactory to the
Company and the Trustee.
2. We are an Accredited Investor or a QIB
purchasing Notes for our own account or for the account of one or more
Accredited Investors, and we are acquiring the Notes for investment
purposes and not with a view to, or for offer or sale in connection
with, any distribution in violation of the Securities Act or the
securities laws of any state of the United States and we have such
knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risk of our or its investment in the Notes for an
indefinite period.
3. We are acquiring the Notes purchased by us
for our own account or for one or more accounts as to each of which we
exercise sole investment discretion and we and any such account are (a)
a QIB, aware that the sale is being made in reliance on Rule 144A under
the Securities Act, (b) an Accredited Investor, or (c) a person other
than a U.S. person ("foreign purchasers"), which term shall include
dealers or other professional fiduciaries in the United States acting
on a discretionary basis for foreign beneficial owners (other than an
estate or trust) in offshore transactions meeting the requirements of
Rules 903 and 904 of Regulation S under the Securities Act.
4. We have received a copy of the Offering
Memorandum and acknowledge that we have had access to such financial
and other information, and have been afforded the opportunity to ask
such questions of representatives of the Company and receive answers
thereto, as we deem necessary in order to verify the information
contained in the Offering Memorandum.
5. We are not purchasing the Notes for or on
behalf of, and will not transfer the Notes to, any pension or welfare
plan (as defined in Section 3 of ERISA), except as may be permitted
under ERISA and as described under "Notice to Investors" in the
Offering Memorandum.
6. In the event that we purchase any Notes,
we will acquire Notes having an outstanding principal amount of at
least $250,000 for our own account and $250,000 for each account for
which we are acting.
We understand that the Trustee and the Transfer Agent will not
be required to accept for registration of transfer any Notes acquired by us,
except upon presentation of evidence satisfactory to the Company and the Trustee
that the foregoing restrictions on transfer have been complied with. We further
understand that the Notes purchased by us will be in the form of definitive
physical certificates and that such certificates will bear a legend reflecting
the substance of this paragraph. We further agree to provide to any person
acquiring any of the Notes from us a notice advising such person that transfers
of such Notes are restricted as stated herein and that certificates representing
such Notes will bear a legend to that effect.
We represent that you, the Company, the Trustee and others are
entitled to rely upon the truth and accuracy of our acknowledgments,
representations and agreements set forth herein, and we agree to notify you
promptly in writing if any of our acknowledgments, representations or agreements
herein cease to be accurate and complete. You are also irrevocably authorized to
produce this letter or a copy hereof to any interested party in any
administrative or legal proceeding or official inquiry with respect to the
matters covered hereby.
We represent to you that we have full power to make the
foregoing acknowledgments, representations and agreements on our own behalf and
on behalf of any investor account for which we are acting as fiduciary agent.
As used herein, the terms "offshore transaction," "United
States" and "U.S. person" have the respective meanings given to them in
Regulation S under the Securities Act.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
Very truly yours,
(Name of Purchaser)
By:________________________________
Date:______________________________
Upon transfer, the Notes would be registered in the name of
the new beneficial owner as follows:
Name:______________________________
Address: __________________________
EXHIBIT D
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
The Chase Manhattan Bank
Global Trust Services
450 West 33rd St.
15th Floor
New York, New York 10001-2697
Attention: Corporate Trust Department
Re: RCN CORPORATION
(the "Company") 9.80% Senior Discount
Notes due 2008 (the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $
aggregate principal amount at maturity of the Securities, we confirm that such
sale has been effected pursuant to and in accordance with Regulation S under the
U.S. Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, we represent that:
(1) the offer of the Securities was not made to a person in
the United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through
the facilities of a designated off-shore securities market and neither
we nor any person acting on our behalf knows that the transaction has
been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer
restrictions applicable to the Securities;
(6) if the circumstances set forth in Rule 904(c) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Securities may be offered and sold during
the restricted period specified in Rule 903(c)(2) or (3), as
applicable, in accordance with the provisions of Regulation S; pursuant
to registration of the Securities under the Securities Act; or pursuant
to an available exemption from the registration requirements under the
Securities Act; and
(7) if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) are applicable thereto, we confirm that
such sale has been made in accordance with such provisions.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:____________________
Authorized Signature
===============================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of February 6, 1998
by and among
RCN CORPORATION
and
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON BROTHERS INC
and
NATIONSBANC MONTGOMERY SECURITIES, LLC,
as Initial Purchasers
===============================================================================
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of February 6, 1998 by and among RCN CORPORATION, a Delaware
corporation (the "Company"), and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED ("Merrill Lynch"), SALOMON BROTHERS INC ("Salomon") and NATIONSBANC
MONTGOMERY SECURITIES, LLC ("Montgomery" and, together with Merrill Lynch and
Salomon, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement
dated as of January 30, 1998 by and among the Company, and the Initial
Purchasers (the "Purchase Agreement"), which provides for, among other things,
the sale by the Company to the Initial Purchasers of an aggregate of
$567,000,000 aggregate principal amount at maturity of the Company's 9.80%
Senior Discount Notes due 2008 (the "Notes"). In order to induce the Initial
Purchasers to enter into the Purchase Agreement, the Company has agreed to
provide to the Initial Purchasers and their direct and indirect transferees the
registration rights set forth in this Agreement. The execution and delivery of
this Agreement is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement, the following
capitalized defined terms shall have the following meanings:
"Additional Interest," see Section 2(e) hereof.
"Advice" see the last paragraph Section 3 hereof.
"Applicable Period" see Section 3(s) hereof.
"Business Day" shall mean a day that is not a Saturday, a
Sunday, or a day on which banking institutions in New York, New York
are required to be closed.
"Closing Time" shall mean the Closing Time as defined in the
Purchase Agreement.
"Company" shall have the meaning set forth in the preamble to
this Agreement and also includes the Company's successors and permitted
assigns.
"Depositary" shall mean The Depository Trust Company, or any
other depositary appointed by the Company; provided, however, that such
depositary must have an address in the Borough of Manhattan, in The
City of New York.
"Effectiveness Period" see Section 2(b) hereof.
"Effectiveness Target Date" see Section 2(e) hereof.
"Event Date" see Section 2(e) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Offer" shall mean the exchange offer by the Company
of Exchange Notes for Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under
the Securities Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange
offer registration statement on Form S-1, S-3 or S-4 (or, if
applicable, on another appropriate form), and all amendments and
supplements to such registration statement, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Exchange Period" see Section 2(a) hereof.
"Exchange Notes" shall mean the 9.80% Senior Discount Notes
due 2008, Series B, issued by the Company under the Indenture
containing terms identical to the Notes (except that (i) the transfer
restrictions with respect to the Notes and all registration rights in
respect thereof shall be eliminated and (ii) the provisions relating to
Additional Interest shall be eliminated) to be offered to Holders of
Notes in exchange for Notes pursuant to the Exchange Offer.
"Holders" shall mean the Initial Purchasers, for so long as
they own any Transfer Restricted Notes, each of their direct and
indirect successors, assigns and transferees who become registered
owners of Transfer Restricted Notes under the Indenture and each
Participating Broker-Dealer that holds Exchange Notes for so long as
such Participating Broker-Dealer is required to deliver a prospectus
meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes.
"Indenture" shall mean the Indenture relating to the Notes
dated as of February 6, 1998 between the Company, and The Chase
Manhattan Bank, as trustee, as the same may be amended from time to
time in accordance with the terms thereof.
"Initial Purchasers" see the preamble to this Agreement.
"Inspectors" see Section 3(m) hereof.
"Issue Date" shall mean the date on which the Notes are
originally issued.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount at maturity of outstanding Transfer
Restricted Notes.
"Merrill Lynch" shall have the meaning set forth in the
preamble to this agreement.
"Notes" see the preamble of this Agreement.
"Participating Broker-Dealer" shall have the meaning set forth
in Section 3(s) hereof.
"Person" shall mean an individual, partnership, corporation,
trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Private Exchange" see Section 2(a) hereof.
"Private Exchange Notes" see Section 2(a) hereof.
"Prospectus" shall mean the prospectus included in a
Registration Statement, including any preliminary prospectus, and any
such prospectus as amended or supplemented by any prospectus
supplement, including a prospectus supplement with respect to the terms
of the offering of any portion of the Transfer Restricted Notes covered
by a Shelf Registration Statement, and by all other amendments and
supplements to a prospectus, including post-effective amendments, and
in each case including all material incorporated by reference therein.
"Purchase Agreement" see the preamble to this Agreement.
"Records" see Section 3(m) hereof.
"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance by the Company with this
Agreement, including without limitation: (i) all applicable SEC, stock
exchange or National Association of Securities Dealers, Inc. (the
"NASD") registration and filing fees, (ii) all fees and expenses
incurred in connection with compliance with state securities or blue
sky laws (including reasonable fees and disbursements of one counsel
for Holders that are Initial Purchasers in connection with blue sky
qualification of any of the Exchange Notes or Transfer Restricted
Notes) and compliance with the rules of the NASD, (iii) all applicable
expenses incurred by the Company in preparing or assisting in
preparing, word processing, printing and distributing any Registration
Statement, any Prospectus and any amendments or supplements thereto,
and in preparing or assisting in preparing any other documents relating
to the performance of and compliance with this Agreement, (iv) all
rating agency fees, if any, (v) the fees and disbursements of counsel
for the Company, (vii) all fees and expenses incurred in connection
with the listing, if any, of any of the Transfer Restricted Notes on
any securities exchange or exchanges, if the Company, in its
discretion, elects to make any such listing; but excluding fees of
counsel to the Holders and underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Transfer
Restricted Notes by a Holder.
"Registration Statement" shall mean any registration statement
(including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement) of the Company which
covers any of the Exchange Notes or Transfer Restricted Notes pursuant
to the provisions of this Agreement, and all amendments and supplements
to any such Registration Statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Shelf Registration" shall mean a registration effected
pursuant to Section 2(b) hereof.
"Shelf Registration Event Date" see Section 2(b).
"Shelf Registration Statement" shall mean a "shelf"
registration statement of the Company pursuant to the provisions of
Section 2(b) hereof which covers all of the Transfer Restricted Notes
or all of the Private Exchange Notes, as the case may be, on an
appropriate form under Rule 415 under the Securities Act, or any
similar rule that may be adopted by the SEC, and all amendments and
supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
"Target Consummation Date" see Section 2(a).
"Target Effectiveness Date" see Section 2(a).
"TIA" shall have the meaning set forth in Section 3(k) hereof.
"Transfer Restricted Notes" means each Note until (i) the date
on which such has been exchanged by a person other than a broker-dealer
for an Exchange Note in the Exchange Offer, (ii) following the exchange
by a broker-dealer in the Exchange Offer of a Note for an Exchange
Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a
copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with
the Shelf Registration Statement, (iv) the date on which such Note is
distributed to the public pursuant to Rule 144(k) under the Securities
Act (or any similar provision then in force, but not Rule 144A under
the Securities Act), (v) such Note shall have been otherwise
transferred by the holder thereof and a new Note not bearing a legend
restricting further transfer shall have been delivered by the Company
and subsequent disposition of such Note shall not require registration
or qualification under the Securities Act or any similar state law then
in force or (vi) such Note ceases to be outstanding.
"Trustee" shall mean the trustee with respect to the Notes
under the Indenture.
2. Registration Under the Securities Act.
(a) Exchange Offer. The Company shall, for the benefit of the
Holders, at the Company's cost, (i) unless the Exchange Offer would not be
permitted by applicable law or SEC policy, file with the SEC within 45 days
after the Issue Date an Exchange Offer Registration Statement on an appropriate
form under the Securities Act covering the offer by the Company to the Holders
to exchange all of the Transfer Restricted Notes (other than Private Exchange
Notes (as defined below)) for a like principal amount of Exchange Notes, (ii)
unless the Exchange Offer would not be permitted by applicable law or SEC
policy, use its best efforts to have such Exchange Offer Registration Statement
declared effective under the Securities Act by the SEC not later than 90 days
after the Issue Date (the "Target Effectiveness Date"), (iii) have such
Registration Statement remain effective until the closing of the Exchange Offer
and (iv) unless the Exchange Offer would not be permitted by applicable law or
SEC policy, commence the Exchange Offer and use its best efforts to issue, on or
prior to the 135th day after the Issue Date (the "Target Consummation Date"),
Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange
Offer. Upon the effectiveness of the Exchange Offer Registration Statement, the
Company shall promptly commence the Exchange Offer, it being the objective of
such Exchange Offer to enable each Holder eligible and electing to exchange
Transfer Restricted Notes for Exchange Notes (assuming that such Holder is not
an affiliate of the Company within the meaning of Rule 405 under the Securities
Act and is not a broker-dealer tendering Transfer Restricted Notes acquired
directly from the Company for its own account, acquires the Exchange Notes in
the ordinary course of such Holder's business and has no arrangements or
understandings with any Person to participate in the Exchange Offer for the
purpose of distributing (within the meaning of the Securities Act) the Exchange
Notes) and to transfer such Exchange Notes from and after their receipt without
any limitations or restrictions under the Securities Act and under state
securities or blue sky laws.
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus
forming part of the Exchange Offer Registration Statement, together
with an appropriate letter of transmittal and related documents;
(ii) keep the Exchange Offer open for acceptance for a
period of not less than 20 Business Days after the date notice thereof
is mailed to the Holders (or longer if required by applicable law)
(such period referred to herein as the "Exchange Period");
(iii) utilize the services of the Depositary for the Exchange
Offer;
(iv) permit Holders to withdraw tendered Notes at any
time prior to the close of business, New York time, on the last
Business Day of the Exchange Period, by sending to the institution
specified in the notice, a telegram, telex, facsimile transmission or
letter setting forth the name of such Holder, the principal amount of
Notes delivered for exchange, and a statement that such Holder is
withdrawing his election to have such Notes exchanged; and
(v) otherwise comply in all material respects with all
applicable laws relating to the Exchange Offer.
If, prior to consummation of the Exchange Offer the Initial
Purchasers hold any Notes acquired by them and having the status of an unsold
allotment in the initial distribution, the Company upon the request of any
Initial Purchaser shall, simultaneously with the delivery of the Exchange Notes
in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange
(the "Private Exchange") for the Notes held by such Initial Purchaser, a like
principal amount of debt securities of the Company that are identical (except
that such securities shall bear appropriate transfer restrictions) to the
Exchange Notes (the "Private Exchange Notes").
The Exchange Notes and the Private Exchange Notes shall be
issued under (i) the Indenture or (ii) an indenture identical to all material
respects to the Indenture and which, in either case, has been qualified under
the TIA or is exempt from such qualification and shall provide that the Exchange
Notes shall not be subject to the transfer restrictions set forth in the
Indenture. The Indenture or such indenture shall provide that the Exchange
Notes, the Private Exchange Notes and the Notes shall vote and consent together
on all matters as one class and that none of the Exchange Notes, the Private
Exchange Notes or the Notes will have the right to vote or consent as a separate
class on any matter. The Private Exchange Notes shall be of the same series as
and the Company shall use all commercially reasonable efforts to have the
Private Exchange Notes bear the same CUSIP number as the Exchange Notes. The
Company shall not have any liability under this Agreement solely as a result of
such Private Exchange Notes not bearing the same CUSIP number as the Exchange
Notes.
The Exchange Offer and the Private Exchange shall not be
subject to any conditions, other than that (i) the Exchange Offer or Private
Exchange, as the case may be, does not violate applicable law or any applicable
interpretation of the staff of the SEC (ii) no action or proceeding shall have
been instituted or threatened in any court or by any governmental agency which
might materially impair the ability of the Company to proceed with the Exchange
Offer or the Private Exchange, and no material adverse development shall have
occurred in any existing action or proceeding with respect to the Company and
(iii) all governmental approvals shall have been obtained, which approvals the
Company deems necessary for the consummation of the Exchange Offer or Private
Exchange. As soon as practicable after the close of the Exchange Offer and/or
the Private Exchange, as the case may be, the Company shall:
(i) accept for exchange all Transfer Restricted Notes
or portions thereof properly tendered and not validly withdrawn
pursuant to the Exchange Offer in accordance with the terms of the
Exchange Offer Registration Statement and the letter of transmittal
which is an exhibit thereto;
(ii) accept for exchange all Notes properly tendered
pursuant to the Private Exchange; and
(iii) deliver, or cause to be delivered, to the Trustee
for cancellation all Transfer Restricted Notes or portions thereof so
accepted for exchange by the Company, and issue, and cause the Trustee
under the Indenture to promptly authenticate and deliver to each
Holder, a new Exchange Note or Private Exchange Note, as the case may
be, equal in principal amount to the principal amount of the Transfer
Restricted Notes surrendered by such Holder and accepted for exchange.
To the extent not prohibited by any law or applicable
interpretation of the staff of the SEC, the Company shall use its best efforts
to complete the Exchange Offer as provided above, and shall comply with the
applicable requirements of the Securities Act, the Exchange Act and other
applicable laws in connection with the Exchange Offer. The Exchange Offer shall
not be subject to any conditions, other than those set forth in the immediately
preceding paragraph. Each Holder of Transfer Restricted Notes who wishes to
exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer
will be required to make certain customary representations in connection
therewith, including representations that such Holder is not an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, that any
Exchange Notes to be received by it will be acquired in the ordinary course of
business and that at the time of the commencement of the Exchange Offer it has
no arrangement with any Person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. The Company shall inform
the Initial Purchasers of the names and addresses of the Holders to whom the
Exchange Offer is made, and the Initial Purchasers shall have the right to
contact such Holders and otherwise facilitate the tender of Transfer Restricted
Notes in the Exchange Offer.
Upon consummation of the Exchange Offer in accordance with
this Section 2(a), the provisions of this Agreement shall continue to apply,
mutatis mutandis, solely with respect to Transfer Restricted Notes that are
Private Exchange Notes and Exchange Notes held by Participating Broker-Dealers,
and the Company shall have no further obligation to register Transfer Restricted
Notes (other than Private Exchange Notes) pursuant to Section 2(b) hereof.
(b) Shelf Registration. If (i) the Company is not permitted to
file the Exchange Offer Registration Statement or to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or SEC
policy, (ii) the Exchange Offer is not for any other reason consummated by the
Target Consummation Date, (iii) any holder of Notes notifies the Company within
a specified time period that (a) due to a change in law or policy, in the
opinion of counsel, it is not entitled to participate in the Exchange Offer, (b)
due to a change in law or policy, in the opinion of counsel, it may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and (x) the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder and (y) such prospectus is not promptly amended or modified in order to
be suitable for use in connection with such resales for such holder and all
similarly situated holders or (c) it is a broker-dealer and owns Notes acquired
directly from the Company or an affiliate of the Company, (iv) the holders of a
majority of the Notes may not resell the Exchange Notes acquired by them in the
Exchange Offer to the public without restriction under the Securities Act and
without restriction under applicable blue sky or state securities laws or (v)
the Exchange Offer shall not have been consummated within 135 days after the
Issue Date (the date of any of (i)-(v), the "Shelf Registration Event Date"),
then the Company shall, at its cost, use its best efforts to cause to be filed a
Shelf Registration Statement prior to the later of (A) 30 days after the Shelf
Registration Event Date or (B) 165 days after the Issue Date and use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the SEC on or prior to 60 days after such obligation arises. Each Holder as to
which any Shelf Registration is being effected agrees to furnish to the Company
all information with respect to such Holder necessary to make any information
previously furnished to the Company by such Holder not materially misleading.
The Company agrees to use its best efforts to keep the Shelf
Registration Statement continuously effective for a period of two years from the
effective date of the Shelf Registration Statement (subject to extension
pursuant to the last paragraph of Section 3 hereof) (or such shorter period that
will terminate when all of the Transfer Restricted Notes covered by such Shelf
Registration Statement have been sold pursuant thereto) or cease to be
outstanding (the "Effectiveness Period"); provided, however, that the
Effectiveness Period in respect of the Shelf Registration Statement shall be
extended to the extent required to permit dealers to comply with the applicable
prospectus delivery requirements of Rule 174 under the Securities Act and as
otherwise provided herein. The Company shall not permit any securities other
than Transfer Restricted Notes to be included in the Shelf Registration. The
Company further agrees, if necessary, to supplement or amend the Shelf
Registration Statement, if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement or by the Securities Act or by any other rules and
regulations thereunder for shelf registrations, and the Company agrees to
furnish to the Holders of Transfer Restricted Notes copies of any such
supplement or amendment promptly after its being used or filed with the SEC.
(c) Expenses. The Company shall pay all Registration Expenses
in connection with the registration pursuant to Section 2(a) or 2(b) hereof and
the reasonable fees and expenses of one counsel, if any, designated in writing
by the Majority Holders to act as counsel for the Holders of the Transfer
Restricted Notes in connection with a Shelf Registration Statement. Except as
provided in the preceding sentence, each Holder shall pay all expenses of its
counsel, underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder's Transfer Restricted Notes
pursuant to the Shelf Registration Statement.
(d) Effective Registration Statement. An Exchange Offer
Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration
Statement pursuant to Section 2(b) hereof will not be deemed to have become
effective unless it has been declared effective by the SEC; provided, however,
that if, after it has been declared effective, the offering of Transfer
Restricted Notes pursuant to a Shelf Registration Statement is interfered with
by any stop order, injunction or other order or requirement of the SEC or any
other governmental agency or court, such Registration Statement will be deemed
not to have been effective during the period of such interference, until the
offering of Transfer Restricted Notes may legally resume. The Company will be
deemed not to have used its best efforts to cause the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
to become, or to remain, effective during the requisite period if it voluntarily
takes any action that would result in any such Registration Statement not being
declared effective or in the Holders of Transfer Restricted Notes covered
thereby not being able to exchange or offer and sell such Transfer Restricted
Notes during that period, unless such action is required by applicable law and
except as otherwise provided in the second paragraph of Section 2(e) below.
(e) Additional Interest. In the event that (i) the applicable
Registration Statement is not filed with the SEC on or prior to the date
specified herein for such filing, (ii) the applicable Registration Statement is
not declared effective on or prior to the date specified herein for such
effectiveness after such obligation arises (the "Effectiveness Target Date"),
(iii) if the Exchange Offer is required to be consummated hereunder, the Company
fails to consummate the Exchange Offer by the Target Consummation Date with
respect to the Exchange Offer Registration Statement or (iv) the applicable
Registration Statement is filed and declared effective during the period
effectiveness is required by Section 2(e) and 3(a) but shall thereafter cease to
be effective or usable without being succeeded immediately by an additional
Registration Statement covering the Transfer Restricted Notes which has been
filed and declared effective (each such event referred to in clauses (i) through
(iv), a "Registration Default"), then the interest rate on the Transfer
Restricted Notes as to which such Registration Default relates will increase
("Additional Interest"), with respect to the each 90-day period while a
Registration Default is continuing immediately following the occurrence of such
Registration Default in an amount equal to 0.25% per annum of the principal
amount of the Notes until all Registration Defaults have been cured, subject to
a maximum amount of 1.00% of the principal amount of the Notes. Upon (w) the
filing of the applicable Registration Statement (in the case of clause (i) of
the preceding sentence), (x) the effectiveness of the applicable Registration
Statement (in the case of clause (ii) of the preceding sentence), (y) the
issuance of Exchange Notes in exchange for all Notes properly tendered and not
withdrawn in the Exchange Offer (in the case of clause (iii) of the preceding
sentence) or (z) the effectiveness of the applicable Registration Statement
which has ceased to be effective (in the case of clause (iv) of the preceding
sentence, Additional Interest as a result of the Registration Default described
in such clause shall cease to accrue (but any accrued amount shall be payable)
and the interest rate on the applicable Notes will revert to the original rate
if no other Registration Default has occurred and is continuing. Additional
Interest shall be computed based on the actual number of days elapsed during
which any such Registration Defaults exist.
The Company shall notify the Trustee within three Business
Days after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "Event Date"). Additional
Interest shall be paid by depositing with the Trustee, in trust, for the benefit
of the Holders of Transfer Restricted Notes, on or before the immediately
following February 15 or August 15, immediately available funds in sums
sufficient to pay the Additional Interest then due. The Additional Interest due
shall be payable on each February 15 and August 15 to the record Holder of Notes
entitled to receive the interest payment to be paid on such date as set forth in
the Indenture. Each obligation to pay Additional Interest shall be deemed to
accrue from and including the day following the applicable Event Date.
3. Registration Procedures. In connection with the obligations
of the Company with respect to the Registration Statements pursuant to Sections
2(a) and 2(b) hereof, the Company shall:
(a) prepare and file with the SEC a Registration
Statement or Registration Statements as prescribed by Sections 2(a) and
2(b) hereof within the relevant time period specified in Section 2
hereof on the appropriate form under the Securities Act, which form (i)
shall be selected by the Company, (ii) shall, in the case of a Shelf
Registration, be available for the sale of the Transfer Restricted
Notes by the selling Holders thereof and (iii) shall comply as to form
in all material respects with the requirements of the applicable form
and include all financial statements required by the SEC to be filed
therewith; and use their best efforts to cause such Registration
Statement to become effective and remain effective in accordance with
Section 2 hereof. The Company shall not file any Registration Statement
or Prospectus or any amendments or supplements thereto in respect of
which the Holders must provide information for inclusion therein
without the Holders being afforded an opportunity to review such
documentation a reasonable time prior to the filing of such document if
the Majority Holders or such Participating Broker-Dealer, as the case
may be, their counsel or the managing underwriters, if any, shall
reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
Effectiveness Period or the Applicable Period, as the case may be; and
cause each Prospectus to be supplemented by any required prospectus
supplement and as so supplemented to be filed pursuant to Rule 424 (or
any similar provision then in force) under the Securities Act, and
comply with the provisions of the Securities Act, the Exchange Act and
the rules and regulations promulgated thereunder applicable to it with
respect to the disposition of all securities covered by each
Registration Statement during the Effectiveness Period or the
Applicable Period, as the case may be, in accordance with the intended
method or methods of distribution by the selling Holders thereof
described in this Agreement (including sales by any Participating
Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify
each Holder of Transfer Restricted Notes, at least three Business Days
prior to filing, that a Shelf Registration Statement with respect to
the Transfer Restricted Notes is being filed and advising such Holder
that the distribution of Transfer Restricted Notes will be made in
accordance with the method selected by the Majority Holders; and (ii)
furnish to each Holder of Transfer Restricted Notes, without charge, as
many copies of each Prospectus, and any amendment or supplement thereto
and such other documents as such Holder may reasonably request, in
order to facilitate the disposition of the Transfer Restricted Notes;
and (iii) subject to the last paragraph of Section 3 hereof, hereby
consent to the use of the Prospectus or any amendment or supplement
thereto by each of the selling Holders of Transfer Restricted Notes in
connection with the offering and sale of the Transfer Restricted Notes
covered by such Prospectus or any amendment or supplement thereto
subject to the limitations on the use thereof provided in Sections 2(b)
and 2(c);
(d) in the case of a Shelf Registration, use its best
efforts to register or qualify, as may be required by applicable law,
the Transfer Restricted Notes under all applicable state securities or
"blue sky" laws of such jurisdictions by the time the applicable
Registration Statement is declared effective by the SEC as any Holder
of Transfer Restricted Notes covered by a Registration Statement shall
reasonably request in advance of such date of effectiveness, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such Holder to consummate the disposition in each
such jurisdiction of such Transfer Restricted Notes owned by such
Holder; provided, however, that the Company shall not be required to
(i) qualify as a foreign corporation or as a broker or dealer in
securities in any jurisdiction where it would not otherwise be required
to qualify but for this Section 3(d), (ii) file any general consent to
service of process or (iii) subject itself to taxation in any such
jurisdiction if it is not so subject;
(e) in the case of (1) a Shelf Registration or (2)
Participating Broker-Dealers who have notified the Company that they
will be utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(t) hereof, notify each
Holder of Transfer Restricted Notes, or such Participating
Broker-Dealers, as the case may be, their counsel, if any, promptly and
confirm such notice in writing (i) when a Registration Statement has
become effective and when any post-effective amendments and supplements
thereto become effective, (ii) of any request by the SEC or any state
securities authority for amendments and supplements to a Registration
Statement or Prospectus or for additional information after the
Registration Statement has become effective, (iii) of the issuance by
the SEC or any state securities authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if the Company receives any
notification with respect to the suspension of the qualification of the
Transfer Restricted Notes or the Exchange Notes to be sold by any
Participating Broker-Dealer for offer or sale in any jurisdiction or
the initiation of any proceeding for such purpose, (v) of the happening
of any event or the failure of any event to occur or the discovery of
any facts or otherwise, during the period a Shelf Registration
Statement is effective which makes any statement made in such
Registration Statement or the related Prospectus untrue in any material
respect or which causes such Registration Statement or Prospectus to
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be
appropriate;
(f) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of a Registration
Statement as soon as practicable;
(g) in the case of a Shelf Registration, furnish to
each Holder of Transfer Restricted Notes, without charge, at least one
conformed copy of each Registration Statement relating to such Shelf
Registration and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(h) in the case of a Shelf Registration, cooperate with
the selling Holders of Transfer Restricted Notes to facilitate the
timely preparation and delivery of certificates not bearing any
restrictive legends representing Notes covered by such Shelf
Registration to be sold and relating to the subsequent transfer of such
Notes; and cause such Transfer Restricted Notes to be in such
denominations (consistent with the provisions of the Indenture) and
registered in such names as the selling Holders may reasonably request
at least two Business Days prior to the closing of any sale of Transfer
Restricted Notes;
(i) in the case of a Shelf Registration or an Exchange
Offer Registration, upon the occurrence of any circumstance
contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or
3(e)(vi) hereof, use their best efforts to prepare a supplement or
post-effective amendment to a Registration Statement or the related
Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of the Transfer Restricted Notes, such Prospectus will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and to
notify each Holder to suspend use of the Prospectus as promptly as
practicable after the occurrence of such an event, and each Holder
hereby agrees to suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or
omission;
(j) obtain a CUSIP number for all Exchange Notes or
Transfer Restricted Notes, as the case may be, not later than the
effective date of a Registration Statement, and provide the Trustee
with certificates for the Exchange Notes or the Transfer Restricted
Notes, as the case may be, in a form eligible for deposit with the
Depositary;
(k) cause the Indenture to be qualified under the Trust
Indenture Act of 1939, as amended, (the "TIA") in connection with the
registration of the Exchange Notes or Transfer Restricted Notes, as the
case may be, cooperate with the Trustee and the Holders to effect such
changes to the Indenture as may be required for the Indenture to be so
qualified in accordance with the terms of the TIA and execute, and use
its best efforts to cause the Trustee to execute, all documents as may
be required to effect such changes, and all other forms and documents
required to be filed with the SEC to enable the Indenture to be so
qualified in a timely manner;
(l) in the case of a Shelf Registration, enter into
such agreements (including underwriting agreements) and take all such
other appropriate actions as are reasonably requested in order to
expedite or facilitate the registration or the disposition of such
Transfer Restricted Notes, and in such connection, (i) make such
representations and warranties to Holders of such Transfer Restricted
Notes with respect to the business of the Company and its subsidiaries
as then conducted and the Registration Statement, Prospectus and
documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if and
when requested; (ii) obtain opinions of counsel to the Company and
updates thereof in form and substance reasonably satisfactory to the
Holders of a majority in principal amount of the Transfer Restricted
Notes being sold, addressed to each selling Holder covering the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Holders;
(iii) obtain "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any
subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data are, or are required
to be, included in the Registration Statement, addressed to the selling
Holders of Transfer Restricted Notes, such letters to be in customary
form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such
other matters as reasonably requested by such selling Holders; and (iv)
if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those
set forth in Section 4 hereof (or such other provisions and procedures
acceptable to the Company and the Holders of a majority in aggregate
principal amount of Transfer Restricted Notes covered by such
Registration with respect to all parties to be indemnified pursuant to
said Section (including, without limitation, such selling Holders). The
above shall be done at each closing in respect of the sale of Transfer
Restricted Notes, or as and to the extent required thereunder;
(m) if (1) a Shelf Registration is filed pursuant to
Section 2(b) or (2) a Prospectus contained in an Exchange Offer
Registration Statement filed pursuant to Section 2(a) is required to be
delivered under the Securities Act by any Participating Broker-Dealer
who seeks to sell Exchange Notes during the Applicable Period, make
available for inspection by each such person who would be an
"underwriter" as a result of either (i) the sale by such person of
Notes covered by such Shelf Registration Statement or (ii) the sale
during the Applicable Period by a Participating Broker-Dealer of
Exchange Notes (provided that a Participating Broker-Dealer shall not
be deemed to be an underwriter solely as a result of it being required
to deliver a prospectus in connection with any resale of Exchange
Notes) and any attorney, accountant or other agent retained by any such
person (collectively, the "Inspectors"), at the offices where normally
kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company
and its subsidiaries (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise any applicable due
diligence responsibilities, and cause the officers, directors and
employees of the Company and its subsidiaries to supply all information
in each case reasonably requested by any such Inspector in connection
with such Registration Statement. Records which the Company determines,
in good faith, to be confidential and any Records which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors
unless (i) the disclosure of such Records is necessary to avoid or
correct a material misstatement or omission in such Registration
Statement, (ii) the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction or (iii)
the information in such Records has been made generally available to
the public. Each selling Holder of such Transfer Restricted Notes and
each such Participating Broker-Dealer will be required to agree that
information obtained by it as a result of such inspections shall be
deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company unless and until
such is made generally available to the public. Each selling Holder of
such Transfer Restricted Notes and each such Participating
Broker-Dealer will be required to further agree that it will, upon
learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the
Company at its expense to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
(n) comply with all applicable rules and regulations of
the SEC and make generally available to its securityholders earnings
statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder (or any similar rule promulgated under the
Securities Act) no later than 60 days after the end of any 12-month
period (or 135 days after the end of any 12-month period if such period
is a fiscal year) (i) commencing at the end of any fiscal quarter in
which Transfer Restricted Notes are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold
to underwriters in such an offering, commencing on the first day of the
first fiscal quarter of the Company after the effective date of a
Registration Statement, which statements shall cover said 12-month
periods;
(o) upon consummation of an Exchange Offer or a Private
Exchange, obtain an opinion of counsel to the Company addressed to the
Trustee for the benefit of all Holders of Transfer Restricted Notes
participating in the Exchange Offer or the Private Exchange, as the
case may be, and which includes an opinion that (i) the Company has
duly authorized, executed and delivered the Exchange Notes and Private
Exchange Notes, and (ii) each of the Exchange Notes or the Private
Exchange Notes, as the case may be, constitute a legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its respective terms (in each case, with customary
exceptions);
(p) if an Exchange Offer or a Private Exchange is to be
consummated, upon proper delivery of the Transfer Restricted Notes by
Holders to the Company (or to such other Person as directed by the
Company) in exchange for the Exchange Notes or the Private Exchange
Notes, as the case may be, the Company shall mark, or cause to be
marked, on such Transfer Restricted Notes and on the books of the
Trustee, the Transfer Agent, the Registrar and the Depositary delivered
by such Holders that such Transfer Restricted Notes are being canceled
in exchange for the Exchange Notes or the Private Exchange Notes, as
the case may be; but in no event shall such Transfer Restricted Notes
be marked as paid or otherwise satisfied solely as a result of being
exchanged for Exchange Notes or Private Exchange Notes in the Exchange
Offer or the Private Exchange, as the case may be;
(q) cooperate with each seller of Transfer Restricted
Notes covered by any Registration Statement participating in the
disposition of such Transfer Restricted Notes and one counsel acting on
behalf of all such sellers in connection with the filings, if any,
required to be made with the NASD;
(r) use its best efforts to take all other steps
necessary to effect the registration of the Transfer Restricted Notes
covered by a Registration Statement contemplated hereby; and
(s) (A) in the case of the Exchange Offer Registration
Statement (i) include in the Exchange Offer Registration Statement a
section entitled "Plan of Distribution," which section shall be
reasonably acceptable to Merrill Lynch, as representative of the
Initial Purchasers, and which shall contain a summary statement of the
positions taken or policies made by the staff of the SEC with respect
to the potential "underwriter" status of any broker-dealer (a
"Participating Broker-Dealer") that holds Transfer Restricted Notes
acquired for its own account as a result of market-making activities or
other trading activities and that will be the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be
received by such broker-dealer in the Exchange Offer, whether such
positions or policies have been publicly disseminated by the staff of
the SEC or such positions or policies, in the reasonable judgment of
Merrill Lynch, as representative of the Initial Purchasers or such
other representative, represent the prevailing views of the staff of
the SEC, including a statement that any such broker-dealer who receives
Exchange Notes for Transfer Restricted Notes pursuant to the Exchange
Offer may be deemed a statutory underwriter and must deliver a
prospectus meeting the requirements of the Securities Act in connection
with any resale of such Exchange Notes, (ii) furnish to each
Participating Broker-Dealer who has delivered to the Company the notice
referred to in Section 3(e), without charge, as many copies of each
Prospectus included in the Exchange Offer Registration Statement, and
any amendment or supplement thereto, as such Participating
Broker-Dealer may reasonably request; (iii) hereby consent to the use
of the Prospectus forming part of the Exchange Offer Registration
Statement or any amendment or supplement thereto, by any Person subject
to the prospectus delivery requirements of the SEC, including all
Participating Broker-Dealers, in connection with the sale or transfer
of the Exchange Notes covered by the Prospectus or any amendment or
supplement thereto, (iv) use their best efforts to keep the Exchange
Offer Registration Statement effective and to amend and supplement the
Prospectus contained therein in order to permit such Prospectus to be
lawfully delivered by all Persons subject to the prospectus delivery
requirements of the Securities Act for such period of time as such
Persons must comply with such requirements in order to resell the
Exchange Notes; provided, however, that such period shall not be
required to exceed 90 days (or such longer period if extended pursuant
to the last sentence of Section 3 hereof) (the "Applicable Period"),
and (iv) include in the transmittal letter or similar documentation to
be executed by an exchange offeree in order to participate in the
Exchange Offer (x) the following provision:
"If the exchange offeree is a broker-dealer holding Transfer
Restricted Notes acquired for its own account as a result of
market-making activities or other trading activities, it will
deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of Exchange Notes
received in respect of such Transfer Restricted Notes pursuant
to the Exchange Offer";
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus
in connection with the exchange of Transfer Restricted Notes, such
broker-dealer will not be deemed to admit that it is an underwriter
within the meaning of the Securities Act; and
(B) in the case of any Exchange Offer Registration Statement,
the Company agrees to deliver, upon request, to the Trustee or to
Participating Broker-Dealers upon consummation of the Exchange Offer
(i) an opinion of counsel substantially in the form attached hereto as
Exhibit A, and (ii) an officers' certificate containing certifications
substantially similar to those set forth in Section 7(d) of the
Purchase Agreement.
The Company may require each seller of Transfer Restricted
Notes as to which any registration is being effected to furnish to the Company
such information regarding such seller and the proposed distribution of such
Transfer Restricted Notes, as the Company may from time to time reasonably
request in writing. The Company may exclude from such registration the Transfer
Restricted Notes of any seller who fails to furnish such information within a
reasonable time (not to exceed 10 Business Days) after receiving such request
and shall be under no obligation to compensate any such seller for any lost
income, interest or other opportunity forgone, or any liability incurred, as a
result of the Company's decision to exclude such seller.
In the case of (1) a Shelf Registration Statement or (2)
Participating Broker-Dealers who have notified the Company that they will be
utilizing the Prospectus contained in the Exchange Offer Registration Statement
as provided in Section 3(t) hereof, that are seeking to sell Exchange Notes and
are required to deliver Prospectuses, each Holder agrees that, upon receipt of
any notice from the Company of the happening of any event of the kind described
in Section 3(e)(ii), 3(e)(iii), 3(e)(v), 3(e)(vi) or 3(e)(vii) hereof, such
Holder will forthwith discontinue disposition of Transfer Restricted Notes
pursuant to a Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or
until it is advised in writing (the "Advice") by the Company that the use of the
applicable Prospectus may be resumed, and, if so directed by the Company, such
Holder will deliver to the Company (at the Company's expense) all copies in such
Holder's possession, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Notes or
Exchange Notes, as the case may be, current at the time of receipt of such
notice. If the Company shall give any such notice to suspend the disposition of
Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a
Registration Statement, the Company shall use its best efforts to file and have
declared effective (if an amendment) as soon as practicable an amendment or
supplement to the Registration Statement and, in the case of an amendment, have
such amendment declared effective as soon as practicable and shall extend the
period during which such Registration Statement shall be maintained effective
pursuant to this Agreement by the number of days in the period from and
including the date of the giving of such notice to and including the date when
the Company shall have made available to the Holders (x) copies of the
supplemented or amended Prospectus necessary to resume such dispositions or (y)
the Advice.
4. Indemnification and Contribution. (a) The Company shall
indemnify and hold harmless each Initial Purchaser, each Holder, each
Participating Broker-Dealer, each underwriter who participates in an offering of
Transfer Restricted Notes, their respective affiliates, each Person, if any, who
controls any of such parties within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, joint or several, as incurred, arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (or any amendment or supplement
thereto), covering Transfer Restricted Notes or Exchange Notes,
including all documents incorporated therein by reference, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, joint or several, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any court or governmental agency or
body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Sections 4(c) and 4(d)
below) any such settlement is effected with the prior written consent
of the Company; and
(iii) against any and all expenses whatsoever, as
incurred (including reasonable fees and disbursements of one counsel
(in addition to any local counsel) chosen by Merrill Lynch, such
Holder, such Participating Broker-Dealer or any underwriter (except to
the extent otherwise expressly provided in Section 4(c) hereof)),
reasonably incurred in investigating, preparing or defending against
any litigation, or any investigation or proceeding by any court or
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under subparagraph (i) or (ii) of this Section
4(a);
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with written information furnished in writing to the Company by or
on behalf of such Initial Purchaser, such Holder, such Participating
Broker-Dealer or any underwriter with respect to such Initial Purchaser, Holder,
Participating Broker-Dealer or underwriter, as the case may be, expressly for
use in the Registration Statement (or any amendment or supplement thereto) or
any Prospectus (or any amendment or supplement thereto) or (ii) contained in any
preliminary prospectus if such Initial Purchaser, such Holder, such
Participating Broker-Dealer or such underwriter failed to send or deliver a copy
of the Prospectus (in the form it was first provided to such parties for
confirmation of sales) to the Person asserting such losses, claims, damages or
liabilities on or prior to the delivery of written confirmation of any sale of
securities covered thereby to such Person in any case where the Company shall
have previously furnished copies thereof to such Initial Purchaser, such Holder,
such Participating Broker-Dealer or such underwriter, as the case may be, in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Notes to such Person and the untrue statement contained in or the
omission from the preliminary prospectus was corrected in the Final Prospectus
(or any amendment or supplement thereto). Any amounts advanced by the Company to
an indemnified party pursuant to this Section 4 as a result of such losses shall
be returned to the Company if it shall be finally determined by a court of
competent jurisdiction in a judgment not subject to appeal or final review that
such indemnified party was not entitled to indemnification by the Company.
(b) Each Holder agrees, severally and not jointly, to
indemnify and hold harmless the Company, each Initial Purchaser, each
underwriter who participates in an offering of Transfer Restricted Notes and the
other selling Holders and each of their respective directors and each Person, if
any, who controls any of the Company, any Initial Purchaser, any underwriter or
any other selling Holder within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, against any and all loss, liability, claim, damage and
expense whatsoever described in the indemnity contained in Section 4(a) hereof,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment or supplement thereto) or any Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such selling Holder with respect to
such Holder expressly for use in the Registration Statement (or any supplement
thereto), or any such Prospectus (or any amendment thereto); provided, however,
that, in the case of the Shelf Registration Statement, no such Holder shall be
liable for any claims hereunder in excess of the amount of net proceeds received
by such Holder from the sale of Transfer Restricted Notes pursuant to the Shelf
Registration Statement; provided, further, however, that for purposes of Section
4(a)(iii), such counsel shall (subject to Section 4(c) hereof) be chosen by the
Company.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 4(a) above, one counsel to all the
indemnified parties shall be selected by Merrill Lynch, and, in the case of
parties indemnified pursuant to Section 4(b) above, counsel to all the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party.
Notwithstanding the foregoing, if it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action (which approval shall not be unreasonably withheld),
unless such indemnified parties reasonably object to such assumption on the
ground that there may be legal defenses available to them which are different
from or in addition to those available to such indemnifying party. If an
indemnifying party assumes the defense of such action, the indemnifying parties
shall not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 4 (whether or not the indemnified parties are actual or
potential parties thereto), unless such settlement, compromise or consent (i)
includes a full and unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
the offer and sale of any Notes and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 4(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Company, the Initial
Purchasers and the Holders, as applicable, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity agreement incurred by the Company, the Initial Purchasers and the
Holders; provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person that was not guilty of such
fraudulent misrepresentation. As between the Company and the Initial Purchasers
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Company on the one hand and of the Holder of Transfer
Restricted Notes, the Participating Broker-Dealer or Initial Purchaser, as the
case may be, on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative fault of the Company on the one hand and the
Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the
Initial Purchasers, as the case may be, on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Holder of Transfer
Restricted Notes, the Participating Broker-Dealer or the Initial Purchasers, as
the case may be, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders of the Transfer Restricted Notes
and the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 4.
For purposes of this Section 4, each affiliate of any Person,
if any, who controls a Holder of Transfer Restricted Notes, an Initial Purchaser
or a Participating Broker-Dealer within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as such other Person, and each director of the Company, each
affiliate of the Company, each executive officer of the Company who signed the
Registration Statement, and each Person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as the Company.
5. Miscellaneous.
(a) Rule 144 and Rule 144A. The Company shall provide to each
Holder such reports as are required under Section 10.24 of the Indenture and,
upon the request of any Holder of Transfer Restricted Notes (a) make publicly
available such information as is necessary to permit sales pursuant to Rule 144
under the Securities Act, (b) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the
Securities Act and it will take such further action as any Holder of Transfer
Restricted Notes may reasonably request, and (c) take such further action, if
any, that is reasonable in the circumstances, in each case, to the extent
required from time to time to enable such Holder to sell its Transfer Restricted
Notes without registration under the Securities Act within the limitation of the
exemptions provided by (i) Rule 144 under the Securities Act, as such rule may
be amended from time to time, (ii) Rule 144A under the Securities Act, as such
rule may be amended from time to time, or (iii) any similar rules or regulations
hereafter adopted by the SEC. Upon the reasonable request of any Holder of
Transfer Restricted Notes, the Company will deliver to such Holder a written
statement as to whether they have complied with such requirements.
(b) No Inconsistent Agreements. The rights granted to the
Holders hereunder do not, and will not for the term of this Agreement in any way
conflict with and are not, and will not during the term of this Agreement be
inconsistent with the rights granted to the holders of the Company's other
issued and outstanding securities under any other agreements entered into by the
Company.
(c) Amendments and Waivers. The provisions of this Agreement,
including provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, otherwise than with the prior written consent of the Company
and the Majority Holders; provided, however, that no amendment, modification, or
supplement or waiver or consent to the departure with respect to the provisions
of Section 4 hereof shall be effective as against any Holder of Transfer
Restricted Notes or the Company unless consented to in writing by such Holder of
Transfer Restricted Notes or the Company, as the case may be.
(d) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 5(d), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the
Company, initially at the Company's address set forth in the Purchase Agreement
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 5(d).
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications
shall be concurrently delivered by the Person giving the same to the Trustee, at
the address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Notes in violation of the terms of the Purchase Agreement or
the Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Notes, in any manner, whether by operation of law or otherwise, such Transfer
Restricted Notes shall be held subject to all of the terms of this Agreement,
and by taking and holding such Transfer Restricted Notes, such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers
and each Holder shall be a third party beneficiary of the agreements made
hereunder between the Company, on the one hand, and the Initial Purchasers, on
the other hand, and shall have the right to enforce such agreements directly to
the extent it deems such enforcement necessary or advisable to protect its
rights or the rights of Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day
refer to New York City time.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) Notes Held by the Company or any of its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held
by the Company or any of their affiliates (as such term is defined in Rule 405
under the Securities Act) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
RCN CORPORATION
By:
-----------------------------------
Name: Bruce C. Godfrey
Title: Executive Vice President
and Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
NATIONSBANC MONTGOMERY SECURITIES, LLC
By: MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:___________________________
Name:
Title:
Exhibit A
Form of Opinion of Counsel
1. Each of the Exchange Offer Registration Statement
and the Prospectus (other than the financial statements, notes or schedules
thereto and other financial and statistical information and supplemental
schedules included or referred to therein or omitted therefrom and the Form T-1,
as to which such counsel need express no opinion), complies as to form in all
material respects with the applicable requirements of the Securities Act and the
applicable rules and regulations promulgated under the Securities Act.
2. In the course of such counsel's review and
discussion of the contents of the Exchange Offer Registration Statement and the
Prospectus with certain officers and other representatives of the Company and
representatives of the independent certified public accountants of the Company,
but without independent check or verification or responsibility for the
accuracy, completeness or fairness of the statements contained therein, on the
basis of the foregoing (relying as to materiality to a large extent upon
representations and opinions of officers and other representatives of the
Company), no facts have come to such counsel's attention which cause such
counsel to believe that the Exchange Offer Registration Statement (other than
the financial statements, notes and schedules thereto and other financial and
statistical information contained or referred to therein and the Form T-1, as to
which such counsel need express no belief), at the time the Exchange Offer
Registration Statement became effective and at the time of the consummation of
the Exchange Offer, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading, or that the Prospectus (other than
the financial statements, notes and schedules thereto and other financial and
statistical information contained or referred to therein, as to which such
counsel need express no belief) contains any untrue statement of a material fact
or omits to state a material fact necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading.
[LETTERHEAD OF DAVIS POLK & WARDWELL]
March 23, 1998
RCN Corporation
105 Carnegie Center
Princeton, New Jersey 08540-6215
Ladies and Gentlemen:
We have acted as special counsel to RCN Corporation, a Delaware
company (the "Company"), in connection with the preparation of a Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the proposed exchange of 9.80% Senior Discount
Notes Due 2008, Series B of the Company (the "New Notes") for any and all of
the Company's issued and outstanding 9.80% Senior Discount Notes Due 2008,
Series A (the "Old Notes") . Capitalized terms used herein have the meanings
set forth in the Registration Statement, unless otherwise defined herein.
We have examined the originals, or certified, conformed or
reproduction copies, of all such records, agreements, instruments and
documents as we have deemed relevant or necessary as the basis for the
opinions hereinafter expressed. In all such examinations, we have relied upon
the genuineness of all signatures, the authenticity of all original or
certified copies and the conformity to original or certified copies of all
copies submitted to us as conformed or reproduction copies. We also have
assumed, with respect to all parties to agreements or instruments relevant
hereto other than the Company, that such parties had the requisite power and
authority (corporate or otherwise) to execute, deliver and perform such
agreements or instruments, that such agreements or instruments have been duly
authorized by all requisite action (corporate or otherwise), executed and
delivered by such parties and that such agreements or instruments are the
valid, binding and enforceable obligations of such parties. As to various
questions of fact relevant to such opinions, we have relied upon, and have
assumed the accuracy of, certificates and oral or written statements and other
information of or from public officials, officers or representatives of the
Company and others.
Based upon the foregoing and subject to the other limitations,
qualifications and assumptions set forth herein, we are of the opinion that,
(i) the Company has duly authorized, executed and delivered the New Notes and
(ii) when the Registration Statement has become effective under the Securities
Act and the New Notes have been duly authenticated by the Trustee in accordance
with the terms of the Indenture and delivered in exchange for the Old Notes in
accordance with the terms of the Indenture, the New Notes will constitute valid
and binding obligations of the Company, enforceable in accordance with their
terms and entitled to the benefits of the Indenture, subject to (A) bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium or other laws now
or hereafter in effect affecting creditors' rights generally, and (B) general
principles of equity (including, without limitation, standards of materiality,
good faith, fair dealing and reasonableness) whether considered in a
proceeding in equity or at law.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York, the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
We hereby consent to the filing of this opinion as an Exhibit
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the Prospectus that is included in the Registration
Statement.
The opinions expressed herein are solely for your benefit and
may not be relied upon for any purpose except as specifically provided for
herein, or relied upon by any other person, firm or corporation for any
purpose, without our prior written consent.
Very truly yours,
/s/ Davis Polk & Wardwell
RCN CORPORATION
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations before income taxes $ 10,711 $ 6,171 $ 6,838 $ (4,068) $(73,522)
-------- -------- -------- -------- --------
Minority interest in income of
consolidated entities .......... (85) (95) (144) -- --
-------- -------- -------- -------- --------
Fixed Charges:
Interest on long-term and
short-term debt including
amortization of debt expense .. 1,167 16,669 16,517 16,046 25,602
-------- -------- -------- -------- --------
Total fixed charges 1,167 16,669 16,517 16,046 25,602
-------- -------- -------- -------- --------
Earnings before income taxes and
fixed charges $ 11,793 $ 22,745 $ 23,211 $ 11,978 $(47,920)
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 10.11 1.36 1.41 0.75 (1.87)
</TABLE>
For purposes of computing the ratio, earnings are income from continuing
operations less minority interest in income of consolidated entities and plus
fixed charges. Fixed charges consist of interest on long- and short-term debt
including amortization of debt expense. The ratio of earnings to fixed charges
for the year ended December 31, 1997 is less than 1 and therefore the earnings
are inadequate to cover the fixed charges by $73,522.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of RCN Corporation
on Form S-4 and the related Prospectus of our report dated March 13, 1998, on
our audits of the consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995. We also consent to the reference to our Firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 20, 1998
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 15, 1998, except for Note 10, as to
which the date is February 20, 1998, in the Registration Statement to be filed
on or about March 23, 1998 and related Prospectus of RCN Corporation for the
registration of 9.8% Senior Discount Notes due 2008, Series B.
/s/ Ernst & Young LLP
Vienna, Virginia
March 19, 1998
___________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
____________________________________________
RCN Corporation
(Exact name of obligor as specified in its charter)
Delaware 22-3498533
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
105 Carnegie Center
Princeton, NJ 08540-6215
(Address of principal executive offices) (Zip Code)
____________________________________________
9.80% Senior Discount Notes due 2008, Series B
(Title of the indenture securities)
___________________________________________________________________
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington,
D.C., 20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty
Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of
Amendment dated February 17, 1969, August 31, 1977, December 31, 1980,
September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see
Exhibit 1 to Form T-1 filed in connection with Registration Statement No.
333-06249, which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996,
in connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to
Form T-1 filed in connection with Registration Statement No. 333-06249, which
is incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 16th day
of March, 1998.
THE CHASE MANHATTAN BANK
By /s/ F.J. Grippo
----------------------------------
F.J. Grippo
Vice President
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business December 31, 1997, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Millions
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ............$ 12,428
Interest-bearing balances ..................................... 3,428
Securities:
Held to maturity securities.......................................... 2,561
Available for sale securities........................................ 43,058
Federal funds sold and securities purchased under agreements
to resell ......................................................... 29,633
Loans and lease financing receivables:
Loans and leases, net of unearned income $129,260
Less: Allowance for loan and lease losses 2,783
Less: Allocated transfer risk reserve ..... 0
--------
Loans and leases, net of unearned income, allowance, and
reserve...................................................... 126,477
Trading Assets ...................................................... 62,575
Premises and fixed assets (including capitalized
leases)............................................................ 2,943
Other real estate owned ............................................. 295
Investments in unconsolidated subsidiaries and
associated companies............................................... 231
Customers' liability to this bank on acceptances outstanding ........ 1,698
Intangible assets.................................................... 1,466
Other assets ........................................................ 10,268
--------
TOTAL ASSETS ........................................................$297,061
========
LIABILITIES
Deposits
In domestic offices ........................................... $94,524
Noninterest-bearing ............................ $39,487
Interest-bearing ............................... 55,037
--------
In foreign offices, Edge and Agreement, subsidiaries
and IBF's.................................................... 71,162
Noninterest-bearing .............................$ 3,205
Interest-bearing ................................ 67,957
Federal funds purchased and securities sold under agreements to
repurchase.......................................................... 43,181
Demand notes issued to the U.S. Treasury ............................. 1,000
Trading liabilities .................................................. 48,903
Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less .................. 3,599
With a remaining maturity of more than one year through three
years......................................................... 253
With a remaining maturity of more than three years.............. 132
Bank's liability on acceptances executed and outstanding.............. 1,698
Subordinated notes and debentures .................................... 5,715
Other liabilities..................................................... 9,896
TOTAL LIABILITIES ....................................................280,063
--------
EQUITY CAPITAL
Perpetual preferred stock and related surplus......................... 0
Common stock ......................................................... 1,211
Surplus (exclude all surplus related to preferred stock)............. 10,291
Undivided profits and capital reserves ............................... 5,502
Net unrealized holding gains (losses) on available-for-sale
securities .......................................................... (22)
Cumulative foreign currency translation adjustments ................... 16
TOTAL EQUITY CAPITAL ..................................................16,998
--------
TOTAL LIABILITIES AND EQUITY CAPITAL ................................$297,061
========
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do
hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the appropriate Federal
regulatory authority and is true to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of
our knowledge and belief has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is
true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR.)
LETTER OF TRANSMITTAL
Offer to Exchange
9.80% Senior Discount Notes Due 2008, Series B (CUSIP #749361AG6)
(Registered Under The Securities Act of 1933)
For Any and All of Its Outstanding
9.80% Senior Discount Notes Due 2008, Series A (CUSIP #749361AE1)
of
RCN CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
[ ], 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY RCN CORPORATION
EXCHANGE AGENT:
THE CHASE MANHATTAN BANK
By Mail, by Overnight Delivery or by Hand:
55 Water Street
Room 234, North Building
New York, New York 10041
Attn: Carlos Esteves
By Facsimile:
212-638-7375 or 212-344-9367
Confirm by Telephone:
Carlos Esteves: 212-638-0828
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE
TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated [ ], 1998 (the
"Prospectus") of RCN Corporation (the "Company") which, together with this
Letter of Transmittal (the "Letter of Transmittal"), describes the Company's
offer (the "Exchange Offer") to exchange $1,000 in principal amount of a new
series of 9.80% Senior Discount Notes due 2008, Series B (CUSIP # 749361 [ ])
(the "New Discount Notes") for each $1,000 in principal amount of outstanding
9.80% Senior Discount Notes due 2008, Series A (CUSIP #749361AE1) (the "Old
Discount Notes"). The terms of the New Discount Notes are identical in all
material respects (including principal amount, interest rate and maturity) to
the terms of the Old Discount Notes for which they may be exchanged pursuant to
the Exchange Offer, except that the offering of the New Discount Notes will have
been registered under the Securities Act of 1933, as amended and, therefore, the
New Discount Notes will not bear legends restricting the transfer thereof.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Discount Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the Certificate Numbers and
Principal Amounts should be listed on a separate signed schedule affixed hereto.
DESCRIPTION OF OLD DISCOUNT NOTES TENDERED HEREWITH
Name(s) and address(es) Aggregate Principal
of Registered Holder(s) Certificate Amount Represented Principal Amount
(Please fill in) Number(s)* By Notes* Tendered**
- ------------------------ ----------- -------------------- ----------------
Total
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by Old Discount Notes. See
Instruction 2.
This Letter of Transmittal is to be used either if certificates for Old
Discount Notes are to be forwarded herewith or if delivery of Old Discount Notes
is to be made by book-entry transfer to an account maintained by the Exchange
Agent at The Depository Trust Company ("DTC"), pursuant to the procedures set
forth in "The Exchange Offer--Book-Entry Transfer" in the Prospectus. Delivery
of documents to a book-entry transfer facility does not constitute delivery to
the Exchange Agent.
Unless the context requires otherwise, the term "Holder" for purposes of
this Letter of Transmittal means any person in whose name Old Discount Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder or any person whose Old
Discount Notes are held of record by DTC who desires to deliver such Old
Discount Notes by book-entry transfer at DTC.
Holders whose Old Discount Notes are not immediately available or who
cannot deliver their Old Discount Notes and all other documents required hereby
to the Exchange Agent on or prior to the Expiration Date may tender their Old
Discount Notes according to the guaranteed delivery procedure set forth in the
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures."
|_| CHECK HERE IF TENDERED OLD DISCOUNT NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH DEPOSITORY TRUST COMPANY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
---------------------------------------------
The Depository Trust Company
Account Number
------------------------------------------------------------
Transaction Code Number
---------------------------------------------------
|_| CHECK HERE IF TENDERED OLD DISCOUNT NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
----------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
---------------------
DTC Account Number
--------------------------------------------------------
If Delivered by Book-Entry Transfer:
Account Number
------------------------------------------------------------
|_| CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name
---------------------------------------------------------------------
Address
-------------------------------------------------------------------
--------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of Old Discount Notes. Subject to, and effective upon, the acceptance for
exchange of the Old Discount Notes tendered herewith, the undersigned hereby
exchanges, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Discount Notes. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent as the true and
lawful agent and attorney-in-fact of the undersigned (with full knowledge that
said Exchange Agent acts as the agent of the undersigned in connection with the
Exchange Offer) to cause the Old Discount Notes to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Discount Notes and to
acquire New Discount Notes issuable upon the exchange of such tendered Old
Discount Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Old Discount Notes,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim. The undersigned also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of tendered Old Discount Notes or transfer ownership of
such Old Discount Notes on the account books maintained by The Depository Trust
Company.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer." The undersigned recognizes
that as a result of these conditions (which may be waived, in whole or in part,
by the Company), as more particularly set forth in the Prospectus, the Company
may not be required to exchange any of the Old Discount Notes tendered hereby
and, in such event, the Old Discount Notes not exchanged will be returned to the
undersigned at the address shown below the signature of the undersigned.
BY TENDERING, EACH HOLDER OF OLD DISCOUNT NOTES REPRESENTS TO THE COMPANY
THAT (i) THE NEW DISCOUNT NOTES ACQUIRED PURSUANT TO THE EXCHANGE OFFER ARE
BEING OBTAINED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON RECEIVING SUCH
NEW DISCOUNT NOTES, WHETHER OR NOT SUCH PERSON IS SUCH HOLDER, (ii) NEITHER THE
HOLDER OF OLD DISCOUNT NOTES NOR ANY SUCH OTHER PERSON HAS AN ARRANGEMENT OR
UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH NEW
DISCOUNT NOTES, (iii) IF THE HOLDER IS NOT A BROKER-DEALER OR IS A BROKER-DEALER
BUT WILL NOT RECEIVE NEW DISCOUNT NOTES FOR ITS OWN ACCOUNT IN EXCHANGE FOR OLD
DISCOUNT NOTES, NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS ENGAGED IN OR
INTENDS TO PARTICIPATE IN A DISTRIBUTION OF THE NEW DISCOUNT NOTES AND (iv)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN "AFFILIATE" OF THE COMPANY
WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). IF THE EXCHANGE OFFEREE IS A BROKER-DEALER (WHETHER OR NOT IT IS ALSO AN
"AFFILIATE") HOLDING OLD DISCOUNT NOTES FOR ITS OWN ACCOUNT ACQUIRED FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, IT
WILL DELIVER A PROSPECTUS MEETING THE REQUIREMENTS OF THE ACT IN CONNECTION WITH
ANY RESALE OF NEW DISCOUNT NOTES RECEIVED IN RESPECT OF SUCH OLD DISCOUNT NOTES
PURSUANT TO THE EXCHANGE OFFER. BY ACKNOWLEDGING THAT IT WILL DELIVER AND BY
DELIVERING A PROSPECTUS MEETING THE REQUIREMENTS OF THE ACT IN CONNECTION WITH
ANY RESALE OF SUCH NEW DISCOUNT NOTES, THE UNDERSIGNED IS NOT DEEMED TO ADMIT
THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE ACT.
All authority herein conferred or agreed to be conferred shall survive the
death, bankruptcy or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered Old Discount Notes may be
withdrawn at any time prior to the Expiration Date.
Certificates for all New Discount Notes delivered in exchange for tendered
Old Discount Notes and any Old Discount Notes delivered herewith but not
exchanged, in each case registered in the name of the undersigned, shall be
delivered to the undersigned at the address shown below the signature of the
undersigned.
TENDERING HOLDER(S) SIGN HERE
- -------------------------------------------------------------------------------
(Signature(s) of Holder(s))
Date 199
---------------------------------------------------------------------- --
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) for Old Discount Notes or by any person(s) authorized to become
registered holder(s) by endorsements and documents transmitted herewith or, if
the Old Discount Notes are held of record by DTC, the person in whose name such
Old Discount Notes are registered on the books of DTC. If signature by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
please set forth the full title of such person.) See Instruction 3.
Name(s)
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please Print)
Capacity
-----------------------------------------------------------------------
(Include Full Title)
Address
------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number
-------------------------------------------------
- -------------------------------------------------------------------------------
(Tax Identification No.)
GUARANTEE OF SIGNATURE(S)
(If Required -- See Instructions 3)
Authorized Signature
-----------------------------------------------------------
Name
---------------------------------------------------------------------------
Title
--------------------------------------------------------------------------
Address
------------------------------------------------------------------------
Name of Firm
-------------------------------------------------------------------
Area Code and Telephone Number
-------------------------------------------------
Date 199
---------------------------------------------------------------------- --
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates
for all physically delivered Old Discount Notes or confirmation of any
book-entry transfer to the Exchange Agent's account at The Depository Trust
Company of Old Discount Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses set
forth herein on or prior to the Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD DISCOUNT
NOTES AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER
AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED,
BE USED.
Holders whose Old Discount Notes are not immediately available or who
cannot deliver their Old Discount Notes and all other required documents to the
Exchange Agent on or prior to the Expiration Date or comply with book-entry
transfer procedures on a timely basis may tender their Old Discount Notes
pursuant to the guaranteed delivery procedure set forth in the Prospectus under
"The Exchange Offer--Guaranteed Delivery Procedures." Pursuant to such
procedure: (i) such tender must be made by or through an Eligible Institution
(as defined therein); (ii) on or prior to the Expiration Date the Exchange Agent
must have received from such Eligible Institution, a letter, telegram or
facsimile transmission setting forth the name and address of the tendering
holder, the names in which such Old Discount Notes are registered, and, if
possible, the certificate numbers of the Old Discount Notes to be tendered; and
(iii) all tendered Old Discount Notes (or a confirmation of any book-entry
transfer of such Old Discount Notes into the Exchange Agent's account at The
Depository Trust Company) as well as this Letter of Transmittal and all other
documents required by this Letter of Transmittal must be received by the
Exchange Agent within five New York Stock Exchange trading days after the date
of execution of such letter, telegram or facsimile transmission, all as provided
in the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures."
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Discount Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS. Tenders of Old Discount Notes will be
accepted in all denominations of $1,000 and integral multiples in excess
thereof. If less than the entire principal amount of Old Discount Notes
evidenced by a submitted certificate is tendered, the tendering holder must fill
in the principal amount tendered in the box entitled "Principal Amount
Tendered." A newly issued certificate for the principal amount of Old Discount
Notes submitted but not tendered will be sent to such holder as soon as
practicable after the Expiration Date. All Old Discount Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
Tenders of Old Discount Notes pursuant to the Exchange Offer are
irrevocable, except that Old Discount Notes tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date. To be
effective, a written, telegraphic or facsimile transmission notice of withdrawal
must be timely received by the Exchange Agent. Any such notice of withdrawal
must specify the person named in the Letter of Transmittal as having tendered
Old Discount Notes to be withdrawn, the certificate numbers of the Old Discount
Notes to be withdrawn, the principal amount of Old Discount Notes delivered for
exchange, a statement that such a holder is withdrawing its election to have
such Old Discount Notes exchanged, and the name of the registered holder of such
Old Discount Notes, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Discount Notes being withdrawn. The Exchange Agent will return the
properly withdrawn Old Discount Notes promptly following receipt of notice of
withdrawal. If Old Discount Notes have been tendered pursuant to the procedure
for book-entry transfer, any notice of withdrawal must specify the name and
number of the account at The Depository Trust Company to be credited with the
withdrawn Old Discount Notes or otherwise comply with The Depository Trust
Company's procedures.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered holder(s) of the Old Discount Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of
certificates without alteration, enlargement or any change whatsoever.
If any of the Old Discount Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Discount Notes registered in different names are
tendered, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of Old
Discount Notes.
When this Letter of Transmittal is signed by the registered holder or
holders of Old Discount Notes listed and tendered hereby, no endorsements of
certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Old Discount Notes listed, such Notes must
be endorsed or accompanied by separate written instruments of transfer or
exchange in form satisfactory to the Company and duly executed by the registered
holder, in either case signed exactly as the name or names of the registered
holder or holders appear(s) on the Old Discount Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Discount Notes are tendered: (i) by a
registered holder of such Old Discount Notes and the certificates for New
Discount Notes to be issued in exchange therefor are to be issued (or any
untendered amount of Old Discount Notes are to be reissued) to the registered
holder; or (ii) for the account of any Eligible Institution.
4. TRANSFER TAXES. The Company shall pay all transfer taxes, if any,
applicable to the transfer and exchange of Old Discount Notes to it or its order
pursuant to the Exchange Offer. If, however, New Discount Notes are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered holder of the Old Discount Notes tendered hereby, or if a
transfer tax is imposed for any reason other than the transfer of Old Discount
Notes to the Company or its order pursuant to the Exchange Offer, the amount of
any such transfer taxes (whether imposed on the registered holder or any other
person) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exception therefrom is not submitted herewith the
amount of such transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Discount Notes listed in this
Letter of Transmittal.
5. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive, in whole or in part, any of the conditions to the Exchange Offer set
forth in the Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any holder whose Old
Discount Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated below for further instructions.
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent
at the address and telephone number set forth below. In addition, all questions
relating to the Exchange Offer, as well as requests for assistance or additional
copies of the Prospectus and this Letter of Transmittal, may be directed to the
Company at 105 Carnegie Center, Princeton, NJ 08540-6215. Attention: Bruce
Godfrey (609) 734-3700.
8. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of Letters of Transmittal or Old
Discount Notes will be resolved by the Company, whose determination will be
final and binding. The Company reserves the absolute right to reject any or all
Letters of Transmittal or tenders that are not in proper form or the acceptance
of which would, in the opinion of the Company's counsel, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to the particular Old Discount Notes covered by any Letter of
Transmittal or tendered pursuant to such letter. None of the Company, the
Exchange Agent or any other person will be under any duty to give notification
of any defects or irregularities in tenders or incur any liability for failure
to give any such notification. The Company's interpretation of the terms and
conditions of the Exchange Offer shall be final and binding.
9. DEFINITIONS. Capitalized terms used in this Letter of Transmittal and
not otherwise defined have the meanings given in the Prospectus.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH
CERTIFICATES FOR OLD DISCOUNT NOTES OR CONFIRMATION OF BOOK-ENTRY
TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF
GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO
THE EXPIRATION DATE.
NOTICE OF GUARANTEED DELIVERY
Offer to Exchange
9.80% Senior Discount Notes Due 2008, Series B (CUSIP #749361AG6)
(Registered Under The Securities Act of 1933)
For Any and All of Its Outstanding
9.80% Senior Notes Due 2008, Series A (CUSIP #749361AE1)
of
RCN CORPORATION
This Notice of Guaranteed Delivery or one substantially equivalent
hereto may be used to accept the Exchange Offer (as defined below) if (i)
certificates for the 9.80% Senior Discount Notes due 2008, Series A (CUSIP
#749361AE1) (the "Old Notes") of RCN Corporation, a Delaware corporation (the
"Company"), are not immediately available, (ii) time will not permit the
holder's Old Notes or other required documents to reach The Chase Manhattan Bank
(the "Exchange Agent") before the Expiration Date (as defined in the Prospectus
referred to below) or (iii) the procedures for book-entry transfer cannot be
completed on a timely basis. This Notice of Guaranteed Delivery may be delivered
by hand or sent by facsimile transmission, overnight courier, telex, telegram or
mail to the Exchange Agent. See "The Exchange Offer--Guaranteed Delivery
Procedures" in the Prospectus dated [ ], 1998 (which, together with the related
Letter of Transmittal, constitutes the "Exchange Offer") of the Company.
<TABLE>
<CAPTION
The Exchange Agent for the Exchange Offer is:
THE CHASE MANHATTAN BANK
<S> <C> <C>
By Hand or Overnight Delivery: Facsimile Transmissions: By Registered Or Certified Mail:
(Eligible Institutions Only)
The Chase Manhattan Bank The Chase Manhattan Bank
55 Water Street 212-638-7375 55 Water Street
Room 234 212-344-9367 Room 234
North Building North Building
New York, New York 10041 New York, New York 10041
To Confirm by Telephone
Attention: or for Information Call: Attention:
Carlos Esteves 212-638-0828 Carlos Esteves
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL.
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(Not to be used for Signature Guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, hereby guarantees to deliver to the Exchange
Agent, at one of its addresses set forth above, either the certificates for all
physically tendered Old Notes, in proper form for transfer, or confirmation of
the book-entry transfer of such Old Notes to the Exchange Agent's account at The
Depository Trust Company ("DTC"), pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with one or more
properly completed and duly executed Letter(s) of Transmittal (or facsimile
thereof) and any other documents required by such Letter of Transmittal, within
five New York Stock Exchange trading days after the date of execution of this
Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
- -------------------------------------------------------------------------------
Name of Firm:____________________________ _________________________________
(Authorized Signature)
Address:_________________________________ Title:___________________________
_________________________________________ Name:____________________________
(Zip Code) (Please type or print)
Area Code and Telephone Number:
_________________________________________ Date:___________________________
Principal Amount of 9.80% Senior Discount
Notes due 2008, Series A (CUSIP #749361AE1): $_________________________________
- -------------------------------------------------------------------------------
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND FULLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
Offer to Exchange
9.80% Senior Discount Notes due 2008, Series B (CUSIP #749361AG6)
(Registered under the Securities Act of 1933)
for Any and All Outstanding
9.80% Senior Discount Notes due 2008, Series A (CUSIP #749361AE1)
of
RCN CORPORATION
To Registered Holders and The Depository Trust Company Participants:
We are enclosing herewith the material listed below relating to the
offer by RCN Corporation, a Delaware corporation (the "Company"), to exchange
its 9.80% Senior Discount Notes due 2008, Series B (CUSIP #749361AG6) (the "New
Notes") pursuant to an offering registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of its issued and
outstanding 9.80% Senior Discount Notes due 2008, Series A (CUSIP #749361AE1)
(the "Old Notes") upon the terms and subject to the conditions set forth in the
Company's Prospectus, dated [ ], 1998, and the related Letter of Transmittal
(which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated [ ], 1998;
2. Letter of Transmittal to the 9.80% Senior Discount Exchange Notes
due 2008;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner; and
5. Letter which may be sent to your clients for whose account you
hold Old Notes in your name or in the name of your nominee, to
accompany the instruction form referred to above, for obtaining
such client's instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the
Exchange Offer will expire at 5:00 p.m., New York City time, on [ ], 1998,
unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder and (iii) neither the holder nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes. If the tendering holder is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, you will represent on behalf of such broker-dealer that the Old Notes
to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledge on behalf
of such broker-dealer that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes, such broker-dealer is not deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
The enclosed Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Owner contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer
or to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 4 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
THE CHASE MANHATTAN BANK
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF RCN CORPORATION OR THE CHASE MANHATTAN BANK OR AUTHORIZE YOU TO USE ANY
DOCUMENT OR MAKE ANY STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE
OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED
THEREIN.
Offer to Exchange
9.80% Senior Discount Notes Due 2008, Series B (CUSIP #749361AG6)
(Registered Under The Securities Act of 1933)
For Any and All of Its Outstanding
9.80% Senior Discount Notes Due 2008, Series A (CUSIP #749361AE1)
of
RCN CORPORATION
To Our Clients:
We are enclosing herewith a Prospectus, dated [ ], 1998, of RCN
Corporation, a Delaware corporation (the "Company"), and a related Letter of
Transmittal (which together constitute the "Exchange Offer") relating to the
offer by the Company to exchange its 9.80% Senior Discount Notes Due 2008,
Series B (CUSIP #749361AG6) (the "New Notes"), pursuant to an offering
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for a like principal amount of its issued and outstanding 9.80% Senior Discount
Notes Due 2008, Series A (CUSIP #749361AE1) (the "Old Notes") upon the terms and
subject to the conditions set forth in the Exchange Offer.
Please note that the Exchange Offer will expire at 5:00 p.m., New York
City time, on [ ], 1998, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
We are the holder of record and/or participant in the book-entry
transfer facility of Old Notes held by us for your account. A tender of such Old
Notes can be made only by us as the record holder and/or participant in the
book-entry transfer facility and pursuant to your instructions. The Letter of
Transmittal is furnished to you for your information only and cannot be used by
you to tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of
the Old Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer. We also request that you confirm that we may on your
behalf make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder and (iii) neither the holder nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes. If the tendering holder is a
broker-dealer that will receive New Notes for its own account in exchange for
Old Notes, we will represent on behalf of such broker-dealer that the Old Notes
to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledge on behalf
of such broker-dealer that it will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such New Notes. By
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes, such broker-dealer is not deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
Very truly yours,
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
RCN CORPORATION
9.80% Senior Discount Notes due 2008, Series A
(CUSIP #749361AE1)
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated [
], 1998 (the "Prospectus") of RCN Corporation, a Delaware corporation (the
"Company"), and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Company's offer (the "Exchange
Offer"). Capitalized terms used but not defined herein have the meaning as
ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Old Notes held by you for the account of
the undersigned.
The aggregate face amount of the Old Notes held by you for the account
of the undersigned is (fill in amount):
$___________ of the 9.80% Senior Discount Notes due 2008,
Series A (CUSIP #749361AE1).
With respect to the Exchange Offer, the undersigned hereby instructs
you (check appropriate box):
|_| To TENDER the following Old Notes held by you for the account of
the undersigned (insert principal amount of Old Notes to be tendered,
if any):
$___________ of the 9.80% Senior Discount Notes due 2008,
Series A (CUSIP #749361AE1).
|_| NOT to TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (i) the
holder is not an "affiliate" of the Company, (ii) any New Notes acquired
pursuant to the Exchange Offer are being acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder and (iii) neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes. If the undersigned is a broker-dealer that will receive New
Notes for its own account in exchange for Old Notes, it represents that such Old
Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes, such broker-dealer is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933, as amended.
SIGN HERE
Name of beneficial owner(s):
------------------------------------------------
Signature(s):
---------------------------------------------------------------
Name(s) (please print):
-----------------------------------------------------
Address:
--------------------------------------------------------------------
----------------------------------------------------------------------------
Telephone Number:
------------------------------------------------------------
Taxpayer Identification or Social Security Number:
--------------------------
----------------------------------------------------------------------------
Date:
------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 222,910
<SECURITIES> 415,603
<RECEIVABLES> 19,949
<ALLOWANCES> 2,134
<INVENTORY> 2,745
<CURRENT-ASSETS> 703,232
<PP&E> 307,759
<DEPRECIATION> 107,419
<TOTAL-ASSETS> 1,150,992
<CURRENT-LIABILITIES> 69,705
<BONDS> 686,103
0
0
<COMMON> 27,495
<OTHER-SE> 329,089
<TOTAL-LIABILITY-AND-EQUITY> 1,150,992
<SALES> 0
<TOTAL-REVENUES> 127,297
<CGS> 0
<TOTAL-COSTS> 184,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,732
<INTEREST-EXPENSE> 25,602
<INCOME-PRETAX> (73,522)
<INCOME-TAX> (20,849)
<INCOME-CONTINUING> (49,181)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,210)
<CHANGES> 0
<NET-INCOME> (52,391)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)
</TABLE>
