<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1998
REGISTRATION NO. 333-55673
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
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 (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
105 CARNEGIE CENTER
PRINCETON, NJ 08540-6215
(609) 734-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE GODFREY
RCN CORPORATION
105 CARNEGIE CENTER
PRINCETON, NJ 08540-6215
(609) 734-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
KEITH L. KEARNEY JONATHAN A. SCHAFFZIN
JULIA K. COWLES CAHILL GORDON & REINDEL
DAVIS POLK & WARDWELL 80 PINE STREET
450 LEXINGTON AVENUE NEW YORK, NEW YORK 10005
NEW YORK, NEW YORK 10017 (212) 701-3000
(212) 450-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, 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(c)
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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 STATEMENT OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS PRELIMINARY PROSPECTUS DATED JUNE 15, 1998
$250,000,000 GROSS PROCEEDS
RCN CORPORATION
[LOGO]
% SENIOR DISCOUNT NOTES DUE 2008 RCN(SM)
THE LIVE WIRE OF
COMMUNICATIONS.
------------
RCN Corporation (the "Company" or "RCN") is hereby offering (the "Offering")
$ aggregate principal amount at maturity of % Senior Discount Notes due
2008 (the "Notes"). The Notes will be issued at a discount to their aggregate
principal amount at maturity and will generate gross proceeds to RCN of
approximately $250 million. The yield to maturity of the Notes is % (computed
on a semi-annual bond equivalent basis), calculated from , 1998. See
"Certain U.S. Federal Income Tax Considerations."
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED
HEREBY.
------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRICE TO UNDERWRITING PROCEEDS TO
AT MATURITY INVESTORS(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Note................ % % % %
- --------------------------------------------------------------------------------
Total................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued original issue discount, if any, from , 1998.
(2) RCN has agreed to indemnify the Underwriters (as defined) against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if issued to and accepted by the Underwriters, and subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject any orders in whole or in part. It is expected that
delivery of the Notes offered hereby will be made in New York, New York on or
about , 1998.
------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
------------
The date of this Prospectus is June , 1998.
<PAGE>
(continued from cover)
Cash interest will not accrue on the Notes prior to , 2003. Thereafter,
cash interest on the Notes will accrue at a rate of % per annum and will be
payable semi-annually in arrears on and of each year, commencing ,
2003. The Notes will be redeemable at the option of RCN, in whole or in part,
at any time on or after , 2003 at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of redemption. In
addition, prior to , 2001, RCN may, at its option, use the net proceeds of
one or more Public Equity Offerings (as defined) yielding gross cash proceeds
of not less than $30 million to redeem up to an aggregate of 35% of the
principal amount at maturity of Notes originally issued at a redemption price
equal to % of the Accreted Value (as defined) at the redemption date of the
Notes so redeemed; provided that at least 65% of the principal amount at
maturity of Notes originally issued would remain outstanding immediately after
giving effect to such redemption. In the event of a Change of Control (as
defined), 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. In
addition, RCN will, subject to certain conditions, be obligated to make an
offer to purchase Notes with the Net Cash Proceeds (as defined) of certain
Asset Sales (as defined). See "Description of the Notes--Certain Covenants."
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
March 31, 1998, the Company had outstanding under the Credit Agreement (as
defined), an aggregate amount of $103 million to which holders of Notes would
have been structurally subordinated. In addition, as of March 31, 1998, RCN
had outstanding $225 million aggregate principal amount of its 10% Senior
Notes due 2007 ("10% Senior Notes"), $367 million accreted value of its 11%
Senior Discount Notes due 2007 ("11 1/8% Senior Discount Notes" and, together
with the 10% Senior Notes, the "1997 Notes") and $356 million accreted value
of its 9.80% Senior Discount Notes due 2008 (the "9.80% Senior Discount Notes"
or the "1998 Notes"). The Notes will rank pari passu with the 1997 Notes and
the 1998 Notes. RCN and its subsidiaries are expected to incur substantial
additional indebtedness. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
There is no established trading market for the Notes and RCN does not intend
to apply for listing on any securities exchange. See "Underwriting."
The Company's Common Stock is traded on the Nasdaq Stock Market ("NASDAQ")
under the symbol "RCNC."
Concurrently with the offering of the Notes being made hereby (the
"Offering"), the Company is offering (the "Common Stock Offering" and,
together with the Offering, the "Offerings"), by means of a separate
prospectus, 9,634,802 shares of Common Stock, par value $1.00 per share (the
"Common Stock"). The consummation of the Offering is conditioned upon the
consummation of the Common Stock Offering.
i
<PAGE>
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 CURRENT AND FUTURE 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 10 OF THIS PROSPECTUS, AND PROSPECTIVE INVESTORS
ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER
SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
ii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere herein. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriters' overallotment option. All share and
per share data, stock option data and market prices (including historical
trading prices) of RCN Common Stock have been restated to reflect the one for
one stock dividend (the "Stock Dividend") declared on March 9, 1998 and paid on
April 3, 1998. Unless the context indicates otherwise, "RCN" or the "Company"
means RCN Corporation and its subsidiaries and joint ventures (including
unconsolidated entities).
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 high density markets. 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. The Company believes
that it is the only publicly-traded facilities-based provider of bundled voice,
video and data services to focus on the residential market in the U.S., and
believes that it will be the first competitive provider in its target markets.
RCN's initial advanced fiber optic networks have been established in selected
markets in the Boston to Washington, D.C. corridor, including New York City,
Boston and its surrounding communities and in the Washington, D.C. area. 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. In
the Boston market RCN operates its advanced fiber optic network through a joint
venture with the Boston Edison Company ("BECO"). The venture is managed and 51%
owned by RCN and is accounted for on a consolidated basis. RCN and BECO are
presently in discussions with respect to the conversion of a portion of BECO's
interest in the BECO joint venture into RCN Common Stock. In the Washington,
D.C. market RCN is developing an advanced fiber optic network through 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"). Starpower is owned 50%
by RCN and 50% by Pepco Communications and is accounted for under the equity
method of accounting. RCN believes that these joint ventures provide it with a
number of important advantages including access to rights of way and the 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, Level 3 Communications, Inc. ("Level 3"), and from the
experience gained by certain of the Company's key employees who participated in
the development of MFS Communications Company, Inc.
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." As of March 31, 1998, the Company had approximately
658,600 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. 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
1
<PAGE>
them to provide the same range of voice, video and data services, including
bundled service options. See "Business--Properties." At March 31, 1998, RCN had
approximately 20,300 total connections attributable to customers connected to
advanced fiber optic networks ("on-net" connections) and had approximately
638,200 connections attributable to customers served through other facilities
("off-net" connections). Off-net connections consist of approximately 227,500
connections attributable to the Company's 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, and approximately 325,000 Internet
service customers gained upon completion of the acquisitions of UltraNet
Communications, Inc. ("UltraNet") and Erols Internet, Inc. ("Erols") in
February 1998. As a result of the Erols and UltraNet acquisitions, RCN is a
leading Internet service provider ("ISP") in the Boston to Washington, D.C.
corridor.
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 "Business--Relationship Among Commonwealth Telephone, RCN and
Cable Michigan." 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 in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a
particularly attractive opportunity to develop advanced fiber optic networks.
The Company continues to evaluate new market areas both within and outside of
the Boston to Washington, D.C. corridor and has recently announced its
intention to develop advanced fiber optic networks in the western United
States. See "Recent Developments." The Company believes that its experience in
the Northeast will provide it with a key strategic advantage when it enters new
markets.
BUSINESS STRATEGY
The Company believes that the opportunity to deploy effectively 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. The Company expects that
the substantial growth of the Internet and demand for high speed data service
will play an important role in the demand for its fiber optic networks. 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. The Company estimates that RCN's loop lengths are a small fraction of
the incumbents. RCN also believes that residential customers will be attracted
to lower prices, broader service
2
<PAGE>
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 deploy
efficiently 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 selected services to customers located near its advanced fiber
networks utilizing existing facilities that are available in advance of network
construction. For example, RCN markets Internet services and provides resold
telephone services in advance of constructing or extending its networks. RCN
also provides wireless video services to approximately 40,859 customers in New
York City (as of March 31, 1998) with a view to extending the advanced fiber
optic network to service many of these existing customers.
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 Communications Company, Inc.
("MFS/WorldCom") (which is now a subsidiary of WorldCom, Inc. ("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. In addition, RCN recently entered into an
agreement with Qwest Communications ("Qwest") under which it will lease fiber
lines from Qwest tying RCN's local networks from Boston to Washington, D.C.
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 June 4, 1998 RCN announced its intention to commence developing advanced
fiber optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor. The Company is targeting selected markets in the
western United States which represent approximately 2% of the geography of the
U.S. but account for approximately 12% of the U.S. telecommunications market
based upon the number of telephone access lines. The Company expects that its
initial west coast network will be developed in the San Francisco Bay Area, a
market that benefits from high density, high per capita income and the highest
Internet usage in the United States. RCN has submitted an application for
competitive local exchange carrier ("CLEC") status in California, has
identified the areas which will be covered by its "open video system" ("OVS")
certification filing and has held initial meetings with several municipalities
in the San Francisco Bay Area to discuss network deployment. The Company also
expects its expansion to include selected markets in or near Southern
California, Las Vegas and Phoenix. As is the case in its existing markets, the
Company intends to focus on high density markets with favorable demographics,
and to apply a subscriber-driven investment strategy, in developing new
markets. The Company believes that its experience in the Northeast will provide
it with a key strategic advantage. Subject to obtaining requisite regulatory
approvals, the Company expects to commence initial network construction in the
San Francisco Bay Area in 1999.
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 direct network deployment in
each target market, and (ii) seeks to establish a customer base in advance of
or concurrently with
3
<PAGE>
its network deployment. As part of this development plan, RCN pre-markets its
services by offering Internet and 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 building its advanced fiber optic network in 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 its target markets (including
the Boston to Washington, D.C. corridor and new markets in the western United
States), 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
expenditure requirements for the period from January 1, 1998 through 1999 will
be approximately $850 million, which represents 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 $550 million in 1999. Additional funds will be required to fund
operating losses during this period. As a result of more rapid deployment of
its fiber optic network, the Erols and UltraNet acquisitions, and the
anticipated development of new markets outside the Boston to Washington, D.C.
corridor, the Company's capital expenditure program is being accelerated. 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 from September 1997 through 2000 in connection with development
of the Boston and Washington, D.C. markets. Immediately following the
consummation of the Offerings, the Company will have approximately $1,368
million of cash and cash equivalents and approximately $64 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. Due to its subscriber driven investment
strategy, should the Company encounter a successful rollout in its initial
markets and/or decide to enter additional markets, the Company may accelerate
the rollout and/or extend the reach of its network; such acceleration could
increase the Company's capital requirements. The proposed development of new
networks in selected markets in the western United States will substantially
increase the Company's capital requirements. The Company's initial network
development plan for expansion into its target market markets in the western
United States will require funding of approximately $350 million (including
operating losses) through the year 2000; however, the actual timing and amount
of capital required may vary materially from the Company's initial estimates.
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 September 30, 1997 (the "Distribution Date"), C-TEC
completed a spin-off transaction by distributing all of the shares of its
subsidiaries, RCN and Cable Michigan, Inc. ("Cable Michigan"), to the holders
of C-TEC Common Equity. The Company, Commonwealth Telephone and Cable Michigan
have entered into certain agreements governing various ongoing relationships
between the three companies, including a distribution agreement and a tax
sharing agreement. See "Business--Relationship Among Commonwealth Telephone,
RCN and Cable Michigan."
----------------
The Company's principal executive offices are located at 105 Carnegie Center,
Princeton, New Jersey, and its telephone number is (609) 734-3700. The Company
maintains a web site at http://www.rcn.com where general information about the
Company is available. Reference to the website shall not be deemed to
incorporate the contents of the website into this Prospectus.
4
<PAGE>
THE OFFERING
Securities Offered...... $ aggregate principal amount at maturity of % of
Senior Discount Notes due 2008. The Notes will be
issued at a discount to their aggregate principal
amount at maturity to yield gross proceeds of
approximately $250,000,000. The yield to maturity of
the Notes will be % (computed on a semi-annual bond
equivalent basis), calculated from , 1998. See
"Certain U.S. Federal Income Tax Considerations."
Maturity Date........... , 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 March 31,
1998, the aggregate amount of indebtedness
outstanding under the Credit Agreement to which
holders of Notes would have been structurally
subordinated was approximately $103 million. In
addition, as of March 31, 1998, RCN had outstanding
$225 million aggregate principal amount of its 10%
Senior Notes, $367 million accreted value of its 11
1/8% Senior Discount Notes and $356 million accreted
value of its 9.80% Senior Discount Notes. RCN and its
subsidiaries are expected to incur substantial
additional indebtedness.
Interest................ Cash interest will not accrue on the Notes prior to
, 2003. Thereafter, cash interest on the Notes
will accrue at a rate of % per annum and will be
payable semi-annually in arrears on each and
of each year, commencing , 2003.
Original Issue For federal income tax purposes, the Notes will be
Discount............... 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 , 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 , 2003
at the redemption prices set forth under "Description
of the Notes--Redemption," plus accrued and unpaid
interest, if any, thereon to the date of redemption.
In addition, prior to , 2001, RCN may use the net
proceeds of one or more Public Equity Offerings 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 (in each case, on a pro rata basis) at a
redemption price equal to % of the Accreted Value
at the redemption date of the Notes so redeemed.
5
<PAGE>
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 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 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 will limit 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 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
Underwriters 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 the
Nasdaq Stock Market.
Common Stock Offering... Concurrently with the Offering being made hereby, the
Company is offering, by means of a separate
prospectus, 9,549,877 shares of its Common Stock. The
consummation of the Common Stock Offering is a
condition to the Offering.
Use of Proceeds......... The net proceeds of the Offering will be
approximately $243 million, after deducting estimated
commissions and offering expenses, and will be used
for expansion and development of advanced fiber optic
network facilities. See "Use of Proceeds."
RISK FACTORS
Prospective investors should carefully consider all of the information in
this Prospectus and, in particular, should evaluate the specific risk factors
set forth under "Risk Factors," beginning on page 10.
6
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The table below sets forth selected historical consolidated financial data
for RCN. Prior to September 30, 1997, the Company operated as part of C-TEC.
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. The selected historical consolidated financial
data for the three month periods ended March 31, 1998 and 1997 and as of March
31, 1998 are derived from and should be read in conjunction with the Company's
unaudited historical consolidated financial statements included elsewhere in
this Prospectus. In the opinion of the Company's management, these three month
consolidated historical financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the unaudited interim periods. The results for such interim
periods are not necessarily indicative of the results for the full year. The
supplemental unaudited financial information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
presents RCN's results of operations as if all domestic joint ventures were
fully consolidated, and shows the ownership share of its domestic joint venture
partners as minority interests. The Company believes that this supplemental
unaudited financial data provides useful disclosure in analyzing its business.
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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- --------------------
1993 1994 1995(1) 1996 1997 1997 1998
-------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales..................... $ 49,504 $ 59,500 $ 91,997 $104,910 $ 127,297 $ 29,677 $ 40,138
Costs and expenses,
excluding depreciation
and amortization......... 30,821 49,747 75,003 79,107 134,967 25,524 48,455
-------- -------- -------- -------- ---------- -------- ----------
EBITDA before nonrecurring
charges(2)............... 18,683 9,753 16,994 25,803 (7,670) 4,153 (8,317)
Nonrecurring charges(3)... -- -- -- -- 10,000 10,000 44,700
Depreciation and
amortization............. 9,922 9,803 22,336 38,881 53,205 12,191 17,691
-------- -------- -------- -------- ---------- -------- ----------
Operating (loss) income... 8,761 (50) (5,342) (13,078) (70,875) (18,038) (70,708)
Interest income........... 17,882 21,547 29,001 25,602 22,824 5,153 12,815
Interest expense.......... (17,127) (16,669) (16,517) (16,046) (25,602) (3,431) (22,735)
Other (expense) income,
net...................... 1,195 1,343 (304) (546) 131 (33) (899)
(Benefit) provision for
income taxes............. 167 2,340 1,119 979 (20,849) (4,800) (11,682)
Equity in loss of
unconsolidated
entities(4).............. -- -- (3,461) (2,282) (3,804) (805) (1,493)
Minority interest in loss
(income) of consolidated
entities(5).............. (85) (95) (144) 1,340 7,296 910 3,586
Extraordinary charge--debt
prepayment penalty, net
of tax of $1,728(6)...... -- -- -- -- (3,210) -- --
Cumulative effect of
changes in
accounting principles(7).. 1,628 (83) -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ----------
Net (loss) income......... $ 12,087 $ 3,653 $ 2,114 $ (5,989) $ (52,391) $(11,444) $ (67,752)
======== ======== ======== ======== ========== ======== ==========
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets.............. $291,634 $568,586(8) $649,610 $628,085 $1,150,992 $592,697 $1,578,232
Long-term debt............ 181,500 154,000 135,250 131,250 686,103 131,250 1,053,324
Shareholders' equity...... 74,329 372,847(8) 394,069 390,765 356,584 362,449 362,283
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AS OF
--------------------------------
6/30/97 9/30/97 12/31/97 3/31/98
SERVICE CONNECTIONS(9) ------- ------- -------- -------
<S> <C> <C> <C> <C>
Advanced Fiber:
Voice........................................ 370 1,909 3,214 4,473
Video........................................ 1,060 4,870 11,784 15,599
Data......................................... 81 326 150 267
------- ------- ------- -------
Subtotal On-Net................................ 1,511 7,105 15,148 20,339
------- ------- ------- -------
Other(10):
Voice(11).................................... 4,672 10,953 24,900 40,447
Video(12).................................... 228,458 229,198 227,619 227,558
Data......................................... -- -- -- 370,271
------- ------- ------- -------
Subtotal Off-Net............................... 233,130 240,151 252,519 638,276
------- ------- ------- -------
Total Service Connections...................... 234,641 247,256 267,667 658,615
======= ======= ======= =======
Advanced Fiber Units Passed.................... 7,940 26,083 44,045 63,386
</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) 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.
(3) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to the
Company's wireless video services, and in 1998 represent nonrecurring costs
of $44,700 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.
(4) 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.
(5) In 1997, the minority interest in (income) loss of consolidated entities
consists of minority losses of the RCN-BECOCOM, LLC 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.
(6) Extraordinary charge represents the fee, net of taxes, paid in connection
with the early prepayment of 9.65% Senior Secured Notes of C-TEC Cable
Systems, Inc. (the "Senior Secured Notes"). 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) 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.
(8) 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.
(9) 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.
(10) RCN classifies connections 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.
(11) 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.
(12) Includes approximately 40,859 wireless connections. "Other" also includes,
among other things, wireline video connections serving the University of
Delaware (4,000 connections at March 31, 1998).
8
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
The following unaudited summary pro forma financial data include adjustments
to the historical statements of operations of the Company for three months
ended March 31, 1998 and the year ended December 31, 1997 as if the
Distribution, borrowings of $110 million under the Credit Agreement, the
offering (the "1997 Notes Offering") of the 10% Senior Notes and the 11 1/8%
Senior Discount Notes, both due 2007 (the "10% Senior Notes" and "11 1/8%
Senior Discount Notes," respectively, and together, the "1997 Notes"), the
acquisition of Erols (the "Acquisition"), the issuance of the 9.80% Senior
Discount Notes due 2008 (the "9.80% Senior Discount Notes" or the "1998
Notes"), the issuance of the Common Stock in the Common Stock Offering and the
issuance of the Notes in the Offering 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
such transactions occurred on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had the Company
been operated as a separate, independent Company during such period, and are
not necessarily indicative of the Company's future results of operations or
financial condition.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 141,273 $ 43,467
Costs and expenses, excluding depreciation and
amortization....................................... 154,032 51,664
Nonrecurring charges................................ 10,000 44,700
Depreciation and amortization....................... 61,421 18,829
--------- --------
Operating (loss).................................... (84,180) (71,726)
Interest income..................................... 14,138 12,815
Interest expense.................................... (131,787) (32,728)
Other (expense) income, net......................... 82 (904)
--------- --------
(Loss) before income taxes.......................... (201,747) (92,543)
(Benefit) for income taxes.......................... (61,794) (16,155)
--------- --------
(Loss) before equity in unconsolidated entities and
minority interest.................................. (139,953) (76,388)
Equity in loss of unconsolidated entities........... (17,224) (3,195)
--------- --------
(Loss) before extraordinary charge and minority
interest in loss of consolidated entities.......... $(157,177) $(79,583)
========= ========
OTHER DATA:
EBITDA before nonrecurring charges(1)............... $ (12,759) $ (8,197)
Capital expenditures................................ $ 90,392 $ 30,798
Connections (at end of period)...................... 593,646 658,615
Full Time Employees (at end of period).............. 1,446 1,606
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
HISTORICAL AS ADJUSTED(2)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, temporary cash investments and short-term
investments........................................ $ 923,000 $1,366,788
Cash restricted for debt service.................... 63,619 63,619
Total assets........................................ 1,578,232 2,029,520
Total long-term debt................................ 1,053,324 1,303,324
Shareholders' equity................................ 362,283 563,571
</TABLE>
- --------
(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) Adjusted to give effect to the Offerings and the application of the
proceeds thereof.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully review the following factors.
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 current and future 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 it expands its
network and customer base. The extent to which the Company 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 and $70,708,000 for the three
months ended March 31, 1998. On a pro forma basis, after giving effect to the
transactions described under "Unaudited Pro Forma Consolidated Financial
Statements," the Company had operating losses after depreciation and
amortization and nonrecurring charges of $84,180,000 for the year ended
December 31, 1997 and $71,726,000 for the three months ended March 31, 1998.
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 network development and operations in its target markets (including
the Boston to Washington, D.C. corridor and new markets in the western United
States), 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 expenditure requirements for the period from January 1, 1998 through
1999 will be approximately $850 million, which represents 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 $550 million in 1999. These capital expenditures do not
include amounts to be funded by the Company's joint venture partners in
connection with the Boston and Washington, D.C. joint ventures. The
10
<PAGE>
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, of which approximately $50.9 million has been
contributed. 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. 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. The joint venture
partners of Starpower are currently negotiating the terms of such
contribution. 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 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 (including those associated with adverse weather
conditions), 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. The proposed development of new networks
in selected markets in the western United States will substantially increase
the Company's capital requirements. The Company's initial network development
plan for expansion into its target markets in the western United States will
require funding of approximately $350 million (including operating losses)
through the year 2000; however, the actual timing and amount of capital
required may vary materially from the Company's initial estimates. 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 March 31, 1998, on a pro forma
basis, after giving effect to the transactions described under "Unaudited Pro
Forma Consolidated Financial Statements," the Company had an aggregate of
approximately $1,303 million of indebtedness outstanding, representing 69.8%
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, 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 principal and
interest on the Company's various debt securities. 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 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.
11
<PAGE>
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 will
permit 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 will permit 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.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
A holder of a Note will be required to include in such holder's income, for
federal income tax purposes, the original issue discount with respect to the
Note as it accrues, although no cash payments of interest on the Notes are
expected to be made until 2003. In addition, if the Notes are applicable high
yield discount obligations, as defined in the Internal Revenue Code, the
Company's deductions with respect to part of such original issue discount will
be deferred until the related payments are made by the Company and the
remainder of such original issue discount will not be deductible. See "Certain
U.S. Federal Income Tax Considerations."
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 access 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. In addition to markets presently being developed, RCN is
continually evaluating other potential markets, both within the Boston to
Washington, D.C. corridor and in non-contiguous areas, for possible network
development. As is the case in its present markets, the Company intends to
evaluate potential markets in terms of population density and favorable
demographics, and to apply a subscriber-driven investment strategy, in
developing new markets. There can be no assurance that the Company will be
able to expand its existing network or to identify and develop new markets.
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.
RCN recently announced its intention to commence developing advanced fiber
optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor, initially in the San Francisco Bay Area. There can
be no assurance that the Company will be able to obtain the necessary
regulatory and other approvals
12
<PAGE>
(including rights-of-way) on a timely basis, or at all. The proposed expansion
into non-contiguous markets could place additional strain on management
resources. Furthermore, although the Company believes that its experience in
the Northeast will provide it with strategic advantages in developing new
markets, there can be no assurance that the Company's experience in the Boston
to Washington, D.C. corridor will be replicated in the western United States.
The Company has experienced significant growth through acquisitions and will
continue to consider acquisition opportunities that arise from time to time.
Such acquisitions may place a significant strain on the Company's resources,
and could subject the Company to additional expenses during the integration
process. 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. 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 telecommunications 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
telecommunications 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 ("LEC") 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
13
<PAGE>
offer and tag-along rights; (3) upon a change of control (as defined below) 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 Telecom Services of Washington, D.C., Inc. ("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 1998 Notes and the Notes (the
"Indentures") are applicable to the joint venture companies, neither the joint
venture companies nor the Company's joint venture partners are parties to the
Indentures and accordingly are not bound to comply with the terms of the
Indentures. A disagreement with its joint venture partners over certain
business actions, including actions related to compliance with the Indentures,
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 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. Sprint recently announced its intention to
construct a high speed voice and data network.
14
<PAGE>
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
and SBC Communications ("SBC") in the western United States), 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 recently announced
merger between SBC and Ameritech Corporation ("Ameritech") may also
potentially increase the competitive environment in the Company's target
markets if SBC continues to pursue a nationwide strategy.
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. The Company is
expected to face significant competition from incumbent video programming
providers in the western United States. 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
15
<PAGE>
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
16
<PAGE>
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 RBOCs 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 (local access and transport area) 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 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, D.C. 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
17
<PAGE>
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. 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 for the Fifth Circuit; if certain
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 and information about 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 and information about the Boston OVS network. In a Memorandum
Opinion Order released on April 28, 1998, the FCC's Cable Services Bureau
granted in part and denied in part Time Warner's petition. RCN has sought
review of certain aspects of this order. 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
18
<PAGE>
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 Administrative Law Judge declared that the Initial Decision
would become effective 50 days after its release unless Bartholdi Cable filed
exceptions to the Initial Decision within 30 days of its release or the FCC
elected to review the case on its own motion. Bartholdi Cable filed exceptions
to the Initial Decision on April 7, 1998. 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 is contesting
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. As at the date of this
Prospectus, RCN 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,
19
<PAGE>
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
20
<PAGE>
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 point of presence (each a
"POP") (affecting only subscribers attempting to use that POP) and in
connection with system-wide services (such as e-mail and news services, which
can affect 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.
Reciprocal Compensation. The Company's interconnection agreements with Bell
Atlantic and other incumbent LECs entitle it, among other things, to collect
reciprocal compensation payments from the incumbent
21
<PAGE>
LECs for local telephone calls terminating on the Company's facilities (as
well as obligating the Company to make similar payments for outbound local
calls it delivers to the incumbent LECs). However, Bell Atlantic and other
incumbent LECs have challenged the application of these reciprocal
compensation provisions to calls terminating at ISP points of presence, based
on the argument that Internet traffic is inherently interstate, not local, in
nature. To date, 18 state PUCs have issued final orders on this issue (some of
which are subject to court appeals), and every such order has affirmed (based
on prior FCC decisions) that local calls to ISPs are subject to reciprocal
compensation. In the Bell Atlantic region, the New York, Pennsylvania,
Maryland, and Virginia PUCs have issued such orders, and a similar case is
pending in Massachusetts. However, there can be no assurance that other state
PUCs will not issue contrary rulings, or that the FCC decisions on which the
favorable rulings are based will not be changed as a result of regulatory,
legislative, or judicial action. In addition, there can be no assurance that
the current reciprocal compensation arrangements will be renewed on their
existing terms when they expire (in most cases, in mid-1999).
Proprietary Rights; Risk of Infringement. The Company 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 the Company's 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 Company's 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.
State and Local Taxes on Internet Services. The Company is currently subject
to certain state and local taxes on certain of its telecommunications, data
and Internet access services. The Company may become subject to additional
state and local taxes on such services as it continues to expand and develop
more services to customers throughout the United States and as more state and
local taxing authorities become familiar with such services. Recognizing the
problem of discriminatory and multiple state taxation for telecommunication or
Internet services, various federal legislative proposals are currently pending
before Congress that, if enacted, would limit the ability of the state or
local governments to impose, assess, or attempt to collect any tax on such
services. For example, the most recent version of the Internet Tax Freedom Act
proposes to impose a three-year national moratorium on certain state and local
taxation of electronic and Internet services and trade and to create a
federally-led task force to develop recommendations for a national solution to
the problem of discriminatory and multiple state taxation for online services.
The Company believes that such proposals, if enacted, could reduce certain
state or local taxes currently imposed on or may later be imposed on the
Company's telecommunications, data and Internet access services. However,
there can be no assurance as to whether or in what form any legislation will
be enacted. In addition, there can be no assurance as to the extent that any
such legislation, if enacted, would relieve the state or local taxes currently
imposed, or would reduce the future state or local taxes that may be imposed,
on the Company's telecommunications, data and Internet access services.
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
22
<PAGE>
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.
CONTROL BY LEVEL 3 TELECOM HOLDINGS, INC.; CONFLICTS OF INTEREST
Level 3 Telecom Holdings, Inc. ("Level 3 Telecom"), formerly Kiewit Telecom
Holdings, Inc., beneficially owns approximately 46% of the RCN Common Stock.
Consequently, Level 3 Telecom effectively has the power to elect a majority of
the Company's directors and to determine the outcome of substantially all
matters to be decided by a vote of shareholders. The control of the Company by
Level 3 Telecom may tend to deter non-negotiated tender offers or other
efforts to obtain control of the Company and thereby deprive shareholders of
opportunities to sell shares at prices higher than those prevailing in the
market. Moreover, a disposition by Level 3 Telecom of a significant portion of
its RCN Common Stock, or the perception that such a disposition may occur,
could affect the trading price of the RCN Common Stock and could affect the
control of the Company. The common stock of Level 3 Telecom is owned 90% by
Level 3 and 10% by David C. McCourt, the Chairman and Chief Executive Officer
of the Company. Mr. McCourt is a member of the Board of Directors of Level 3.
As a result of the Distribution, there exist relationships that may lead to
conflicts of interest. Level 3 Telecom 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, also serves as a director and Chairman and Chief Executive Officer of
Cable Michigan and 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%). In addition, Dennis Spina, Director and President of
Internet Services of RCN, is expected to devote approximately 85-90% of his
time to the affairs of RCN. 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
23
<PAGE>
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. See "Business--
Relationship Among Commonwealth Telephone, RCN and Cable Michigan." The
aforementioned arrangements were 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
The Notes are new securities for which there currently is no established
trading market. Although the Underwriters 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 the Nasdaq Stock
Market.
24
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes and Common Stock
are estimated to be $243 million and $201 million ($237 million if the
overallotment option relating to the Common Stock Offering is exercised),
respectively, after deducting the Underwriters' discounts and commissions and
estimated expenses payable by the Company. The net proceeds from the sale of
the Notes 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. The consummation of the Common Stock Offering
is a condition to the Offering.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an unaudited historical basis and (ii) on an as adjusted
basis, giving effect to the consummation of the Offering and the Common Stock
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 Statement of Operations." 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.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------
AS ADJUSTED
FOR THE OFFERING
AND THE
COMMON STOCK
HISTORICAL OFFERING(1)
---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, temporary cash investments and short-term
investments...................................... $ 923,000 $1,366,788
========== ==========
Cash restricted for debt service.................. $ 63,619 $ 63,619
========== ==========
Credit Agreement(2)............................... $ 103,000 $ 103,000
10% Senior Notes due 2007......................... 225,000 225,000
11 1/8% Senior Discount Notes due 2007(3)......... 367,720 367,720
9.80% Senior Discount Notes due 2008(3)........... 355,752 355,752
% Senior Discount Notes due 2008................ -- 250,000
Capital lease obligations......................... 1,852 1,852
---------- ----------
Total long-term debt.............................. 1,053,324 1,303,324
---------- ----------
Shareholders' equity.............................. 362,283 563,571
---------- ----------
Total capitalization............................ $1,415,607 $1,866,895
========== ==========
</TABLE>
- --------
(1) The consummation of the Offering is conditioned upon the consummation of
the Common Stock Offering.
(2) 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 March 31, 1998, $100,000
had been borrowed under the term credit facility and $3,000 had been
borrowed under the revolving credit facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) These notes were originally recorded at their initial issue price and the
amount reported represents such original issue price plus a ratable
portion of the accrual of the original issue discount.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Prior to September 30, 1997, the Company was operated as part of C-TEC. The
following Unaudited Pro Forma Consolidated Statements of Operations set forth
the historical statements of operations of the Company for the year ended
December 31, 1997 and the three months ended March 31, 1998 and as adjusted
for the Distribution, the acquisition of the 19.9% minority interest in
Freedom, the 1997 Notes Offering, the Erols Acquisition, the 1998 Notes
Offering, the Offering and the Common Stock Offering 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 each
respective period.
Management believes that the assumptions used provide a reasonable basis on
which to present such Unaudited Pro Forma Statements of Operations. The
Unaudited Pro Forma Statements of Operations 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 STATEMENTS OF
OPERATIONS ARE PROVIDED FOR INFORMATION PURPOSES ONLY AND SHOULD NOT BE
CONSTRUED TO BE INDICATIVE OF THE COMPANY'S RESULTS OF OPERATIONS 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.
27
<PAGE>
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 ADJUSTMENTS
LIBERTY/ FOR ISSUANCE FOR THE
ADJUSTMENTS FREEDOM OF THE 1997 ACQUISITION OFFERING AND
RCN FOR ACQUISITION AND 1998 EROLS ADJUSTMENTS THE COMMON
HISTORICAL DISTRIBUTION ADJUSTMENTS NOTES HISTORICAL(8) FOR EROLS STOCK OFFERING
----------- ------------ ----------- ------------ ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........... $ 127,297 $ 36,528 $ (22,552)(9)
Cost and
expenses,
excluding
depreciation and
amortization.... 134,967 49,829 (30,764)(9)
Nonrecurring
charges......... 10,000
Depreciation and
amortization.... 53,205 $ 1,250 (1) 6,360 606 (10)
----------- ------- ------- -------- -------- ---------- ----------
Operating (loss)
income.......... (70,875) (1,250) (19,661) 7,606 --
Interest
income.......... 22,824 $(8,686)(2)
Interest
expense......... (25,602) (5,654)(3) $(85,179)(4) (162) 100 $ (25,750)(14)
10,460 (5)
Other (expense)
income, net..... 131 (49)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before income
taxes........... (73,522) (3,880) (1,250) (85,179) (19,872) 7,706 (25,750)
(Benefit) for
income taxes.... (20,849) (1,358)(6) (437)(7) (29,812)(4) (9,338)(11)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before equity in
unconsolidated
entities and
minority
interest........ (52,673) (2,522) (813) (55,367) (19,872) 17,044 (25,750)
Equity in (loss)
of
unconsolidated
entities........ (3,804) (13,420)(9)
----------- ------- ------- -------- -------- ---------- ----------
(Loss) income
before
extraordinary
charge and
minority
interest in loss
of consolidated
entities........ $ (56,477) $(2,522) $ (813) $(55,367) $(19,872) $ 3,624 $ (25,750)
=========== ======= ======= ======== ======== ========== ==========
Unaudited pro
forma (loss)
before
extraordinary
charge and
minority
interest per
common share.... $ (1.03)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 54,965,716 1,730,648 (12) 9,634,802 (13)
<CAPTION>
PRO FORMA
------------
<S> <C>
Sales........... $ 141,273
Cost and
expenses,
excluding
depreciation and
amortization.... 154,032
Nonrecurring
charges......... 10,000
Depreciation and
amortization.... 61,421
------------
Operating (loss)
income.......... (84,180)
Interest
income.......... 14,138
Interest
expense......... (131,787)
Other (expense)
income, net..... 82
------------
(Loss) income
before income
taxes........... (201,747)
(Benefit) for
income taxes.... (61,794)
------------
(Loss) income
before equity in
unconsolidated
entities and
minority
interest........ (139,953)
Equity in (loss)
of
unconsolidated
entities........ (17,224)
------------
(Loss) income
before
extraordinary
charge and
minority
interest in loss
of consolidated
entities........ $ (157,177)
============
Unaudited pro
forma (loss)
before
extraordinary
charge and
minority
interest per
common share.... $ (2.37)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 66,331,166
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
28
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
ADJUSTMENTS EROLS OFFERING AND
FOR ISSUANCE HISTORICAL ACQUISITION THE COMMON
RCN OF THE 1997 1/1/98- ADJUSTMENTS STOCK
HISTORICAL AND 1998 NOTES 2/28/98(8) FOR EROLS OFFERING PRO FORMA
----------- -------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Sales.................... $ 40,138 $ 8,700 $(5,371)(9) $ 43,467
Cost and expenses,
excluding depreciation
and amortization......... 48,455 8,388 (5,179)(9) 51,664
Nonrecurring acquisition
costs: In-process
technology............... 44,700 -- -- 44,700
Depreciation and
amortization............. 17,691 1,478 (340)(10) 18,829
----------- ------- ------- ------- ---------- -----------
Operating (loss) income.. (70,708) (1,166) 148 -- (71,726)
Interest income.......... 12,815 -- -- 12,815
Interest expense......... (22,735) $(3,492)(4) (164) 101 $ (6,438)(14) (32,728)
Other (expense), net..... (899) (5) -- (904)
----------- ------- ------- ------- ---------- -----------
(Loss) income before
income taxes............. (81,527) (3,492) (1,335) 249 (6,438) (92,543)
(Benefit) for income
taxes.................... (11,682) (1,222)(4) -- (998)(11) (2,253)(14) (16,155)
----------- ------- ------- ------- ---------- -----------
(Loss) income before
equity in unconsolidated
entities and minority
interest................. (69,845) (2,270) (1,335) 1,247 (4,185) (76,388)
Equity in (loss) of
unconsolidated entities.. (1,493) -- (1,702)(9) (3,195)
----------- ------- ------- ------- ---------- -----------
(Loss) before minority
interest in loss of
consolidated entities.... $ (71,338) $(2,270) $(1,335) $ (455) $ (4,185) $ (79,583)
=========== ======= ======= ======= ========== ===========
Unaudited pro forma
(loss) before minority
interest per common
share.................... $ (1.27) $ (1.21)
Weighted average number
of common shares and
common stock
equivalents outstanding.. 56,216,310 9,634,802 (13) 65,851,112
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
29
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statement of Operations assumes 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
share and per share data of RCN Common Stock have been restated to reflect the
Stock Dividend.
(1) Adjustment to reflect the additional depreciation and amortization of
$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 1997. See
Note 4 to the Consolidated Financial Statements in the Company's Form 10-K for
the year ended December 31, 1997.
(2) Adjustment to eliminate interest income of $8,686 for the year ended
December 31, 1997, net of income taxes of $(3,040) 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.
(3) Adjustment to reflect interest expense and amortization of debt issuance
costs of $5,654 for the year ended December 31, 1997, net of income taxes of
$(1,979) on new third party debt of $110,000 which was incurred.
(4) Adjustment to reflect interest expense and amortization of debt issuance
costs related to the issuance of the 1997 and 1998 Notes aggregating $3,492
and $85,179 for the three months ended March 31, 1998 and for the year ended
December 31, 1997, respectively, net of income taxes of $1,222 and $29,812 for
the three months ended March 31, 1998 and for the year ended December 31,
1997, respectively. Interest expense on the 1997 Notes is already included in
the Company's historical results for the entire three months ended March 31,
1998, therefore the pro forma adjustment is correspondingly lower than the
ratable portion of the adjustment for the year ended December 31, 1997.
(5) Adjustment to eliminate interest expense and amortization of debt
issuance costs of $10,460 for the year ended December 31, 1997 and related
income taxes of $3,661 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.
(6) Income tax effects for the distribution adjustments are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
BENEFIT
(PROVISION)
<S> <C>
Elimination of interest expense and amortization of debt
issuance costs on existing outstanding third party debt (see
Note 5)...................................................... $ 3,661
Incurrence of interest expense and amortization of debt
issuance costs on new third party debt (see Note 3).......... (1,979)
Elimination of interest income on outstanding intercompany
notes (see Note 2)........................................... (3,040)
-------
Total....................................................... $(1,358)
=======
</TABLE>
(7) Adjustments to income taxes of $(437) relating to additional
depreciation and amortization in 1997 due to the acquisition of a 19.9%
minority interest in Freedom in March 1997 (see Note 1).
(8) On February 20, 1998, the Company completed the acquisition of Erols,
Washington, D.C.'s largest Internet service provider, for $29,200 in cash,
1,730,648 newly issued shares of RCN Common Stock plus the
30
<PAGE>
assumption and repayment of $5,800 of debt (including payment of accrued
interest). Additionally, the Company is converting approximately 999,000 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 year ended
December 31, 1997. In 1998, the financial results of Erols also are not
consolidated with the Company's historical financial statements for the period
prior to February 20, 1998. The financial information of Erols was provided by
Erols.
(9) Such adjustments include a pro forma allocation of historical operating
results of Erols to the joint venture with PEPCO (see below) 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."
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 $51,937. The joint
venture is accounted for under the equity method of accounting. Additionally,
the Company expects that Starpower will assume the liability for the unearned
revenue related to the subscribers contributed to Starpower.
(10) Such adjustment reflects the change in depreciation and amortization
for the effect of the fair value adjustment of the net assets of Erols
acquired. Amortization of such excess over a five-year period has been
assumed, although a shorter life may result based on the study discussed
below. Also, as discussed below, at least $31,600 is expected to be allocated
to certain in-process technology projects which has resulted in a ratable
reduction of pro forma amortization expense. The Company allocated the
purchase price for Erols (see Note 8) on the basis of the fair market value of
the assets acquired and liabilities assumed. The Company has undertaken a
study to determine such fair market values, including in-process technology.
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. The
amounts preliminarily allocated to subscriber base, goodwill and other
intangible assets have been ratably reduced by the portion of the purchase
price preliminarily allocated to in-process technology of $31,600, which was
recognized as a charge for the quarter ended March 31, 1998. The final
allocation to in-process technology may differ from the preliminary estimate.
(11) Adjustment to reflect the tax effect of the pro forma adjustments,
including the tax effect of the historical results of operations of Erols.
(12) Represents adjustment for shares to be issued in connection with the
acquisition of Erols. (See Note 8.)
(13) Represents adjustment for 9,634,802 additional shares from the issuance
of the Common Stock based upon assumed gross proceeds of $211,388 and using
the closing price of the Company's Common Stock on June 11, 1998.
(14) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the Notes aggregating $6,438 and
$25,750 for the three months ended March 31, 1998 and for the year ended
December 31, 1997, respectively, and related income taxes of ($2,253) for the
three months ended March 31, 1998. No tax benefit was assumed for the year
ended December 31, 1997 since such benefit would result in a material pro
forma net deferred tax asset, the realization of which would be uncertain.
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth selected historical consolidated financial data
for the Company. Prior to September 30, 1997, the Company and the RCN
Businesses were operated as part of C-TEC. The historical consolidated
financial data presented below reflect periods during which the Company did
not operate as an independent company and, accordingly, certain assumptions
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. The
selected historical consolidated financial data for the three month periods
ended March 31, 1997 and 1998 and as of March 31, 1998 and 1997 are derived
from and should be read in conjunction with the Company's unaudited historical
consolidated financial statements included elsewhere in this Prospectus. The
supplemental unaudited financial information set forth in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
presents RCN's results of operations as if all domestic joint ventures were
fully consolidated, and shows the ownership share of its domestic joint
venture partners as minority interests. The Company believes that this
supplemental unaudited financial data provides useful disclosure in analyzing
its business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $ 49,504 $ 59,500 $ 91,997 $104,910 $ 127,297 $ 29,677 $ 40,138
Costs and expenses,
excluding depreciation
and amortization....... 30,821 49,747 75,003 79,107 134,967 25,524 48,455
-------- -------- -------- -------- ---------- -------- ----------
EBITDA before
nonrecurring
charges(1)............. 18,683 9,753 16,994 25,803 (7,670) 4,153 (8,317)
Nonrecurring
charges(2)............. -- -- -- -- 10,000 10,000 44,700
Depreciation and
amortization........... 9,922 9,803 22,336 38,881 53,205 12,191 17,691
-------- -------- -------- -------- ---------- -------- ----------
Operating (loss)
income................. 8,761 (50) (5,342) (13,078) (70,875) (18,038) (70,708)
Interest income......... 17,882 21,547 29,001 25,602 22,824 5,153 12,815
Interest expense........ (17,127) (16,669) (16,517) (16,046) (25,602) (3,431) (22,735)
Other (expense) income,
net.................... 1,195 1,343 (304) (546) 131 (33) (899)
(Benefit) provision for
income taxes........... 167 2,340 1,119 979 (20,849) (4,800) (11,682)
Equity in loss of
unconsolidated
entities............... -- -- (3,461) (2,282) (3,804) (805) (1,493)
Minority interest in
loss (income) of
consolidated entities.. (85) (95) (144) 1,340 7,296 910 3,586
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) $(11,444) $ (67,752)
======== ======== ======== ======== ========== ======== ==========
Ratio of earnings to
fixed charges(3)....... 10.11x 1.36x 1.41x 0.75x -- N/A --
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets............ $291,634 $568,586 $649,610 $628,085 $1,150,992 $592,697 $1,578,232
Long-term debt.......... 181,500 154,000 135,250 131,250 686,103 131,250 1,053,324
Shareholders' equity.... 74,329 372,847 394,069 390,765 356,584 362,449 362,283
</TABLE>
- -------
(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) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to
the Company's wireless video services, and in 1998 represent nonrecurring
costs of $44,700 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.
(3) 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. The
Company's earnings were insufficient to cover fixed charges by $73.5
million for the year ended December 31, 1998 and by $81.5 million for the
three months ended March 31, 1998.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements contained 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 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 high speed 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, and the Company is
developing an advanced fiber network in Washington, D.C. The Company has also
recently announced its intention to develop advanced fiber optic networks in
the western United States. The Company also has hybrid fiber/coaxial cable
television operations in New York (outside New York City), New Jersey and
Pennsylvania, wireless video operations in New York City, and certain other
operations, including Internet as well as local and long distance telephone.
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 the western
United States 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
33
<PAGE>
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.
RCN Corporation is a holding company with limited assets that conducts
substantially all of its operations through subsidiaries and joint ventures.
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
Company's various debt securities. The ability of RCN Corporation'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. The Indentures allow subsidiaries and joint ventures to incur
indebtedness for network buildout costs, which indebtedness may contain
limitations on the subsidiaries' and joint ventures' ability to pay dividends
and distributions to RCN Corporation.
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. Commonwealth
Telephone, 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 Level 3 Telecom. Freedom held the wireless cable
television business of Liberty Cable Television, Inc. ("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.
During the first quarter of 1998, the majority of the Company's advanced
fiber construction activity was concentrated in Somerville, MA, and, to a
lesser extent, New York City. The majority of such construction was
34
<PAGE>
scheduled to be performed by crews of Boston Edison, the Company's joint
venture partner in the Boston market. During the first quarter of 1998, severe
ice storms in nearby territories diverted the crews of utilities such as
Boston Edison as well as most independent contractors in and around those
territories from approximately mid-January until mid-February in order to
provide emergency services for power restoration. The Company is not able to
quantify the effect, if any, that this construction delay will have on its
connections and corresponding results of operations for the immediately
succeeding quarterly periods. The Company's construction activities have
expanded to multiple markets and multiple towns within those markets, and as
such, the Company is less susceptible to delays in executing its operating
plan resulting from weather, political or other external influences; however,
there can be no assurance that such delays will not occur.
SUPPLEMENTAL UNAUDITED FINANCIAL DATA
RCN conducts portions of its business through joint ventures, including its
joint venture with BECO (which is consolidated in RCN's historical results of
operations) and Starpower (which is accounted for under the equity method in
RCN's historical results of operations). The supplemental unaudited financial
information set forth below presents RCN's results of operations as if all
domestic joint ventures were fully consolidated (hereinafter referred to as
"Pro Forma Total RCN"), and shows the ownership share of its domestic joint
venture partners as minority interests. The Company believes that this
supplemental unaudited financial data provides useful disclosure in analyzing
its business.
<TABLE>
<CAPTION>
PRO FORMA TOTAL RCN
YEAR ENDED PRO FORMA TOTAL RCN
DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------- ------------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales:
Voice................. $ 237 $ 830 $ 4,007 $ 431 $ 3,515
Video................. 65,699 87,470 103,371 24,596 26,707
Data.................. -- 4 41 4 5,732
Commercial and other.. 26,061 16,606 19,878 4,646 7,065
-------- -------- -------- ----------- -----------
Total sales............. 91,997 104,910 127,297 29,677 43,019
Costs and expenses,
excluding depreciation
and amortization:
Direct expenses....... 39,604 35,226 51,757 11,287 18,837
Operating, selling,
general and
administrative....... 35,399 43,881 83,422 14,237 33,815
-------- -------- -------- ----------- -----------
EBITDA before
nonrecurring charges... 16,994 25,803 (7,882) 4,153 (9,633)
Depreciation and
amortization........... 22,336 38,881 53,205 12,191 17,691
Nonrecurring charges.... -- -- 10,000 10,000 44,700
-------- -------- -------- ----------- -----------
Operating (loss)........ (5,342) (13,078) (71,087) (18,038) (72,024)
Interest income......... 29,001 25,602 22,824 5,153 13,046
Interest expense........ (16,517) (16,046) (25,602) (3,431) (22,735)
Other income (expense),
net.................... (304) (546) 131 (33) (1,381)
-------- -------- -------- ----------- -----------
(Loss) income before
income taxes........... 6,838 (4,068) (73,734) (16,349) (83,094)
(Benefit) provision for
income taxes........... 1,119 979 (20,849) (4,800) (11,682)
-------- -------- -------- ----------- -----------
(Loss) income before
equity in
unconsolidated
entities, minority
interest and
extraordinary item..... 5,719 (5,047) (52,885) (11,549) (71,412)
Equity in loss of
unconsolidated
entities............... (3,461) (2,282) (3,698) (805) (709)
Minority interest in
loss (income) of
consolidated entities.. (144) 1,340 7,402 910 4,369
-------- -------- -------- ----------- -----------
(Loss) income before
extraordinary item..... 2,114 (5,989) (49,181) $ (11,444) $ (67,752)
Extraordinary charge--
debt prepayment
penalty................ -- -- (3,210) -- --
-------- -------- -------- ----------- -----------
Net (loss) income....... $ 2,114 $ (5,989) $(52,391) $ (11,444) $ (67,752)
======== ======== ======== =========== ===========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA TOTAL RCN PRO FORMA TOTAL RCN
YEAR ENDED DECEMBER 31, AT MARCH 31,
-------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, temporary cash
investments and short-term
investments................... $158,485 $108,674 $638,513 $ 53,137 $ 942,304
Property, plant and equipment.. $173,373 $220,357 $307,920 $227,635 $ 373,587
Accumulated depreciation....... $ 71,293 $ 84,529 $107,419 $ 89,948 $ 119,040
Net property, plant and
equipment..................... $102,080 $135,828 $200,501 $137,687 $ 254,547
Long-term debt
(including current portion)... $161,000 $131,250 $686,103 $131,250 $1,054,418
</TABLE>
RESULTS OF OPERATIONS
The Company has elected to adopt Statement of Financial Accounting Standards
No. 131--"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131") in the first quarter of 1998. The Company's operations involve
developing an advanced fiber network to provide a bundled service package of
voice, video and data services to new customers in high density markets and
migrating as many customers as is economically justified to the single source
network, including customers which were served by the Company's previously
separate lines of business, for which profitability was separately measurable
and monitored. While the Company's chief decision makers monitor the revenue
streams of the various products, operations are managed and financial
performance is evaluated based upon the delivery of multiple services to
customers over a single network. This allows the Company to leverage its
network costs to maximum profitability. As a result, there are many shared
expenses generated by the various revenue streams; because management believes
that any allocation of the expenses incurred on a single network to multiple
revenue streams would be impractical and arbitrary, management does not
currently make such allocations internally. The chief decision makers do,
however, monitor financial performance in a way which is different from that
depicted in the historical general purpose financial statements included in
this Prospectus.
The Company manages operations and evaluates operating financial performance
on a pro forma total RCN basis (shown in the table captioned "Supplemental
Unaudited Financial Data" above), which reflects the consolidation of all
domestic joint ventures, including those not consolidated under generally
accepted accounting principles. The same net loss results on both a historical
and pro forma total RCN basis since the outside ownership of the joint
venture, which is consolidated only in the pro forma total RCN information, is
reflected as minority interest in the pro forma total RCN information. The
discussion which follows addresses results on a pro forma total RCN basis.
Pro Forma Total RCN Three Months ended March 31, 1998 Compared to Three
Months ended March 31, 1997
On a historical basis for the three months ended March 31, 1998, EBITDA
before nonrecurring charge and in-process technology was $(8,317) as compared
to $4,153 for the same period in 1997. Sales increased 35.3% to $40,138 for
the quarter ended March 31, 1998 from $29,677 for the same period in 1997.
Sales. Video sales are comprised primarily of subscription fees for basic,
premium and pay-per-view cable television services; for both wireless and
hybrid fiber/coaxial cable customers in New York, New Jersey and Pennsylvania
which the Company expects to migrate to its advanced fiber networks over time.
Voice sales include local telephone service fees consisting primarily of
monthly line charges, local toll and special features and long distance
telephone service fees, based on minutes of traffic and tariffed rates or
contracted fees. Voice sales include both resold services and traffic over the
Company's own switches. Data sales represent Internet access fees billed at
contracted rates.
Total sales increased $13,342, or 45% to $43,019 for the quarter ended March
31, 1998 from $29,677 for the quarter ended March 31, 1997. The increase was
fueled by higher total service connections which increased 191.3% to
approximately 660,000 at March 31, 1998 from approximately 226,000 at March
31, 1997. The
36
<PAGE>
increase in service connections resulted from expansion of the Company's
advanced fiber network, growth in resold voice connections and the
acquisitions of Erols and UltraNet, which provided approximately 370,000 data
connections. Advanced fiber units passed increased 698.3% to approximately
63,000 units at March 31, 1998 from approximately 8,000 units at March 31,
1997.
Voice revenues increased $3,084 to $3,515 for the quarter ended March 31,
1998 from $431 for the quarter ended March 31, 1997 primarily due to an
increase in off-net connections. Off-net connections were 40,447 and 2,315 at
March 31, 1998 and 1997, respectively.
Video revenue increased $2,111 or 8.6% to $26,707 for the quarter ended
March 31, 1998 from $24,596 for the quarter ended March 31, 1997. The increase
is primarily due to increases of approximately 5,800 average hybrid/fiber
coaxial cable connections and approximately 15,600 advanced fiber video
connections.
Data revenues increased $5,728 to $5,732 for the quarter ended March 31,
1998 from $4 for the quarter ended March 31, 1997 primarily due to the
acquisitions of Erols and UltraNet on February 20, 1998 and February 27, 1998,
respectively. At March 31, 1998, with the acquisitions of Erols and UltraNet,
the Company had 370,271 off-net data connections.
Commercial and other revenues increased $2,419, or 52.1% to $7,065 for the
quarter ended March 31, 1998 from $4,646 for the quarter ended March 31, 1997.
Commercial long distance revenues increased to approximately $5,500 for the
three months ended March 31, 1998 from $4,646 for the same period in 1997. The
increase primarily results from terminating access provided to Commonwealth
Telecom Services, Inc. ("CTSI"), a subsidiary of Commonwealth Telephone. CTSI
is a CLEC which operates in areas adjacent to the traditional service area of
Commonwealth Telephone Company (also a wholly-owned subsidiary of Commonwealth
Telephone). Additionally, commercial and other revenues increased
approximately $1,300 primarily due to an increase in commercial local main
access lines of approximately 8,600 over the same period in 1997.
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 and operating, selling,
general and administrative expenses.
Direct expenses include direct costs of providing services, primarily video
programming and franchise costs, network access fees, and video transmission
licensing fees. Direct expenses increased $7,550, or 66.9% to $18,837 for the
quarter ended March 31, 1998 from $11,287 for the quarter ended March 31,
1997. The increase was the result of both higher sales and a change in the
overall revenue mix to a higher volume of resold voice, which has a lower
margin than the Company's other products. The resold voice increase represents
planned marketing in areas ahead of construction of the advanced fiber network
to build a customer base which is intended to be migrated to the advanced
fiber network. Additionally, direct expenses increased as a result of higher
video programming rates and channel launches.
Operating, selling, general and administrative expenses primarily include
customers service costs, advertising, sales and marketing expenses, plant
maintenance and repair ("technical expenses"), salaries and benefits, and
other corporate overhead. Operating, selling, general and administrative costs
increased $19,578, or 137.5% to $33,815 for the quarter ended March 31, 1998
from $14,237 for the quarter ended March 31, 1997. Advertising costs increased
approximately $6,300 for the quarter ended March 31, 1998 primarily due to an
extensive high visibility multi-media campaign primarily in New York City and
Boston. Customer service costs increased approximately $4,100 or 193.2% for
the quarter ended March 31, 1998 primarily due to increased staff required to
support expanding markets and new service offerings. Telephone expense to
support higher call volumes related to expansion of the customer base, billing
costs for increased customers and facilities expense for expanded staff
comprise the remainder of the customer service cost increase. Technical
expense increased approximately $3,300, or 73%, for the quarter ended March
31, 1998. The increase was primarily due to expenses associated with the
commencement of telephony operations in the Lehigh Valley, Pennsylvania market
and engineering and construction headcount additions made to plan and execute
network expansion. Sales and
37
<PAGE>
marketing costs increased approximately $3,500, or 126.1% for the quarter
ended March 31, 1998. The increase resulted from additional staff, and related
commissions and benefits, to cover the Company's expanding market. The
remaining increase represents higher telemarketing expenses, principally in
the Lehigh Valley, Pennsylvania market for campaigns related to the
commencement of telephony services.
Depreciation and Amortization. Depreciation and amortization is comprised
principally of depreciation related to the Company's advanced fiber network,
its wireless network, and its hybrid fiber/coaxial cable systems; and
amortization of subscriber lists, building access rights and goodwill
resulting primarily from its acquisitions of Freedom, Twin County, Erols and
UltraNet.
Depreciation and amortization was $17,691 for the three month period ending
March 31, 1998 and $12,191 for the three month period ending March 31, 1997.
The increase of $5,500, or 45.1% was the result of a higher depreciable basis
of plant resulting primarily from expansion of the Company's advanced fiber
network. The cost basis of property, plant and equipment on a pro forma total
RCN basis, at March 31, 1998 and 1997 was $373,587 and $227,635, respectively.
Additionally, higher intangible assets resulted from the payment of $15,000 on
March 21, 1997 of contingent consideration applicable to the Company's
original purchase of an 80.1% ownership interest in Freedom and from the
payment of an additional $15,000 on March 21, 1997 to acquire the remaining
19.9% ownership in Freedom. The intangible assets resulting from these
payments were depreciable for the full quarter ended March 31, 1998 but only
from the date of payment for the quarter ended March 31, 1997. The basis of
intangible assets, on a pro forma total RCN basis, was $180,791 and $150,272
at March 31, 1998 and 1997, respectively.
Nonrecurring Charge-Acquisition Costs--In-Process Technology. Acquisition
costs--In-process technology was $44,700 for the quarter ended March 31, 1998.
In connection with the acquisitions of Erols and UltraNet, the Company and an
independent third party are conducting a study for the purpose of allocating
the purchase price paid for Erols and UltraNet. The preliminary results of
this study indicate that at least $44,700 will be allocable to in-process
technology.
The value of in-process technology constitutes that portion of the purchase
price representing future cash flows from those new and developing
technologies expected to displace the current approaches to serving customer
needs in the Internet service field.
Interest Income. Interest income was $13,046 and $5,153 for the three month
periods ended March 31, 1998 and 1997, respectively. The increase of $7,893,
or 153.2% results from higher cash, temporary cash investments and short-term
investments as compared to the same period in 1997. Cash, temporary cash
investments and short-term investments, on a pro forma total RCN basis, were
approximately $942,000 at March 31, 1998 and approximately $53,000 at March
31, 1997. Such increase was due to proceeds from the Company's borrowings
subsequent to March 31, 1997.
Interest Expense. Interest expense primarily represents interest on the
Company's $225,000 of 10% Senior Notes issued in October 1997, its $601,045 of
11 1/8% Senior Discount Notes issued in October 1997, the $25,000 revolving
credit agreement and the $100,000 term credit facility of certain of the
Company's subsidiaries issued in August 1997, and the Company's $567,000 of
9.8% Senior Discount Notes issued in February 1998, along with amortization of
debt acquisition costs related to these financing arrangements. For the
quarter ended March 31, 1998, interest expense was $22,735 as compared to
$3,431 for the quarter ended March 31, 1997. The increase resulted from the
financings placed subsequent to the first quarter of 1997, described above,
offset by a reduction due to the prepayment in September 1997 of $131,250 of
9.65% Senior Secured Notes.
Other Expense. Other expense was $1,381 and $33 for the quarterly periods
ended March 31, 1998 and 1997, respectively. The primary component of other
expense for the quarter ended March 31, 1998 was the write down of certain of
the Company's information technology assets which the Company intends to
replace within the next several months with higher capacity state of the art
products in connection with an overall internal technology upgrade.
38
<PAGE>
Income Tax. The Company's effective income tax rate was a benefit of 14.7%
and 29.5% for the quarters ended March 31, 1998 and March 31, 1997,
respectively. The primary reason for the difference was the charge for in-
process technology for which a benefit is not realizable and correspondingly
was not recorded.
Minority Interest. On a pro forma total RCN basis, for the first quarter of
1998 minority interest of $4,369 primarily represents the 49% interest of BECO
in the loss of RCN-BECOCOM of $3,645 and the 50% interest of PCI in the loss
of Starpower of $783. On a historical basis, Starpower is accounted for under
the equity method. In the first quarter of 1997, minority interest primarily
represents the 19.9% minority interest in the loss of Freedom of $966. The
Company purchased the remaining 19.9% ownership interest in Freedom on March
21, 1997.
Equity in Loss of Unconsolidated Entities. On a pro forma total RCN basis
equity in the loss of unconsolidated entities primarily represents the
Company's share of the losses and amortization of excess cost over net assets
of Megacable. On a historical basis, for the first quarter of 1998, equity in
the loss of unconsolidated entities also includes the Company's 50% interest
in the loss of Starpower of $784.
Pro Forma Total RCN Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996:
On a historical basis, 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. For the year ended December 31, 1997, total sales were $127,297, an
increase of $22,387 or 21.3%, from $104,910 for the year ended December 31,
1996, primarily due to higher total service connections which increased 20.6%
to approximately 268,000 at December 31, 1997 from approximately 222,000 at
December 31, 1996. The increase is due to the commencement of service through
advanced fiber optic network facilities as well as growth in resold voice and
off-net video connections.
Voice revenues increased $3,177 to $4,007 for the year ended December 31,
1997 from $830 for the year ended December 31, 1996. The increase was
primarily due to an increase in off-net connections. Off-net connections were
24,900 and 1,875 at December 31, 1997 and 1996, respectively.
Video revenue increased $15,901 or 18.2% to $103,371 for the year ended
December 31, 1997 from $87,470 for the year ended December 31, 1996. The
increase was due to an increase in off-net video sales principally resulting
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. Additionally, other video sales increased
primarily due to the acquisition of Freedom on August 30, 1996 (the "Freedom
Acquisition"), which resulted in approximately 38,000 wireless video
connections for a full year in 1997 as compared to four months in 1996. The
Company also began providing video service over its advanced fiber network
during 1997 and had approximately 11,800 advanced fiber connections at
December 31, 1997.
Commercial and other revenues increased $3,272, or 19.7% to $19,878 for the
year ended December 31, 1997 from $16,606 for the year ended December 31,
1996. The increase primarily results from terminating access provided to CTSI.
An increase in commercial main access lines of approximately 5,200 over 1996
accounted for approximately $1,100 of the increase in commercial and other
revenue.
Cost and Expenses, Excluding Depreciation and Amortization and Nonrecurring
Charges. For the year ended December 31, 1997, direct expenses were $51,757,
an increase of $16,531 or 46.9% as compared to direct expenses of $35,226 in
1996. The increase is primarily attributable to higher sales and a change in
overall revenue mix to a higher volume of resold voice, which has a lower
margin than the Company's other products. The resold voice increase represents
planned marketing primarily in the Boston and New York City markets ahead of
construction of the advanced fiber network to build a customer base which is
intended to be migrated
39
<PAGE>
to the advanced fiber network. Origination and programming costs increased
approximately $7,200 primarily due to higher video connections, rate increases
and additional channels. The remaining increase in direct costs and expenses
is principally attributable to higher commercial long distance network
capacity in anticipation of volume growth in the Company's markets resulting
in higher recurring costs.
Operating, selling, general and administrative expenses primarily include
customers service costs, advertising, sales and marketing expenses, plant
maintenance and repair ("technical expenses"), salaries and benefits, and
other corporate overhead.
Operating, selling, general and administrative expenses increased $39,541 or
90.1% to $83,422 for the year ended December 31, 1997 from $43,881 for the
year ended December 31, 1996. Advertising costs increased approximately $9,000
for the year ended December 31, 1997 primarily due to a high visibility multi-
media campaign to promote name recognition primarily in New York City and
Boston. Customer service costs increased approximately $4,100, or 60.3%
primarily related to headcount additions to support the increase in the
customer base and to meet the Company's objectives for world class customer
service. Technical expense increased approximately $8,300, or 75.1% for the
year ended December 31, 1997. The increase is primarily related to salaries
and benefits associated with increased network engineering staff, responsible
for planning the development and construction of the advanced fiber network,
and increased installation and repair technicians. Sales and marketing costs
increased approximately $8,500, or 116.7%, for the year ended December 31,
1997. The increase relates to higher sales staff to increase penetration in
the Company's markets, higher marketing staff to monitor and coordinate the
Company's direct advertising efforts and plan sales promotions and to higher
telemarketing expenses. The remaining increase in operating, selling, general
and administrative expenses is attributable to several factors including costs
associated with the spin-off of the Company from C-TEC. Additionally, in
connection with the Distribution (Note 1), 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 defined pension benefits 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 underlying liabilities were also
allocated. 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. Such gain did not recur in 1997.
Depreciation and Amortization. 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 (Note 19).
Nonrecurring Charges. Nonrecurring charges of $10,000 in 1997 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
(Note 10).
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
40
<PAGE>
$601,045 aggregate principal amount at maturity of 11 1/8% Senior Discount
Notes placed in October 1997 (Note 10). This was partially offset by lower
interest expense resulting from the required principal payment in December
1996 of $18,750 on the 9.65% Senior Secured Notes. Additionally, the Company
paid $922 to Level 3 Telecom Holdings, Inc. ("Level 3 Telecom") in 1996 in
connection with the Company's August 1996 acquisition of Level 3 Telecom's
80.1% interest in Freedom. This portion of the consideration represents an
amount to compensate Level 3 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 after minority interest and equity in
unconsolidated entities before income 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 $6,062 primarily as a result of the minority share of the losses of
the BECO joint venture (Note 7), 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 and the minority share of the losses of the PEPCO
joint venture which began operations in 1997, and which is consolidated in the
pro forma total RCN statements but not the historical statements, was $106.
Equity in loss of Unconsolidated Entities. The Company's equity in the
(loss) of unconsolidated entities was ($3,698) 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 Megacable's 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 (Note 10). The early
extinguishment of the Senior Secured Notes resulted in an extraordinary charge
of $3,210, net of taxes.
41
<PAGE>
Pro Forma Total RCN Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
On a historical basis, 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 the year ended December 31, 1996, total sales were $104,910, an
increase of $12,913 or 14.0% from $91,997 for the year ended December 31,
1995. Video sales increased $21,771, or 33.1% to $87,470 in 1996 from $65,699
in 1995, 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 sales in 1996. The Pennsylvania cable system serves
approximately 74,000 subscribers in the Greater Lehigh Valley area of
Pennsylvania. The remaining increase in video 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. The 14.0% increase
in total 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 incremental five months revenue as compared to
incremental seven months revenue in 1995.
Commercial and other revenues decreased $9,455, or 36.3%, to $16,606 in 1996
from $26,061 in 1995 principally as a result of termination of AT&T Tariff 12
resale services in the second quarter of 1995.
Cost and Expenses, Excluding Depreciation and Amortization and Nonrecurring
Charges. For the year ended December 31, 1996, direct expenses were $35,226, a
decrease of $4,378 or 11.1% as compared to direct expenses of $39,604 in 1995.
Lower costs associated with the reduction in AT&T Tariff 12 resale services
were partially offset primarily by higher origination, programming and
franchise costs principally resulting from the acquisition of the Pennsylvania
cable system, the Freedom Acquisition, other subscriber growth, channel
additions and programming fee increases.
Operating, selling, general and administrative expenses increased $8,482 or
24.0% to $43,881 for the year ended December 31, 1996 from $35,399 for the
year ended December 31, 1995. Customer service costs increased approximately
$2,700 or 66.1% primarily due to increased staff to support the start-up and
expected growth of bundled service operations in New York City and Boston.
Technical expenses increased approximately $3,000 or 38.3% primarily as a
result of the Freedom Acquisition in August 1996. Additionally, technical
expense increased as a result of the acquisition of the Pennsylvania cable
system in May 1995, resulting in consolidation for seven months in 1995 as
compared to a full year in 1996. Sales and marketing costs increased
approximately $1,500 or 26.6% for the year ended December 31, 1996. The
increase is primarily related to the Freedom Acquisition and the start-up of
sales and marketing efforts for the bundled service product in New York City
and Boston. The remaining increase in operating, selling, general and
administrative expenses is comprised of an increase of approximately $250 in
advertising, the Company's allocable share of costs associated with
investigation of the feasibility of various restructuring alternatives of C-
TEC to enhance shareholder value, and other increases in general and
administrative expenses of approximately $3,900 resulting from the Freedom
Acquisition. These other increases were partially offset by the Company's
allocable share of the gain on the partial curtailment and settlement of C-
TEC's defined benefit pension plan of $3,437.
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 the
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.
42
<PAGE>
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 Level 3
Telecom, the Company's controlling shareholder, in connection with the Freedom
Acquisition. This portion of the consideration represents an amount to
compensate Level 3 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 its target markets (including
markets in the Boston to Washington, D.C. corridor and new markets in the
western United States), 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 expenditure requirements for the period from
January 1, 1998 through 1999 will be approximately $850 million, which
represents 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 $550 million in 1999.
Additional funds will be required to fund operating losses during the period.
As a result of more rapid deployment of its fiber optic network, the Erols and
UltraNet acquisitions, and the anticipated development of new markets outside
the Boston to Washington, D.C. corridor, certain aspects of the Company's
capital expenditure program is being accelerated. To build out its target
markets 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 direct network deployment 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
Internet and 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
43
<PAGE>
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 from
September 1997 through 2000 of which approximately $50,900 has been
contributed.
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, and/or decide to enter new markets, the Company may
accelerate the rollout and/or extend the reach of its network; such
acceleration could increase the Company's capital requirements. The proposed
development of new networks in selected markets in the western United States
will substantially increase the Company's capital requirements. The Company's
initial network development plan for expansion into its target market markets
in the western United States will require funding of approximately $350
million (including operating losses) through the year 2000; however, the
actual timing and amount of capital required may vary materially from the
Company's initial estimates. 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 and potentially beyond the
Boston to 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. RCN and BECO are presently in discussions with respect to the
conversion of a portion of BECO's interest in the BECO joint venture into RCN
Common Stock.
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.
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 $601,045 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,000 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 $350,588 in gross proceeds from an offering of $567,000
principal amount at maturity of 9.80% Senior Discount Notes, due in 2008. The
Indentures which govern the 1997 Notes and the 1998 Notes contain similar
provisions. The Chase Manhattan Bank acts as Trustee for each of the
Indentures. The 1997 Notes and the 1998 Notes are general senior unsecured
obligations of RCN. The 9.80% Senior Discount Notes will mature on February
15, 2008. The 9.80% Senior Discount Notes will not bear cash interest prior to
February 15, 2003. The 1997 Notes will mature on October 15, 2007. Interest on
the 10% Senior Notes are 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 11 1/8% Senior Discount Notes will not bear cash interest prior to
October 15, 2002.
44
<PAGE>
The 9.80% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of RCN. The 9.80% Senior
Discount Notes may be redeemed at redemption prices starting at 104.900% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest. The 1997 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. 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.
RCN may, at its option, use the net proceeds of certain offerings of RCN
Common Stock to redeem up to an aggregate of 35% of the aggregate principal
amount at maturity of the debt securities issued under the Indentures at a
certain premium. Upon the occurrence of a change of control, RCN must make an
offer to purchase all of the debt securities issued under the Indentures then
outstanding at a premium.
The Indentures contain 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.
RCN Cable and certain of its subsidiaries have in place secured credit
facilities 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 March 31,1998, $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 March 31, 1998,
$3,000 principal was outstanding under the Revolving Credit Facility.
Revolving loans may be repaid and reborrowed from time to time. All borrowings
under the Credit Agreement will be pari passu and will be secured under a
common collateral package.
The interest rate on the Credit Agreement 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 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. In addition, the Borrowers are subject to a prohibition on
granting negative pledges and the Borrowers must apply certain cash proceeds
realized from certain asset sales, certain payments under insurance policies
and certain incurrences of additional debt to repay the Revolving Credit
Facility. The Credit Agreement requires the Borrowers 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 also includes customary events of
default.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At March 31, 1998 after giving effect to
the Offering, the Company had an aggregate of approximately $1,303,000 of
indebtedness outstanding, and the ability to borrow up to an additional
$22,000 under the Credit Agreement.
45
<PAGE>
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.
On a historical basis, for the quarter ended March 31, 1998, the Company's
net cash provided by operating activities was $8,277 comprised primarily of a
net loss of $(67,752) adjusted by non-cash depreciation and amortization of
$17,691, other non-cash items totaling $46,310, working capital changes of
$8,592 and changes in long-term unearned revenue of $2,248. Net cash used in
investing activities of $(76,279) consisted primarily of purchase of short-
term investments of $77,614, additions to property, plant and equipment of
$28,064, an investment in an unconsolidated joint venture of $12,500 and
acquisitions of $40,717 (primarily the acquisitions of Erols and UltraNet),
partially offset by sales and maturities of short-term investments of $82,014.
Net cash provided by financing activities of $356,854 consisted primarily of
the issuance of long-term debt of $350,588 and contributions from a minority
interest partner of $11,025, partially offset by payments made for debt
financing costs of $5,652.
On a historical basis, 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.
On a historical basis, 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 $38,548, 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'
46
<PAGE>
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 management information
systems, 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.
47
<PAGE>
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 high density markets. 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. The Company believes that it is the only publicly-traded
facilities- based provider of bundled voice, video and data services to focus
on the residential market in the U.S., and believes that it will be the first
competitive provider in its target markets.
RCN's initial advanced fiber optic networks have been established in
selected markets in the Boston to Washington, D.C. corridor, including New
York City, Boston and its surrounding communities and in the Washington, D.C.
area. 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. In the Boston market RCN operates its advanced fiber optic
network through a joint venture with BECO. The venture is managed and 51%
owned by RCN and is accounted for on a consolidated basis. RCN and BECO are
presently in discussions with respect to the conversion of a portion of BECO's
interest in the BECO joint venture into RCN Common Stock. In the Washington,
D.C. market RCN is developing an advanced fiber optic network through a joint
venture named Starpower with Pepco Communications, an indirect wholly owned
subsidiary of PEPCO. Starpower is owned 50% by RCN and 50% by Pepco
Communications and is accounted for under the equity method of accounting. RCN
believes that these joint ventures provide it with a number of important
advantages including access to rights of way and the 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, Level 3, and from the experience gained by certain of the
Company's key employees who participated in the development of MFS
Communications Company, Inc.
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." As of March 31, 1998, the Company had approximately
658,600 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. 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--Properties." At March 31, 1998, RCN
had approximately 20,300 total connections attributable to customers connected
to advanced fiber optic networks ("on-net" connections) and had approximately
638,200 connections attributable to customers served through other facilities
("off-net" connections). Off-net corrections consist of approximately 227,500
connections attributable to the Company's 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, and approximately 325,000 Internet service
customers gained upon completion of the acquisitions of UltraNet and Erols in
February 1998. As a result of the Erols and UltraNet acquisitions, RCN is a
leading ISP in the Boston to Washington, D.C. corridor.
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
48
<PAGE>
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 "--Relationship Among Commonwealth Telephone, RCN and Cable Michigan." 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 in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a
particularly attractive opportunity to develop advanced fiber optic networks.
The Company continues to evaluate new market areas both within and outside of
the Boston to Washington, D.C. corridor. The Company believes that its
experience in the Northeast will provide it with a key strategic advantage
when it enters new markets.
BUSINESS STRATEGY
The Company believes that the opportunity to deploy effectively advanced
fiber optic networks and to compete with incumbent telephone and cable
television service providers results from several key factors, including the
broad demand for 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. The Company expects
that the substantial growth of the Internet and demand for high speed data
service will play an important role in the demand for its fiber optic
networks. 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. The Company estimates that RCN's loop lengths are a small fraction
of that of the incumbents. 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 deploy
efficiently 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 selected services to customers located near its advanced fiber
networks utilizing existing facilities that are available in advance of
network construction. For example, RCN markets Internet services and provides
resold telephone services in advance of constructing or extending its
networks. RCN also provides wireless video services to approximately 40,859
customers in New York City (as of March 31, 1998) with a view to extending the
advanced fiber optic network to service many of these existing customers.
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
49
<PAGE>
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. In addition, RCN recently entered into an agreement with Qwest
under which it will lease fiber lines from Qwest tying RCN's local networks
from Boston to Washington, D.C.
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.
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
--------------------------------
6/30/97 9/30/97 12/31/97 3/31/98
SERVICE CONNECTIONS(1) ------- ------- -------- -------
<S> <C> <C> <C> <C>
Advanced Fiber:
Voice........................................ 370 1,909 3,214 4,473
Video........................................ 1,060 4,870 11,784 15,599
Data......................................... 81 326 150 267
------- ------- ------- -------
Subtotal On-Net................................ 1,511 7,105 15,148 20,339
------- ------- ------- -------
Other(2):
Voice(3)..................................... 4,672 10,953 24,900 40,447
Video(4)..................................... 228,458 229,198 227,619 227,558
Data......................................... -- -- -- 370,271
------- ------- ------- -------
Subtotal Off-Net............................... 233,130 240,151 252,519 638,276
------- ------- ------- -------
Total Service Connections...................... 234,641 247,256 267,667 658,615
======= ======= ======= =======
Advanced Fiber Units Passed.................... 7,940 26,083 44,045 63,386
</TABLE>
- --------
(1) Because RCN delivers multiple services, the Company accounts for its
customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections," purchased.
Consequently, a single customer purchasing local telephone, video
programming and Internet access constitutes three connections.
(2) RCN classifies connections 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.
(3) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.
(4) Includes approximately 40,859 wireless connections. "Other" also includes,
among other things, wireline video connections serving the University of
Delaware (4,000 connections at March 31, 1998).
50
<PAGE>
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 March 31,
1998, RCN had approximately 4,473 telephone service connections on its
advanced fiber optic networks and approximately 40,447 customers for resold
telephone service.
RCN Long Distance Company provides long distance telephone services,
including outbound, inbound, calling card and operator services. These
services are offered to residential and business customers. As of March 31,
1998, RCN Long Distance Company had approximately 13,100 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 March 31, 1998, RCN had approximately 15,599 subscribers for its video
programming services provided over advanced fiber optic networks. As of such
date, RCN also had approximately 40,859 connections attributable to the
wireless video system and approximately 187,000 connections attributable to
the hybrid fiber/coaxial cable systems.
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
expects to commence offering a high-speed Internet access service in certain
markets during the second quarter of 1998. 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. As of March 31, 1998, RCN had
approximately 370,271 Internet subscribers.
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 internet services and 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.
51
<PAGE>
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.
Fiber Agreements with MFS/WorldCom. 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 extraordinary actions require the consent of both
parties. In addition, the
52
<PAGE>
BECO Operating Agreement provides that 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 to the other party 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.
53
<PAGE>
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
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 Starpower 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 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 66, 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
54
<PAGE>
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 to the other party 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.
55
<PAGE>
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.
RECENT ACQUISITION TRANSACTIONS
Merger with Erols Internet, Inc.
Erols is a leading regional ISP serving residential and business subscribers
in targeted markets, including New York City, Philadelphia, Washington, D.C.
and Boston. At the date of the Erols Acquisition, Erols had approximately
293,000 subscribers. Erols currently operates 57 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 LEC. Erols offers a broad range of Internet-
based services, including (i) Global TraderSM, 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.
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 transaction was
completed in February 1998. The approximate total Erols Merger consideration
was $29.2 million in cash, 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). Additionally, the Company is converting
approximately 999,000 stock options to stock options to purchase approximately
699,000 shares of RCN Common Stock with 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 consummation of
the Erols Merger, 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 of the Erols
Merger 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.
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. 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. The joint venture
partners of Starpower are currently negotiating the terms of such
contribution.
56
<PAGE>
Merger With UltraNet Communications, Inc.
UltraNet is a leading ISP in the Boston area serving residential and
business customers in New England. At the date of RCN's acquisition of
UltraNet, UltraNet had approximately 32,000 subscribers. 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.
On January 21, 1998, RCN, Holding and UltraNet entered into the UltraNet
Merger Agreement. The transaction was completed in February 1998. The total
consideration for the acquisition was approximately $7.9 million in cash,
approximately 890,384 shares of RCN Common Stock and $3 million in deferred
compensation. Additionally, the Company is converting approximately 63,500
UltraNet stock options to stock options to purchase 117,052 shares of RCN
Common Stock at an average exercise price of $1.825 per share.
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.
Pursuant to the UltraNet Merger Agreement, on February 27, 1998, the
UltraNet Registration Rights Agreement was executed and delivered. Under the
terms of the UltraNet Registration Rights Agreement, certain former
shareholders of UltraNet received registration rights, subject to certain
limitations as set forth in the UltraNet Registration Rights Agreement.
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.
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).
57
<PAGE>
Merger With Lancit Media Entertainment, Ltd.
On February 27, 1998, RCN entered into an Agreement and Plan of Merger
("Lancit Merger Agreement") with Lancit Media Entertainment, Ltd., a New York
corporation ("Lancit"), and LME Acquisition Corporation, a New York
corporation and a wholly owned subsidiary of RCN ("LME"). Pursuant to the
Lancit Merger Agreement, LME will merge with and into Lancit, with Lancit
surviving the merger and becoming a wholly owned subsidiary of RCN (the
"Lancit Merger"). Lancit is a producer of high-quality children's programming,
for which it has won 11 Emmy Awards. The consummation of the Lancit Merger is
subject to customary conditions, including the approval by Lancit shareholders
of the Lancit Merger.
Acquisition of Interport Communications Inc.
On June 1, 1998 RCN announced that it has signed a definitive agreement to
acquire New York City's largest independent Internet service provider,
Interport Communications Inc., for $11 million in RCN stock and $871,000 in
cash. The acquisition of Interport Communications brings RCN more than 10,000
dial-up accounts and 500 dedicated line and web hosting customers.
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>
THREE
MONTHS
AS OF DECEMBER 31, ENDED
--------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed.................. 118,216 119,761 282,836 283,940 290,612 293,146
Basic Subscribers............. 87,660 92,140 176,131 179,932 184,938 186,699
</TABLE>
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. 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. Certain of
the Company's Hybrid Fiber/Coaxial Cable systems are being upgraded to enable
such networks to provide voice, video and data services, including local
telephone service, through an RCN switch. When such conversion is completed,
customers served by such networks will be included within the "on-net
connections" category. 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 System in the Lehigh Valley area. The
Company expects that certain customers served by such system will be migrated
to "on-net" connections over time.
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 interLATA
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
58
<PAGE>
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 1996 Act (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; (ii) 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 March 31, 1998, RCN
had 40,447 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 Long Distance Company 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 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 Level 3 for 800/888 origination, Frontier for off network
origination of outbound calling and various carriers for terminating calls.
59
<PAGE>
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.
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.
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's 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.
60
<PAGE>
RCN LONG DISTANCE COMPANY
RCN Long Distance Company, a wholly owned subsidiary of RCN, provides
switched-based resale long distance services to customers on the advanced
fiber optic network as well as other customers. RCN Long Distance Company
operates the long distance business formerly operated by C-TEC, except within
the territory serviced by Commonwealth Telephone. During 1996, RCN obtained
certification in forty-seven states. As of March 31, 1998, RCN Long Distance
Company had approximately 13,100 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 multi-channel multipoint distribution service ("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 March
31, 1998 their wireline systems passed approximately 64,000 homes and served
approximately 202,400 subscribers. Megacable had revenues of $30.4 million and
$23.2 million for the years ended December 31, 1997 and 1996, respectively and
$9.2 million for the three months ended March 31, 1998.
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.
RELATIONSHIP AMONG COMMONWEALTH TELEPHONE, RCN AND CABLE MICHIGAN
The Distribution Agreement defines certain aspects of the relationship among
Commonwealth Telephone, RCN and Cable Michigan and provides for the allocation
of certain assets and liabilities among Commonwealth Telephone, RCN and Cable
Michigan. Commonwealth Telephone, RCN and Cable Michigan have also entered
into a Tax Sharing Agreement dated as of September 5, 1997 (the "Tax Sharing
Agreement" and together with the Distribution Agreement, the "Distribution
Documents") to define certain aspects of their relationship with respect to
taxes and to provide for the allocation of tax assets and liabilities.
Indemnification
Commonwealth Telephone, RCN and Cable Michigan have agreed to indemnify one
another against certain liabilities. RCN has agreed to indemnify Commonwealth
Telephone and its subsidiaries at the time of the Distribution (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 at the time of the Distribution (collectively, the "Cable
Michigan Group") and the respective directors, officers, employees and
affiliates of each person in the Cable Michigan Group (collectively, the
"Cable Michigan Indemnitees") from and against any and all damage, loss,
liability and expense ("Losses") incurred or suffered by any of the
Commonwealth Telephone Indemnitees or the Cable Michigan Indemnitees,
respectively, (i) arising out of, or due to the failure of RCN or any of its
subsidiaries at the time of the Distribution (collectively, the "RCN Group")
to pay, perform or otherwise discharge any of the RCN Liabilities (as defined
below), (ii) arising out of the breach by any member of the RCN Group of any
obligation under the Distribution Agreement or any of the other Distribution
Documents and (iii) in the case of the Commonwealth Telephone Indemnitees,
arising out of the provision by the Commonwealth Telephone Group of the
services described below to the RCN Group except to the extent that such
Losses result from the gross negligence or willful misconduct of a
Commonwealth Telephone Indemnitee. "RCN Liabilities" refers to (i) all
liabilities of the RCN Group under the Distribution Agreement or any of the
other distribution documents, (ii) all other liabilities of Commonwealth
Telephone, RCN or Cable Michigan (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
61
<PAGE>
Date, to the extent such liabilities arise primarily from or relate primarily
to the management or conduct of the RCN Businesses prior to the effective time
of the Distribution (the liabilities in clauses (i) and (ii) collectively, the
"True RCN Liabilities") and (iii) 30% of the Shared Liabilities (as defined
below).
Cable Michigan has agreed to indemnify the RCN Group and the respective
directors, officers, employees and affiliates of each person in the RCN Group
(collectively, the "RCN Indemnitees") and the Commonwealth Telephone
Indemnitees from and against any and all Losses incurred or suffered by any of
the RCN 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 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
RCN Indemnitees, arising out of the provision by RCN of the services described
below to the Cable Michigan Group except to the extent that such Losses result
from the gross negligence or willful misconduct of an RCN Indemnitee. "Cable
Michigan Liabilities" refers to (i) all liabilities of the Cable Michigan
Group under the Distribution Agreement or any of the other distribution
documents, (ii) all other liabilities of the Cable Michigan, RCN 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 Cable Michigan
Indemnitees and the RCN Indemnitees from and against any and all Losses
incurred or suffered by any of the Cable Michigan Indemnitees or the RCN
Indemnitees, respectively, (i) arising out of, or due to the failure of any
person in the 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 RCN Indemnitees, arising
out of the provision by RCN 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 an RCN 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 Cable Michigan, RCN 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 Commonwealth Telephone, RCN or Cable Michigan 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 RCN Liability or a True Cable Michigan Liability.
RCN, 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 certain
information provided to shareholders in connection with the Distribution.
62
<PAGE>
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.
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.
Employee Matters
Under the Distribution Agreement, RCN, Cable Michigan and Commonwealth
Telephone agreed generally to assume employee benefits-related liabilities
with respect to its current and, in some cases, former employees. Each of RCN,
Cable Michigan and Commonwealth Telephone also agreed to an allocation of
employee-related liabilities arising out of certain shared operations prior to
the Distribution on the same basis as Shared Liabilities are allocated.
Services and Other Arrangements
RCN has agreed to provide or cause to be provided to the Commonwealth
Telephone Group the following services: (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. The fee for 1997 was
$8,332,000.
RCN has also agreed to provide or cause to be provided to the Cable Michigan
Group certain specified services for a transitional period after the
Distribution. The transitional services to be provided are the following: (i)
customer service, (ii) marketing, (iii) accounting, (iv) payroll, (v)
management supervision, (vi) cash management, (vii) human resources and
benefit plan administration, (viii) insurance administration, (ix) legal, (x)
tax, (xi) internal audit, (xii) programming administration, (xiii) billing,
(xiv) monthly cable guides, (xv) investor and public relations, (xvi)
provision of third party programming, and (xvii) other miscellaneous
administrative services. Subject to certain limitations, the fee per year for
services listed in items (ii)-(xiii), (xv) and (xvii) will be 4.0% of the
revenues of the Cable Michigan Group plus a direct allocation of certain
consolidated cable administration functions. The fee for customer service
listed in item (i) along with the billing service listed in item (xiii) will
be a pro rata share (based on the relative number of subscribers) of the fees
and expenses incurred by RCN to provide such customer billing services and
fees to the RCN Group and the Cable Michigan Group. The total charge to Cable
Michigan for such services rendered in 1997 was $6,740,000. 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, are
reimbursed to RCN by Cable Michigan and no additional fee is charged with
respect thereto.
Commonwealth Telephone has agreed to provide or cause to be provided to the
RCN Group and the Cable Michigan Group financial data processing applications,
lockbox services, storage facilities, LAN and WAN support services, building
maintenance and other miscellaneous administrative services for a transitional
period after the Distribution. The fees for such services and arrangements
will be an allocated portion (based on relative usage) of the cost incurred by
Commonwealth Telephone to provide such services and arrangements to all three
groups.
63
<PAGE>
The services will terminate upon 60 days notice by either the service
provider or the relevant service recipient, except that the billing, customer
service, programming administration and provision of third party programming
services provided by RCN to Cable Michigan may not be terminated by RCN on
less than one year advance notice to Cable Michigan. A service recipient may
also terminate individual services by giving 60 days notice to the applicable
service provider.
The aforementioned arrangements are not the result of arm's length
negotiation between unrelated parties as Cable Michigan, Commonwealth
Telephone and RCN have certain common officers and directors. Although the
transitional service arrangements in such agreements are designed to reflect
arrangements that would have been agreed upon by parties negotiating at arm's
length, there can be no assurance that Cable Michigan would not be able to
obtain similar services at a lower cost from unrelated third parties.
Additional or modified agreements, arrangements and transactions may be
entered into between the Cable Michigan and either or both of Commonwealth
Telephone and RCN after the Distribution, which will be negotiated at arm's
length.
Miscellaneous
The Distribution Agreement also contains provisions concerning access to
information and records and rights to technology, software, intellectual
property, know-how or other proprietary rights owned, licensed or held for use
by the respective Groups. The Distribution Agreement provides that any dispute
arising out of or in connection with the Distribution Agreement will be
submitted to arbitration in accordance with the procedures described in the
Agreement.
There exist relationships among Commonwealth Telephone, RCN and Cable
Michigan that may lead to conflicts of interest. Each of Commonwealth
Telephone, RCN and Cable Michigan is effectively controlled by Level 3
Telecom. In addition, the majority of the Company's named executive officers
will also be acting as directors and/or executive officers of one or more
group companies. See "Risk Factors--Control by Level 3 Telecom Holding, Inc.;
Conflicts of Interest." 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 other group companies.
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 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 Cable Michigan, 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 Cable Michigan Group, the RCN Group, or the
Commonwealth Telephone Group will be allocated solely to such group.
Adjustments to all other tax liabilities will generally be allocated 50% to
Commonwealth Telephone, 20% to Cable Michigan and 30% to RCN.
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.
64
<PAGE>
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 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
voice, video and data industries 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
65
<PAGE>
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 (which have long-standing relationships with their
customers) have begun to expand the amount of fiber facilities in their
networks and to prepare to re-enter the long distance telephone service
market. The recently announced merger between SBC and Ameritech may also
potentially increase the competitive environment in the Company's target
markets if SBC continues to pursue a nationwide strategy.
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.
66
<PAGE>
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 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.
67
<PAGE>
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 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 the SBC Decision finding that Sections 271 to 275 of
the 1996 Act are unconstitutional. 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
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.
68
<PAGE>
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 are 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, Delaware, New Jersey, 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) and RCN has applied for authority to offer such
services in New Hampshire. Starpower has separately obtained similar authority
in Maryland, Virginia and the District of Columbia. 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, Massachusetts and 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.
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).
69
<PAGE>
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. The Company 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 for the Fifth Circuit; if certain 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 and
information about 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 and information about the Boston OVS network. In a Memorandum Opinion Order
released on April 28, 1998, the FCC's Cable Services Bureau granted in part
and denied in part Time Warner's petition. RCN has sought review of certain
aspects of this order. 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
70
<PAGE>
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 Administrative Law Judge declared that the Initial Decision
would become effective 50 days after its release unless Bartholdi Cable filed
exceptions to the Initial Decision within 30 days of its release or the FCC
elected to review the case on its own motion. Bartholdi Cable filed exceptions
to the Initial Decision on April 7, 1998. 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, 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 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
71
<PAGE>
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.
72
<PAGE>
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 March 31, 1998, the Company had 1,606 full-time employees including
general office and administrative personnel. The Company considers relations
with its employees to be good.
73
<PAGE>
PROPERTIES
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 Optic Networks." Any
disruption of these arrangements and relationships could have a material
adverse effect on the Company.
74
<PAGE>
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.
75
<PAGE>
In the Initial Decision, the Administrative Law Judge found Bartholdi Cable
unqualified with respect to 15 such licenses. The Administrative Law Judge
declared that the Initial Decision would become effective 50 days after its
release unless Bartholdi Cable filed exceptions to the Initial Decision within
30 days of its release or the FCC elected to review the case on its own
motion. Bartholdi Cable filed exceptions to the Initial Decision on April 7,
1998. 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.
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.
76
<PAGE>
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.
LEGAL PROCEEDINGS
On September 30, 1997, the Yee Family Trusts, as holders of C-TEC'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 the Distribution (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 filed their response
on March 9, 1998 and defendants filed their reply on April 6, 1998. The New
Jersey court has not yet scheduled argument on the motion.
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.
77
<PAGE>
MANAGEMENT
STRUCTURE OF RCN'S BOARD OF DIRECTORS
The Company Board is divided into three classes of directors and currently
consists of 13 directors. The term of office of Class I Directors will expire
at the 2001 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, among other
things, has 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
makes 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, among other
things, considers the overall scope and approach of the annual audit and
recommendations from the audit performed by the independent accountants;
recommends the appointment of the independent accountants; considers
significant accounting methods adopted or proposed to be adopted; and
considers 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 May 18, 1998
concerning the directors and executive officers of RCN:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Director (Class III), Chairman and Chief
David C. McCourt........ 41 Executive Officer
Director (Class I), President and Chief Operating
Michael J. Mahoney...... 47 Officer
Director (Class II), Executive Vice President and
Bruce C. Godfrey........ 42 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
54 Director (Class I), Vice Chairman and President,
Dennis J. Spina......... Internet Services
James Q. Crowe.......... 48 Director (Class III)
Alfred Fasola........... 49 Director (Class II)
Stuart E. Graham........ 52 Director (Class I)
Richard R. Jaros........ 46 Director (Class II)
Thomas J. May........... 51 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...... 52 Senior Vice President, Sales and Marketing
Salvatore M. Quadrino... 51 Chief Administrative Officer
Paul E. Sigmund......... 33 Executive Vice President
Timothy J. Stoklosa..... 37 Senior Vice President and Treasurer
</TABLE>
78
<PAGE>
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, Chairman and Chief Executive Officer of Cable Michigan since
September 1997. In addition, he is a Director, Chairman and Chief Executive
Officer of Commonwealth Telephone, positions he has held since October 1993.
Mr. McCourt has also been President and, a Director of Level 3 Telecom. He has
also been Chairman and Chief Executive Officer, as well as a Director, of
Mercom since October 1993, Director of MFS/WorldCom 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 from
December 1996 to March 1998 and a Director of Level 3 since January 1998.
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 Commonwealth
Telephone from February 1994 to September 1997, President and Chief Operating
Officer of Mercom from February 1994 to September 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 1995 and has been Executive Vice President and Chief Financial
Officer of Commonwealth Telephone since April 1994 and Corporate Secretary
since September 1997. 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 of Mercom 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 of C-TEC International, Inc., (now RCN International
Holdings Inc.) from November 1995 to February 1996, 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, 54, 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
79
<PAGE>
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.
Mr. Crowe has been the President and Chief Executive Officer of Level 3 since
August 1997 and a Director of Level 3 since June 1993. 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 from
1992 to 1996 and President and Chief Executive Officer of MFS/WorldCom from
June 1993 to June 1997. Mr. Crowe has been a Director of Inacom
Communications, Inc. since 1997. Mr. Crowe was Chairman of the Board of
Directors of WorldCom from December 1996 to June 1997.
Alfred Fasola, 49, has been a Director of the Company since September 1997.
Mr. Fasola has served as Chairman and Chief Executive Officer of Hot Sports,
LLC since 1995 and served as Chief Operating Officer of Purolater Courier
Corp. from 1986 to 1987, Mr. Fasola was Chief Executive Officer of Pilot
Freight Carriers, Inc., from 1987 to 1989, Chairman and Chief Executive
Officer of Circle Express/Internet from 1990 to 1992 and Chief Executive
Officer of Herman's Sporting Goods from 1992 to 1995.
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 has been President of Skanska USA Inc. since
1994. Previously he was 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, Level 3,
CalEnergy Company, Inc. ("CECI") and Commonwealth Telephone. From 1980 to 1992
and from 1994 to 1997, Mr. Jaros served as President of Kiewit Diversified
Group Inc. and Executive Vice President and Chief Financial Officer of Old
PKS. He served as Chairman of CECI from 1993 to 1994 and as President from
1992 to 1993.
Thomas J. May, 51, has been a Director of the Company since September 1997.
Mr. May has been Chairman, President and Chief Executive Officer of BECO since
1994. Previously, Mr. May served as President and Chief Operating Officer of
BECO 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 October 1993. Mr. Roth has been a Senior Partner at Rosenn, Jenkins and
Greenwald L.L.P. 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 1979. Mr. Scott has been Chairman of the Board of Directors and
Chief Executive Officer of Old PKS for over nineteen years, Chairman of Level
3 since 1979 and Director since 1964. He is also a Director of Berkshire
Hathaway Inc., Burlington Resources, Inc., CECI, ConAgra, Inc., US Bancorp,
and Valmont Industries, Inc., and Level 3 Telecom. Mr. Scott was a Director of
WorldCom from December 1996 to July 1997.
80
<PAGE>
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 Communications, Inc., Mid-America Apartment Communities, PKS
Information Services, Inc. and Level 3. Mr. Yanney was a Director of WorldCom
from December 1996 to July 1997 and Commonwealth Telephone 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, 52, 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, 51, has been Chief Administrative Officer of the
Company since February 1998. Previously he served as Vice President, Treasurer
and Chief Financial Officer of Erols 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 Old 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
share and per share data, stock option data and market prices (including
historical trading prices) of RCN Common Stock have been restated to reflect
the Stock Dividend.
81
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- ----------------------------------
AWARDS PAYOUTS TOTAL
------------ ---------- ----------
NAME AND OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
PRINCIPAL COMPENSATION STOCK UNDERLYING LTIP COMPENSATION
POSITION YEAR SALARY($)(1) BONUS($) ($)(1) AWARDS($)(2) OPTIONS(#) PAYOUTS($) ($)(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. Maho-
ney............... 1997 $248,654 $ 500,000 -- $149,731 400,000 -- $ 5,871 $ 754,525
President and
Chief 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 Officer 1995 183,731 150,000 -- 67,000 -- -- 4,790 338,521
Mark Haverkate..... 1997 $205,192 $ 100,000 -- $ 61,038 80,000 -- $ 2,985 $ 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 purchased under the C-TEC Executive Stock Purchase Plan ("C-
TEC ESPP") 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, RCN and Cable
Michigan. After the Distribution RCN created its own Executive Stock
Purchase Plan ("ESPP") which has terms substantially similar to the C-TEC
ESPP.
(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 officers listed for
relocation expenses incurred in moving said senior officers and their
families to the Company's new executive offices in Princeton, New Jersey.
82
<PAGE>
As of December 31, 1997, the aggregate holdings and value of restricted
stock awards for RCN Common Stock were as follows:
<TABLE>
<CAPTION>
RCN
CORPORATION SHARES AGGREGATE VALUE
------------------ ---------------
<S> <C> <C>
David C. McCourt....................... 50,249.00 $851,242
Michael J. Mahoney..................... 17,586.00 $301,155
Bruce C. Godfrey....................... 18,065.00 $309,359
Mark Haverkate......................... 9,496.00 $162,615
Michael Adams.......................... 8,960.00 $153,442
</TABLE>
Vesting of restricted shares is accelerated upon a change in control of the
Company. Dividends, if any, are paid on restricted shares. Subject to
continued employment, restricted share units credited to participants'
accounts vest in three calendar years following the date on which the share
units were initially credited to the participant's account.
RCN OPTIONS/SAR GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER % OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN TOTAL EXERCISE OPTION TERM
OPTIONS FISCAL YEAR OR BASE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) 1997 ($/SH) DATE 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. Adams........ 30,000 0.63% 8.360 2/21/2007 $ 157,785 $ 399,735
Michael A. Adams........ 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...... 120,000 480,000 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.
83
<PAGE>
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 ESPP 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, 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 Commonwealth Telephone Group (as defined
below) 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.
One of the members, Eugene Roth, Esq., is a senior partner at Rosenn,
Jenkins and Greenwald, which serves as counsel to RCN from time to time.
TRANSACTIONS WITH MANAGEMENT AND CERTAIN CONCERNS
David C. McCourt, Chairman, Chief Executive Officer and Director of RCN, is
a director of C-SPAN. In 1997, paid $236,563 to C-SPAN for programming
services.
David C. McCourt served as a Director of MFS/WorldCom from December 1996 to
March 1998. In 1997, RCN paid $2,959,306 to MFS/WorldCom for telephone usage,
circuit charges and network access charges. RCN earned $519,485 in revenue
from MFS/WorldCom, primarily for engineering and construction management
services.
In September 1996, RCN and BECO, through wholly owned subsidiaries, entered
into a joint venture to utilize 126 fiber miles of BECO's fiber optic network
to deliver RCN's comprehensive communications package in Greater Boston. In
1997, RCN paid $91,674 to BECO for utility expenses.
Each of Commonwealth Telephone, RCN and Cable Michigan is effectively
controlled by Level 3. In addition, the majority of RCN's directors and
executive officers are also directors and/or executive officers of
Commonwealth Telephone and/or Cable Michigan. RCN provides certain services to
Commonwealth Telephone and Cable Michigan. See "Business--Relationship Among
Commonwealth Telephone, RCN and Cable Michigan."
84
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Set forth in the table below is information as of May 18, 1998 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
executive 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 share, per share and stock option
data of RCN Common Stock have been restated to reflect the Stock Dividend.
<TABLE>
<CAPTION>
RCN COMMON STOCK
----------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES PERCENT OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING BENEFICIALLY OUTSTANDING
OWNED PRIOR SHARES PRIOR SHARES BEING OWNED SHARES AFTER
NAME OF BENEFICIAL OWNER TO OFFERING(1) TO OFFERING(1) OFFERED AFTER OFFERING OFFERING
- ------------------------ -------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Directors and Named Ex-
ecutive Officers
Michael A. Adams(2)..... 25,304 * 25,304 *
James Q. Crowe.......... 1,464 * 1,464 *
Alfred Fasola........... 798 * 798 *
Bruce C. Godfrey(2)..... 57,630 * 57,630 *
Stuart E. Graham........ 10,806 * 10,806 *
Mark Haverkate(2)....... 67,512 * 67,512 *
Richard R. Jaros........ 6,638 * 6,638 *
Michael J. Mahoney(2)... 65,972 * 65,972 *
Thomas J. May........... 2,798 * 2,798 *
David C. McCourt(2)(3).. 192,104 * 192,104 *
Thomas P. O'Neill, III.. 2,798 * 2,798 *
Eugene Roth............. 14,240 * 14,240 *
Walter Scott, Jr........ 1,464 * 1,464 *
Dennis Spina............ -- -- -- --
Michael B. Yanney....... 5,520 * 5,520 *
All Directors and Execu-
tive Officers as a
Group (20 per-
sons)(2)(3)............ 445,835 * 445,835 *
5% Stockholders
Level 3 Telecom Hold-
ings, Inc.(4).......... 26,640,970 46 26,640,970 39
</TABLE>
- --------
* Less than 1% of outstanding shares.
(1) Includes shares of Company Common Stock acquired in respect of Matching
Shares (defined below) but excludes RCN Share Units (defined below).
(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.
85
<PAGE>
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 TOTAL PURCHASED
ACQUIRED UNDER AND ACQUIRED
SHARES THE ESPP IN TOTAL SHARES RESTRICTED AND RESTRICTED
PURCHASED LIEU OF CURRENT PURCHASED AND MATCHING MATCHING
OUTRIGHT COMPENSATION ACQUIRED SHARES SHARES
--------- --------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Adams........ 1,834 11,735 15,569 11,735 25,304
Bruce C. Godfrey........ 14,636 21,497 36,133 21,497 57,630
David C. McCourt........ 76,788 57,658 134,446 57,658 192,104
Michael J. Mahoney...... 23,732 21,120 44,852 21,120 65,972
Mark Haverkate.......... 46,416 10,548 56,964 10,548 67,512
</TABLE>
- --------
(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) Level 3 owns 90% of the common stock and all of the preferred stock of
Level 3 Telecom. Level 3 is the successor to an entity known as Peter
Kiewit Sons' Inc. See "Level 3 Communications, Inc." below. David C.
McCourt, Chairman and Chief Executive Officer of Commonwealth Telephone
and RCN, owns the remaining 10% of the common stock of Level 3 Telecom.
The address for Level 3 Telecom and Level 3 is 1000 Kiewit Plaza, Omaha,
Nebraska 68131.
The information set forth above does not give effect to the ownership of
Company securities by Level 3 Telecom. Certain executive officers or directors
of the Company are directly or indirectly affiliated with Level 3 Telecom. For
information with respect to the beneficial ownership of securities by Level 3
Telecom, see "Security of Ownership Certain Beneficial Owners and Management."
LEVEL 3 COMMUNICATIONS, INC.
Set forth below is certain information regarding the beneficial ownership of
equity securities of Level 3 as of April 1, 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. On March 31, 1998, the entity known as
Peter Kiewit Sons' Inc. ("Old PKS") prior to such date separated its
construction and mining management business ("Construction Group") from its
other businesses (the "PKS Split-Off"). In conjunction with the PKS Split-Off,
Level 3 merged into Old PKS which changed its name to Level 3 Communications,
Inc. As a result of the PKS Split-Off, Level 3 no longer owns any interest in
the Construction Group whose business is now held in a company which changed
its name to Peter Kiewit Sons' Inc. ("New PKS").
<TABLE>
<S> <C> <C>
<CAPTION>
NUMBER OF PERCENT OF
SHARES SHARES
NAME OF BENEFICIAL OWNER ---------- ----------
<S> <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(1) *
Michael J. Mahoney................................... 1,000 --
Thomas J. May........................................ -- --
David C. McCourt..................................... 57,500 *
Thomas P. O'Neill, III............................... -- --
Eugene Roth.......................................... -- --
Walter Scott, Jr..................................... 17,636,397 12.0%
Dennis Spina......................................... -- --
Michael B. Yanney.................................... 50,000 --
All Directors and Executive Officers as a Group (20
persons)............................................ 24,162,161 16.4%
</TABLE>
- --------
* Less than 1% of the outstanding of the class.
(1) Includes 185,000 shares in the Jaros Family Limited Partnership.
86
<PAGE>
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, the 11 1/8% Senior Discount Notes and the 9.80% Senior
Discount Notes which RCN has outstanding. The following descriptions do 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 and to the
provisions of the documents governing the 10% Senior Notes, the 11 1/8% Senior
Discount Notes and the 9.80% Senior Discount Notes, which are filed as
exhibits to the Company's Registration Statement on Form S-1, of which this
Prospectus constitutes a part, filed with the Commission.
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 March 31, 1998, $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 March 31, 1998. 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:
<TABLE>
<S> <C>
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
</TABLE>
87
<PAGE>
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) LCI, formerly known as PKS,
shall cease to hold, either directly or indirectly through one or more LCI
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 LCI or an LCI 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.
88
<PAGE>
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 was funded with 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 9.80% 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.
1998 NOTES OFFERING
9.80% Senior Discount Notes due 2008
The 9.80% Senior Discount Notes were issued under an indenture dated
February 6, 1998 between RCN and The Chase Manhattan Bank, as Trustee (the
"9.80% Indenture"). The 9.80% Senior Discount Notes are general senior
obligations of RCN, limited to $567,000,000 aggregate principal amount at
maturity and will
89
<PAGE>
mature on February 15, 2008. The 9.80% Senior Discount Notes were issued at a
discount to yield gross proceeds of $350,587,440. The 9.80% Senior Discount
Notes will not bear cash interest prior to February 15, 2003. The yield to
maturity of the 9.80% Senior Discount Notes, determined on a semi-annual bond
equivalent basis, will be 9.80% per annum.
The 9.80% 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 9.80% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of RCN. The 9.80% Senior
Discount Notes may be redeemed at redemption prices starting at 104.900% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest.
90
<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture (the "Indenture") dated as of
, 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. 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 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,
"RCN" or the "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 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.
MATURITY, INTEREST AND PRINCIPAL
The Notes will be general senior unsecured obligations of RCN, limited to
$ aggregate principal amount at maturity, and will mature on , 2008. See
"--Ranking." The Notes will be issued at a discount to yield gross proceeds of
$250,000,000. See "Certain U.S. Federal Income Tax Considerations." The Notes
will not bear cash interest prior to , 2003. Commencing on , 2003,
interest on the Notes will be payable, in cash at a rate of % per annum,
semi-annually in arrears on each and to the holders of record of Notes
at the close of business on the and 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 , 1998. 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 % per annum.
REDEMPTION
Optional Redemption by RCN. The Notes will be redeemable, in whole or in
part, at any time on or after , 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 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003..................................................... %
2004..................................................... %
2005..................................................... %
2006 and thereafter...................................... 100.00%
</TABLE>
91
<PAGE>
Redemption Following Public Equity Offerings. Notwithstanding the foregoing,
on or prior to , 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 % 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
92
<PAGE>
(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 June 1, 2001 or 5.0:1.0 if such Indebtedness
is incurred on or after June 1, 2001 (Y) the ratio of Total Consolidated
Indebtedness to Total Invested Equity Capital would not exceed 2.0:1.0 and (B)
on or after June 1, 2003, 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 9.80% Notes 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 9.80% Notes Issue Date (including,
without duplication, the Common Stock Offering and 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 9.80% Notes 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 9.80% Notes 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 9.80% Notes Issue Date plus (f) in the
case of the JV Designation after the 9.80% Notes 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 9.80% Notes 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.
93
<PAGE>
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
94
<PAGE>
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
95
<PAGE>
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.
96
<PAGE>
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
97
<PAGE>
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."
98
<PAGE>
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.
99
<PAGE>
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
100
<PAGE>
(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
101
<PAGE>
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
102
<PAGE>
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
103
<PAGE>
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:
<TABLE>
<CAPTION>
SEMI-ANNUAL
ACCRUAL DATE
------------
<S> <C>
Issue Date................................................... $
, 1998.................................................... $
, 1999.................................................... $
, 1999.................................................... $
, 2000.................................................... $
, 2000.................................................... $
, 2001.................................................... $
, 2001.................................................... $
, 2002.................................................... $
, 2002.................................................... $
, 2003.................................................... $1,000.00
</TABLE>
104
<PAGE>
(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 , 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.
105
<PAGE>
"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.
106
<PAGE>
"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
107
<PAGE>
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
108
<PAGE>
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.
109
<PAGE>
"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.
110
<PAGE>
"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."
111
<PAGE>
"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 Level 3 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.
"9.80% Notes Issue Date" means February 6, 1998.
"Other Partners" has the meaning set forth in the definition of "Joint
Venture."
112
<PAGE>
"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;
113
<PAGE>
(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 June 1, 2003;
(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."
114
<PAGE>
"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.
115
<PAGE>
"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 the Common Stock
Offering and 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 9.80% Notes 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 9.80%
Notes 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 9.80%
Notes Issue Date plus (v) in the case of the JV Designation after the 9.80%
Notes 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 9.80% Notes 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 9.80%
Notes 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.
116
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be represented by one or more permanent global notes 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 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 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
117
<PAGE>
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.
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.
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.
118
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which is based on the opinion of Davis Polk &
Wardwell, counsel to the Company, describes the material United States federal
income tax consequences of the ownership and disposition of the Notes to
initial purchasers who are U.S. Holders (as defined below) and who purchase
the Notes at their "issue price" (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
Offering Memorandum 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
purchase of the 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 a Note
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, or (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.
Interest and Original Issue Discount
The excess of a Note's "stated redemption price at maturity" over its "issue
price" will generally constitute original issue discount ("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 its method of accounting, a U.S. Holder of the Notes will be
required to include such OID in income for 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. Payments of stated interest on a Note will not be separately included
in income, but rather will reduce a U.S. Holder's basis in a Note, as
described below under "Sale, Exchange or Retirement of the Notes."
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
a Note. 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 advisors in this regard.
Applicable High Yield Discount Obligations
The Notes will be "applicable high yield discount obligations" ("AHYDOs"),
as defined in the Code, if the yield to maturity of such Notes exceeds the
"applicable Federal rate" in effect at the time of their issuance (the "AFR")
plus five percentage points. Under the rules applicable to AHYDOs, if the
Notes are AHYDOs, a portion of the OID that accrues on the Notes may not be
deductible by the Company at any time. The non-deductible portion of the OID
will be an amount that bears the same ratio to such OID as (i) the excess of
the yield to maturity of the Notes over the AFR plus six percentage points
bears to (ii) the yield to maturity of the Notes. To the extent that the non-
deductible portion of OID would have been treated as a dividend if it had been
119
<PAGE>
distributed with respect to the Company's stock, it will be treated as a
dividend to holders of the Notes for purposes of the rules relating to the
dividends received deduction for corporate holders. In addition, if the Notes
are AHYDOs, any remaining OID on the Notes will not be deductible by the
Company until such OID is paid.
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 the 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 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. 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 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 backup withholding at a
rate of 31% on payments of principal, premium 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 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.
120
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among RCN and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Salomon Brothers Inc, Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Montgomery Securities, Inc. (together,
the "Underwriters"), RCN has agreed to sell to each of the Underwriters and
each of the Underwriters has agreed to purchase from RCN the aggregate
principal amount at maturity of the Notes set forth opposite its name below.
The Underwriters will be obligated to purchase all the Notes, if any are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT AT
UNDERWRITERS MATURITY OF THE NOTES
------------ ---------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... $
Salomon Brothers Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation......
NationsBanc Montgomery Securities, Inc...................
----
Total............................................... $
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the Notes are subject to, among other
conditions, the delivery of certain legal opinions by their counsel.
The Underwriters propose to offer part of the Notes offered hereby directly
to the public at the public offering price set forth on the cover page hereof
and part to certain dealers at a price that represents a concession not in
excess of % of the principal amount at maturity of the Notes. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of % of the principal amount at maturity of the Notes to other
Underwriters or to certain other dealers. After the Offering, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
The Underwriting Agreement provides that RCN will indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act,
and will contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed that it will not, for a period of 120 days from the
date of the Offering Memorandum, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, directly or indirectly, offer,
sell, grant any option to purchase or otherwise dispose of any debt securities
of the Company or any of its subsidiaries.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Notes. As an exception to
these rules, the Underwriters are permitted to engage in certain transactions
that stabilize the price of the Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Notes.
If the Underwriters create a short position in the Notes in connection with
the Offering, i.e., if they sell more Notes than are set forth on the cover
page of this Prospectus, the Underwriters may reduce that short position by
purchasing Notes in the open market. In general, purchases of a security for
the purpose of stabilization or to reduce a short position could cause the
price of the security to be higher than it might be in the absence of such
purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Notes. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
121
<PAGE>
Certain of the Representatives and their affiliates have provided and are
currently providing investment banking and related services to the Company and
its affiliates, for which they have received or are receiving customary
compensation, and may continue to do so in the future. Each of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc and NationsBanc
Montgomery Securities LLC acted as initial purchasers in the offering of the
1997 Notes and the 1998 Notes and received customary discounts and commissions
in connection therewith. In addition, each of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Smith Barney Inc., an affiliate of Salomon Brothers Inc,
Donaldson Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery
Securities LLC are acting as managing underwriters in connection with the
Common Stock Offering and will receive customary discounts and commissions in
connection therewith.
Prior to the Offering, there has been no active market for the Notes and
there can be no assurance as to the development or liquidity of any market for
the Notes. The Underwriters have indicated to RCN that they intend to make a
market in the Notes, but they are under no obligation to do so and such
market-making could be discontinued at any time without notice, at their sole
discretion.
LEGAL MATTERS
The validity of the Notes offered hereby is being passed on for the Company
by Davis Polk & Wardwell, New York, New York. Certain legal matters relating
to the Notes will be passed upon for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), New York, New
York.
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-1 (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 Shares, 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.
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
122
<PAGE>
(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.
123
<PAGE>
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-6
Notes to Consolidated Financial Statements............................... F-7
Condensed Consolidated Statements of Operations--Quarters Ended March 31,
1998 and 1997........................................................... F-32
Condensed Consolidated Balance Sheets March 31, 1998 and December 31,
1997.................................................................... F-33
Condensed Consolidated Statements of Cash Flows--Quarters Ended March 31,
1998 and 1997........................................................... F-34
Notes to Condensed Consolidated Financial Statements..................... F-36
EROLS INTERNET, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-41
Balance Sheets as of December 31, 1996 and 1997.......................... F-42
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-43
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-44
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-45
Notes to Financial Statements............................................ F-46
</TABLE>
F-i
<PAGE>
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.
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
except Note 2, as to which
the date is May 20, 1998
F-1
<PAGE>
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 amortization......... 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
=========== =========== ===========
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.
F-2
<PAGE>
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 receivable, 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................................. -- 11,854
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.
F-3
<PAGE>
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............................... 1,900 -- --
Other................................... (14) (1,646) (2,057)
----------- ---------- -----------
Net cash used in investing activities..... (475,860) (9,377) (146,203)
----------- ---------- -----------
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>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(THOUSANDS OF DOLLARS)
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:
<TABLE>
<S> <C>
Cash paid.......................................................... $ 40,000
Non-capitalizable costs............................................ (10,000)
Reduction of minority interest..................................... (3,812)
--------
Fair value of assets acquired...................................... $ 26,188
========
</TABLE>
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:
<TABLE>
<S> <C>
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
=======
</TABLE>
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:
<TABLE>
<S> <C>
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
========
</TABLE>
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" at its fair value.
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE>
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 ADDITIONAL CUMULATIVE TOTAL
ISSUED AND PAID IN SHAREHOLDER'S TRANSLATION SHAREHOLDERS'
OUTSTANDING COMMON STOCK 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) --
Stock plan
transactions......... 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.
F-6
<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 has elected to adopt Statement of Financial Accounting Standards
No. 131--"Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131") in the first quarter of 1998 and has retroactively restated its
segment disclosures.
F-7
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's operations involve developing an advanced fiber network to
provide a bundled service package of voice, video and data services to new
customers in high density markets and migrating as many customers as is
economically justified to the single source network, including customers which
were served by the Company's previously separate lines of business for which
profitability was separately measurable and monitored. While the Company's
chief decision makers monitor the revenue streams of the various products,
operations are managed and financial performance is evaluated based upon the
delivery of multiple services to customers over a single network. This allows
the Company to leverage its network costs to maximum profitability. As a
result, there are many shared expenses generated by the various revenue
streams; because management believes that any allocation of the expenses
incurred on a single network to multiple revenue streams would be impractical
and arbitrary, management does not currently make such allocations internally.
The chief decision makers do, however, monitor financial performance in a way
which is different from that depicted in the Company's historical general
purpose financial statements.
The Company manages operations and evaluates operating financial performance
on a pro forma total RCN basis, which reflects the consolidation of all
domestic joint ventures, including those not consolidated under generally
accepted accounting principles. The same net loss results on both a historical
and pro forma total RCN basis since the outside ownership of the joint
venture, which is consolidated only in the pro forma total RCN information, is
reflected as minority interest in the pro forma total RCN information. Such
results are as follows:
<TABLE>
<CAPTION>
PRO FORMA TOTAL RCN
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales:
Voice.......................................... $ 4,007 $ 830 $ 237
Video.......................................... 103,371 87,470 65,699
Data........................................... 41 4 --
Commercial and other........................... 19,878 16,606 26,061
-------- -------- --------
Total Sales...................................... 127,297 104,910 91,997
Costs and expenses, excluding depreciation and
amortization:
Direct expenses................................ 51,757 35,226 39,604
Operating, selling, general and
administrative................................ 83,422 43,881 35,399
-------- -------- --------
EBITDA before nonrecurring charge................ (7,882) 25,803 16,994
Depreciation and amortization.................... 53,205 38,881 22,336
Nonrecurring charge.............................. 10,000 -- --
-------- -------- --------
Operating (loss)................................. (71,087) (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................ (73,734) (4,068) 6,838
(Benefit) provision for income taxes............. (20,849) 979 1,119
-------- -------- --------
(Loss) income before equity in unconsolidated
entities, minority interest and extraordinary
item............................................ (52,885) (5,047) 5,719
Equity in (loss) of unconsolidated entities...... (3,698) (2,282) (3,461)
Minority interest in loss (income) of
consolidated entity............................. 7,402 1,340 (144)
-------- -------- --------
(Loss) income before extraordinary item.......... (49,181) (5,989) 2,114
Extraordinary charge--debt prepayment penalty.... (3,210) -- --
-------- -------- --------
Net (loss) income................................ $(52,391) $ (5,989) $ 2,114
======== ======== ========
</TABLE>
F-8
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
LIVES
-----------
<S> <C>
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
</TABLE>
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.
F-9
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-10
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
F-11
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-12
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
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)
</TABLE>
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at cost, include the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
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
======== =======
</TABLE>
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,
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
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
========= ========
</TABLE>
Depreciation expense was $24,257, $19,372 and $13,236 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-13
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INVESTMENTS AND JOINT VENTURES
Investments at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Megacable.................................................. $70,363 $74,232
Partnership................................................ -- 2,315
Other...................................................... 61 --
------- -------
Total Investments.......................................... $70,424 $76,547
======= =======
</TABLE>
Investments carried on the equity method consist of the following at
December 31:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
------------------
1997 1996
-------- --------
<S> <C> <C>
Megacable.............................................. 40.00% 40.00%
Partnership Interest................................... -- 33.33%
Starpower Communications, LLC.......................... 50.00% --
</TABLE>
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.
F-14
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-15
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
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
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31,
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1997 1996
------------ -------- --------
<S> <C> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
F-16
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. DEBT
a. Long-term debt
Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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 11 1/8% due 2007.................... 358,103 --
-------- --------
Total..................................................... 686,103 131,250
Due within one year....................................... -- --
-------- --------
Total Long-Term Debt...................................... $686,103 $131,250
======== ========
</TABLE>
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.
F-17
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-18
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AGGREGATE AMOUNTS
------------------------ -----------------
<S> <C>
1998..................................................... $ --
1999..................................................... $ 3,750
2000..................................................... $11,250
2001..................................................... $16,250
2002..................................................... $20,500
</TABLE>
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 cancellable 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.
F-19
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
FEDERAL STATE
------- -------
<S> <C> <C>
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
====== =======
</TABLE>
F-20
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 35%. The
differences are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
(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
=========== ========== =========
</TABLE>
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.
F-21
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
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 $11.95
=========
Shares exercisable December 31, 1997................ 1,221,000 $ 7.05
</TABLE>
The following table summarizes stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE EXERCISE AVERAGE EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES 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
F-22
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Net earnings--as reported......................... $(52,391) $(5,989) $2,114
Net earnings--pro forma........................... $(54,419) $(6,612) $1,695
Basic earnings per 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
</TABLE>
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.
F-23
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
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
======= ========
</TABLE>
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ------
<S> <C> <C>
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%
</TABLE>
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.
F-24
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in C-TEC's balance sheet at December 31, 1996:
<TABLE>
<S> <C>
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 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
========
</TABLE>
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.
F-25
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 noncancellable leases, excluding annual
pole rental commitments of approximately $794 that are expected to continue
indefinitely, are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNTS
---- ---------
<S> <C>
1998............................................................... $3,725
1999............................................................... $3,314
2000............................................................... $2,939
2001............................................................... $2,826
2002............................................................... $2,848
Thereafter......................................................... $8,501
</TABLE>
c. The Company has outstanding letters of credit aggregating $3,060 at
December 31, 1997.
d. The Company has entered into various noncancellable contracts for network
services. Future obligations under these agreements are as follows:
<TABLE>
<CAPTION>
NETWORK
YEAR SERVICES
---- --------
<S> <C>
1998................................................................ $3,026
1999................................................................ $3,064
2000................................................................ $3,012
2001................................................................ $2,762
2002................................................................ $ 12
Thereafter.......................................................... $ 14
</TABLE>
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
F-26
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
1998................................................................. $56,250
1999................................................................. $68,750
2000................................................................. $25,000
</TABLE>
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.
F-27
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-28
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
</TABLE>
18. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
----
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 common
share...................... N/A N/A N/A $ (0.31)
Common Stock
High........................ N/A N/A $ 16.63 $ 21.63
Low......................... N/A N/A $ 12.44 $ 12.50
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
----
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>
F-29
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-30
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-31
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales............................................... $ 40,138 $ 29,677
Costs and expenses, excluding depreciation and
amortization....................................... 48,455 25,524
Depreciation and amortization....................... 17,691 12,191
Nonrecurring acquisition costs: In-process technolo-
gy................................................. 44,700 --
Other nonrecurring charges.......................... -- 10,000
----------- -----------
Operating (loss).................................... (70,708) (18,038)
Interest income..................................... 12,815 5,153
Interest expense.................................... (22,735) (3,431)
Other (expense), net................................ (899) (33)
----------- -----------
(Loss) before income taxes.......................... (81,527) (16,349)
(Benefit) for income taxes.......................... (11,682) (4,800)
----------- -----------
(Loss) before equity in unconsolidated entities and
minority interest.................................. (69,845) (11,549)
Equity in (loss) of unconsolidated entities......... (1,493) (805)
Minority interest in loss of consolidated entities.. 3,586 910
----------- -----------
Net (loss).......................................... $ (67,752) $ (11,444)
=========== ===========
Basic and Diluted (loss) per average common share:
Net loss to shareholders.......................... $ (1.21) $ (0.21)
=========== ===========
Weighted average shares outstanding............... 56,216,310 54,950,914
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................. $ 511,762 $ 222,910
Short-term investments.............................. 411,238 415,603
Accounts receivable from related parties............ 4,120 9,829
Accounts receivable, net of reserve for doubtful
accounts of $3,427 at March 31, 1998 and $2,134 at
December 31, 1997.................................. 24,567 19,510
Material and supply inventory, at average cost...... 2,613 2,745
Prepayments and other............................... 7,489 5,314
Deferred income taxes............................... 4,913 4,821
Investments restricted for debt service............. 22,500 22,500
---------- ----------
Total current assets.................................. 989,202 703,232
Property, plant and equipment, net of accumulated
depreciation of $119,039 at March 31, 1998 and
$107,419 at December 31, 1997........................ 247,118 200,340
Investments restricted for debt service............... 41,119 39,411
Investments........................................... 133,384 70,424
Intangible assets, net................................ 120,720 96,547
Deferred charges and other assets..................... 46,689 41,038
---------- ----------
Total assets.......................................... $1,578,232 $1,150,992
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................ $ 1,094 $ --
Accounts payable.................................... 36,872 24,835
Accounts payable to related parties................. 867 3,748
Advance billings and customer deposits.............. 18,999 7,318
Accrued taxes....................................... -- 488
Accrued interest.................................... 10,970 5,549
Accrued contract settlements........................ 3,029 3,126
Accrued cable programming expense................... 3,908 3,498
Accrued expenses.................................... 30,767 21,143
---------- ----------
Total current liabilities............................. 106,506 69,705
Long-term debt........................................ 1,053,324 686,103
Deferred income taxes................................. 22,985 19,612
Other deferred credits................................ 9,358 2,596
Minority interest..................................... 23,776 16,392
Commitments and contingencies.........................
Preferred stock....................................... -- --
Common shareholders' equity:
Common stock........................................ 57,811 54,989
Additional paid-in capital.......................... 392,148 321,766
Cumulative translation adjustments.................. (3,055) (3,055)
Unrealized appreciation on investments.............. 502 --
Treasury stock...................................... (255) --
Retained earnings................................... (84,868) (17,116)
---------- ----------
Total common shareholders' equity..................... 362,283 356,584
---------- ----------
Total liabilities and shareholders' equity............ $1,578,232 $1,150,992
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-33
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.. $ 8,277 $ (1,107)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment........... (28,064) (7,459)
Investment in unconsolidated joint venture......... (12,500) --
Purchase of short-term investments................. (77,614) --
Sales and maturities of short-term investments..... 82,014 33,925
Acquisitions....................................... (40,717) (30,079)
Other.............................................. 602 (1,142)
----------- -----------
Net cash used in investing activities............ (76,279) (4,755)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt......................... 350,588 --
Redemption of long-term debt....................... (122) --
Purchase of treasury stock......................... (255) --
Payments made for debt financing costs............. (5,652) --
Contribution from minority interest partner........ 11,025 --
Proceeds from the exercise of stock options........ 1,270 --
Transfer to CTE.................................... -- (16,418)
Change in affiliate notes.......................... -- 567
----------- -----------
Net cash provided by (used in) financing
activities........................................ 356,854 (15,851)
----------- -----------
Net increase (decrease) in cash and temporary cash
investments....................................... 288,852 (21,713)
Cash and temporary cash investments at beginning of
year.............................................. 222,910 61,843
----------- -----------
Cash and temporary cash investments at March 31.... $ 511,762 $ 40,130
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized)............ $ 16,711 $ 7,363
=========== ===========
Income taxes..................................... $ 75 $ 25
=========== ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-34
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
On February 20, 1998, the Merger with Erols was consummated. The transaction
was accounted for under the purchase method of accounting.
A summary of the transaction is as follows:
<TABLE>
<S> <C>
Cash paid.......................................................... $ 35,931
Fair value of RCN stock issued..................................... 44,672
Liabilities assumed................................................ 58,664
Deferred tax liability incurred.................................... 14,626
Acquisition cost--In-process technology............................ (31,600)
--------
Fair value of assets acquired...................................... $122,293
========
</TABLE>
On February 27, 1998, the Merger with Ultranet was consummated. The
transaction was accounted for under the purchase method of accounting.
A summary of the transaction is as follows:
<TABLE>
<S> <C>
Cash paid.......................................................... $ 7,608
Fair value of RCN stock issued..................................... 26,155
Liabilities assumed................................................ 5,688
Deferred tax liability incurred.................................... 683
Acquisition cost--In-process technology............................ (13,100)
--------
Fair value of assets acquired...................................... $ 27,034
========
</TABLE>
The company transferred approximately 60% of the subscribers acquired in the
Merger with Erols, and related unearned revenue to the Starpower joint
venture. The value of the subscriber contribution was preliminarily estimated
to be $51,937 and the related unearned revenue was preliminarily estimated to
be $25,523.
See accompanying notes to Condensed Consolidated Financial Statements.
F-35
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1997.
2. Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation ("C-TEC"). RCN consists primarily of C-TEC's high growth, 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"). In
connection with the Distribution, C-TEC changed its name to Commonwealth
Telephone Enterprises, Inc. ("CTE").
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.
3. The Company owns a 40% equity interest in Megacable. For the quarters
ended March 31, 1998 and 1997, the Company recorded equity in the earnings of
Megacable which consists of its proportionate share of income and amortization
of excess cost over equity in net assets of $709 and $712, respectively.
Summarized information for the financial position and results of operations
of Megacable, as of and for the three months ended March 31, 1998 and 1997, is
as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Assets...................................................... $76,449 $70,575
Liabilities................................................. 6,150 7,185
Shareholders' equity........................................ 70,299 63,390
Sales....................................................... 9,219 6,764
Costs and expenses.......................................... 6,085 4,530
Foreign currency transaction losses......................... 104 --
Net income.................................................. $ 2,638 $ 2,144
</TABLE>
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 as having a highly inflationary economy. Therefore, the U.S. dollar
is treated as the functional currency and translation adjustments are included
in income. The Company's proportionate share of such adjustments were losses
of $(41), for the three month period ended March 31, 1998.
4. During the first quarter of 1998, approximately 1,180,000 options were
granted, approximately 227,000 were exercised yielding cash proceeds of $1,270
and approximately 48,000 options were canceled. At March 31, 1998, there are
approximately 8,012,000 options outstanding at exercise prices ranging from
$1.30 to $25.75 under RCN's 1997 Plan.
F-36
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. On September 30, 1997, the Yee Family Trusts, as holders of CTE's
Preferred Stock Series A and Preferred Stock Series B, filed an action against
the Company, CTE and Cable Michigan in the Superior Court of New Jersey. The
complaint alleges that CTE's distribution of the Common Stock of RCN and Cable
Michigan in connection with the Distribution constitutes a fraudulent
conveyance. The plaintiffs further allege breaches of contract and fiduciary
duties in connection with the Distribution. On December 1, 1997, the complaint
was amended to allege that CTE's distribution of the common stock of RCN and
Cable Michigan was an unlawful distribution in violation of Pa. C.S. 1551
(b)(2). The plaintiffs have asked the Court to set aside the alleged
fraudulent conveyance and are seeking unspecified monetary damages alleged to
be in excess of $52,000. The Company believes that this lawsuit is without
merit and is contesting this action vigorously. On January 9, 1998, the
defendants, including RCN, filed a Motion to Dismiss, or in the Alternative,
for Summary Judgement ("the Motion"). Response and Reply Briefs have also been
filed. At this writing, the Court has not scheduled oral argument on the
Motion.
6. Basic earnings per share is computed based on net (loss) income divided
by the weighted average number of shares of common stock outstanding during
the period.
Diluted earnings per share is computed based on net (loss) income 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 the 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 the first quarter of 1998 and have a dilutive effect if
the Company had income from continuing operations is 4,041,754.
For periods prior to October 1, 1997, during which the Company was a wholly-
owned subsidiary of C-TEC, earnings per share was calculated by dividing net
(loss) income 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>
QUARTER ENDED MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net (loss)....................................... $ (67,752) $ (11,444)
Basic earnings per average common share:
Weighted average shares outstanding............ 56,216,310 54,950,914
Loss per average common share.................. $ (1.21) $ (.21)
Diluted earnings per average common share:
Weighted average shares outstanding............ 56,216,310 54,950,914
Dilutive shares resulting from stock options... -- --
----------- -----------
Weighted average shares and common stock
equivalents outstanding....................... 56,216,310 54,950,914
=========== ===========
Loss per average common share.................. $ (1.21) $ (.21)
</TABLE>
7. In August 1997, RCN and Potomac Electric Power Company ("PEPCO"), through
wholly-owned subsidiaries, entered into a letter of intent to form a joint
venture to 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 venture in
the form of an unregulated entity with a perpetual term, was formed pursuant
to a joint venture agreement providing for the organization and operation of
Starpower Communications, LLC ("Starpower").
RCN owns 50% of the equity interest in Starpower and PEPCO owns the
remaining 50% interest.
RCN paid $12,500 in cash in January 1998 as its initial capital contribution
to Starpower.
F-37
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. 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 of Erols stock options to 699,104 of RCN stock options
at an average exercise price of $3.424 per share. The transaction was
accounted for under the purchase method of accounting. In connection with the
acquisition of Erols, the Company and an independent third party are
conducting a study for the purpose of allocating the purchase price paid for
Erols. The preliminary results of this study indicate that at least $31,600
will be allocated to in-process technology, which the Company recorded as a
charge in the first quarter of 1998.
RCN expects to contribute to Starpower approximately 60% of the subscribers
acquired in the acquisition of Erols.
9. 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 of Ultranet stock options to 117,052 of RCN stock options
at an average exercise price of $1.825 per share and making cash payments
aggregating approximately $503 to certain holders of Ultranet stock options.
The transaction was consummated on February 27, 1998. The transaction was
accounted for under the purchase method of accounting. In connection with the
acquisition of Ultranet, the Company and an independent third party are
conducting a study for the purpose of allocating the purchase price paid for
Ultranet. The preliminary results of this study indicate that at least $13,100
will be allocated to in-process technology, which the Company recorded as a
charge in the first quarter of 1998.
RCN expects to contribute to RCN-BECOCOM approximately 30% of the
subscribers acquired in the acquisition of Ultranet.
10. In January 1998, Boston Edison Company ("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.
11. 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 ("Merger Sub"), a wholly-owned
subsidiary of RCN. Pursuant to the terms of the Merger Agreement, Merger Sub
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.
12. 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 $350,588. The 9.8% Senior Discount
Notes are general senior obligations of the Company. The 9.8% Senior Discount
Notes will not pay cash interest prior
F-38
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 to 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.
13. The Company has elected to adopt Statement of Financial Accounting
Standard No. 131--"Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). The Company's operations involve developing an
advanced fiber network to provide a bundled service package of voice, video
and data services to new customers in high density markets and migrating as
many customers as is economically justified to the single source network,
including customers which were served by the Company's previously separate
lines of business, for which profitability was separately measurable and
monitored. While the Company's chief decision makers monitor the revenue
streams of the various products, operations are managed and financial
performance is evaluated based upon the delivery of multiple services to
customers over a single network. This allows the Company to leverage its
network costs to maximum profitability. As a result, there are many shared
expenses generated by the various revenue streams; because management believes
that any allocation of the expenses incurred on a single network to multiple
revenue streams would be impractical and arbitrary, management does not
currently make such allocations internally. The chief decision makers do,
however, monitor financial performance in a way which is different from that
depicted in the Company's historical general purpose financial statements.
F-39
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company manages operations and evaluates operating financial performance
on a pro forma total RCN basis, which reflects the consolidation of all
domestic joint ventures, including those not consolidated under generally
accepted accounting principles. The same net loss results on both a historical
and pro forma total RCN basis since the outside ownership of the joint
venture, which is consolidated only in the pro forma total RCN information, is
reflected as minority interest in the pro forma total RCN information. Such
results are as follows:
<TABLE>
<CAPTION>
PRO FORMA
TOTAL RCN QUARTER
ENDED MARCH 31,
--------------------
1998 1997
---------- --------
<S> <C> <C>
Sales:
Voice.................................................. $ 3,515 $ 431
Video.................................................. 26,707 24,596
Data................................................... 5,732 4
Commercial & other..................................... 7,065 4,646
---------- --------
Total................................................ 43,019 29,677
Costs and expenses, excluding depreciation and
amortization:
Direct expenses.................................... 18,837 11,287
Operating, selling, general and administrative..... 33,815 14,237
---------- --------
EBITDA before nonrecurring charges................. (9,633) 4,153
Depreciation and amortization.......................... 17,691 12,191
Nonrecurring charge.................................... -- 10,000
Nonrecurring acquisition costs:
In-process technology................................ 44,700 --
---------- --------
Operating (loss)....................................... (72,024) (18,038)
Interest income........................................ 13,046 5,153
Interest expense....................................... (22,735) (3,431)
Other (expense), net................................... (1,381) (33)
---------- --------
(Loss) before income taxes............................. (83,094) (16,349)
(Benefit) for income taxes............................. (11,682) (4,800)
---------- --------
(Loss) before equity in unconsolidated entities and
minority interest..................................... (71,412) (11,549)
Equity in loss of unconsolidated entities.............. (709) (805)
Minority interest in loss of consolidated entities..... 4,369 910
---------- --------
Net (loss)............................................. $ (67,752) $(11,444)
========== ========
BALANCE SHEET DATA (AT MARCH 31):
Cash, temporary cash investments and short-term
investments........................................... $ 942,304 $ 53,137
Property, plant and equipment.......................... $ 373,587 $227,635
Accumulated depreciation............................... 119,040 89,948
---------- --------
Net property, plant and equipment...................... $ 254,547 $137,687
Long-term debt (including current portion)............. $1,054,418 $131,250
</TABLE>
14. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130--"Reporting Comprehensive
Income" ("SFAS 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim and
annual periods beginning after December 15, 1997. The Company does not
currently have any material items subject to disclosure pursuant to SFAS 130.
F-40
<PAGE>
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.
Ernst & Young LLP
Vienna, Virginia
January 15, 1998, except for Note 10,
as to which the date is February 20, 1998
F-41
<PAGE>
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 outstanding 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
F-42
<PAGE>
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
F-43
<PAGE>
EROLS INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
----------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT 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
F-44
<PAGE>
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
F-45
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
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,
F-46
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
F-47
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
F-48
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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 1/2per 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.
F-49
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
Operating Leases
The Company leases office space and various office and computer equipment
under non-cancelable 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-cancelable operating leases
are as follows:
<TABLE>
<S> <C>
1998.............................................................. $1,301,609
1999.............................................................. 914,082
2000.............................................................. 578,203
2001.............................................................. 461,561
2002.............................................................. 314,831
----------
$3,570,286
==========
</TABLE>
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:
<TABLE>
<S> <C>
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
==========
</TABLE>
F-50
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<S> <C>
1998.............................................................. $ 840,000
1999.............................................................. 225,000
----------
$1,065,000
==========
</TABLE>
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.
F-51
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
F-52
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
------------------------ -------------------------
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
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
======= ===== ========= =====
</TABLE>
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
--------------------------------------- ------------------------
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AT AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 LIFE PRICE 1997 PRICE
------------------------ ----------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Less 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:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 1, 1995
(INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1995 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Net loss--pro forma............... $(1,018,274) $(16,690,399) $(20,086,156)
=========== ============ ============
</TABLE>
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
F-53
<PAGE>
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
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........................... $ -- $ --
=========== ============
</TABLE>
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.
F-54
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TION 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 HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PRO-
SPECTUS 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 OF-
FER 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 25
Capitalization........................................................... 26
Unaudited Pro Forma Consolidated Financial Statements of Operations...... 27
Selected Historical Consolidated Financial Data.......................... 32
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 48
Management............................................................... 78
Security Ownership of Management and Principal Stockholders.............. 85
Description of Certain Indebtedness...................................... 87
Description of the Notes................................................. 91
Certain U.S. Federal Income Tax Considerations........................... 119
Underwriting............................................................. 121
Legal Matters............................................................ 122
Experts.................................................................. 122
Additional Information................................................... 122
Index to Financial Statements............................................ F-i
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$250,000,000 GROSS PROCEEDS
[LOGO]
RCN(SM)
THE LIVE WIRE OF
COMMUNICATIONS.
RCN CORPORATION
% SENIOR DISCOUNT NOTES
DUE 2008
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
JUNE , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company
in connection with the sale of the securities being registered hereby. All
amounts are estimates except the Registration Fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
Registration fee........................................... $ 73,750.00
NASD fee................................................... $ 25,500.00
Printing................................................... $ 75,000.00
Legal fees and expenses.................................... $115,000.00
Accounting fees and expenses............................... $ 20,000.00
Miscellaneous.............................................. $ 3,250.00
-----------
TOTAL.................................................... $312,500.00
===========
</TABLE>
ITEM 14. 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 elimination of the personal liability of RCN directors for
breaches of fiduciary duty and for the indemnification by the Company of each
director and officer of the Company, in each case, to the fullest extent
permitted by applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
1. Issuance of Notes. On October 10, 1997, RCN issued $225,000,000 aggregate
principal amount of 10% Senior Notes due 2007 and $601,045,000 aggregate
principal amount at maturity of 11 1/8% Senior Discount Notes due 2007. On
February 6, 1998, RCN issued $567,000,000 aggregate principal amount at
maturity of 9.80% Senior Discount Notes due 2008. The underwriters for each of
the issuances were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon
Brothers Inc and NationsBanc Montgomery Securities LLC. The notes were sold
under Rule 144A under the Securities Act to qualified institutional buyers.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT AT OFFERING UNDERWRITING
TITLE OF NOTES MATURITY PRICE COMMISSION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
10% Senior Notes due 2007............. $225,000,000 $225,000,000 $6,750,000
- -------------------------------------------------------------------------------
11 1/8% Senior Discount Notes due
2007................................. $601,045,000 $350,000,524 $12,250,018
- -------------------------------------------------------------------------------
9.80% Senior Discount Notes due 2008.. $567,000,000 $350,587,440 $5,732,370
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
II-1
<PAGE>
2. Issuance of Common Stock. On February 20, 1998, RCN issued 1,730,648
shares of RCN Common Stock in connection the merger of Erols Internet, Inc.
with and into a wholly owned subsidiary of RCN. On February 27, 1998, RCN
issued 890,384 shares of RCN Common Stock in connection with the merger of
UltraNet Communications, Inc. with and into a wholly owned subsidiary of RCN.
Both of these issuances were made pursuant to the exemption from registration
under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Form of Distribution Agreement among C-TEC Corporation, Cable
Michigan, Inc. and RCN Corporation (incorporated by reference to
Exhibit 2.1 to Amendment No. 2 to the Company's Information
Statement on Form 10/A ("Form 10A") filed on September 5, 1997)
2.2 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)
2.3 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 Form 10A)
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 (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-4 ("1998 Form S-4") filed on March 23, 1998)
4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B
(included in Exhibit 4.1) (incorporated by reference to Exhibit
4.2 to the Company's 1998 Form S-4)
4.3 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)
4.4 Form of the 10% Senior Exchange Notes due 2007 (included in
Exhibit 4.3) (incorporated by reference to Exhibit 4.2 to the
Company's Form S-4)
4.5 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)
4.6 Form of the 11 1/8% Senior Discount Exchange Notes due 2007
(included in Exhibit 4.5) (incorporated by reference to Exhibit
4.4 to the Company's Form S-4)
4.7 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)
4.8 Indenture dated as of , 1998 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the %
Senior Discount Notes due 2008
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
4.9 Form of the % Senior Discount Notes due 2008 (included as an
exhibit to 4.8)
5.1 Opinion re legality
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)
10.14 Amended and Restated Operating Agreement of Starpower
Communications, LLC dated as of December 18, 1997 by and between
Pepco Communications, L.L.C. and RCN Telecom Services of
Washington, D.C., Inc. (incorporated by reference to Exhibit 10.M
to RCN's Annual Report on Form 10-K filed on March 31, 1998 ("10-
K"))
11.1 Statement regarding Computation of Per Share Earnings (included in
the Notes to the Consolidated Financial Statements)
12.1 Statement regarding Ratio of Earnings to Fixed Charges
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
21.1 Subsidiaries (incorporated by reference to Exhibit 21 to the
Company's 10-K)
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.
23.3 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1* Power of Attorney
25.1 Statement of Eligibility of Trustee
99.1 Financial Statement Schedule--Schedule I: Condensed Financial
Information of RCN for the Year Ended December 31, 1997
(incorporated by reference to Item 14(a)(2) to RCN's 10-K)
99.2 Financial Statement Schedule--Schedule II: Valuation and
Qualifying Accounts and Reserves for the Years Ended December 31,
1997, 1996 and 1995 (incorporated by reference to Item 14(a)(2) to
RCN's 10-K)
</TABLE>
- --------
* 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.
(b) Financial Statement Schedules
Description
Condensed Financial Information of RCN for the Year Ended December 31, 1997
(Schedule I) (incorporated by reference to Item 14(a)(2) to RCN's 10-K)
Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 1997, 1996 and 1995 (Schedule II) (incorporated by reference to Item
14(a)(2) to RCN's 10-K)
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
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.
(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.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, NEW YORK, ON THIS 12TH DAY OF JUNE, 1998.
RCN Corporation
/s/ Bruce C. Godfrey
By: _________________________________
BRUCE C. GODFREY
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE 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 Chief Executive June 12, 1998
DAVID C. MCCOURT Officer
/s/ Michael J. Mahoney Director, President
- ------------------------------------- and Chief Operating June 12, 1998
MICHAEL J. MAHONEY Officer
/s/ Bruce C. Godfrey Director, Executive
- ------------------------------------- Vice President and June 12, 1998
BRUCE C. GODFREY Chief Financial
Officer
/s/ Dennis Spina Director, Vice
- ------------------------------------- Chairman and June 12, 1998
DENNIS SPINA President Internet
Services
Director
- -------------------------------------
JAMES Q. CROWE
/s/ Alfred Fasola Director
- ------------------------------------- June 12, 1998
ALFRED FASOLA
/s/ Stuart E. Graham Director
- ------------------------------------- June 12, 1998
STUART E. GRAHAM
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ Richard R. Jaros Director
- ------------------------------------- June 12, 1998
RICHARD R. JAROS
/s/ Thomas May Director
- ------------------------------------- June 12, 1998
THOMAS MAY
/s/ Thomas P. O'Neill, III Director
- ------------------------------------- June 12, 1998
THOMAS P. O'NEILL, III
/s/ Eugene Roth Director
- ------------------------------------- June 12, 1998
EUGENE ROTH
/s/ Walter Scott, Jr. Director
- ------------------------------------- June 12, 1998
WALTER SCOTT, JR.
/s/ Michael B. Yanney Director
- ------------------------------------- June 12, 1998
MICHAEL B. YANNEY
/s/ Ralph Hromisin Vice President and
- ------------------------------------- Chief Accounting June 12, 1998
RALPH HROMISIN Officer
II-6
<PAGE>
Exhibit 1.1
================================================================================
RCN CORPORATION
$[ ]
[ ]% Senior Discount Notes Due 2008
UNDERWRITING AGREEMENT
Dated as of June [ ], 1998
================================================================================
<PAGE>
RCN Corporation
$[ ]
[ ] Senior Discount Notes due 2008
UNDERWRITING AGREEMENT
----------------------
New York, New York
June [ ], 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
NationsBanc Montgomery Securities LLC
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1305
Ladies and Gentlemen:
RCN Corporation, a Delaware corporation (the "Company"), confirms
its agreements with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch, Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation
and NationsBanc Montgomery Securities LLC are acting as representatives (in such
capacity, the "Representatives"), with respect to the issue and sale by the
Company (the "Offering") and the purchase by the Underwriters, acting severally
and not jointly, of the respective principal amounts set forth in Schedule A of
$[ ] aggregate principal amount at maturity of the Company's (the
"Securities"). The Securities are to be issued pursuant to an indenture dated as
of June [ ], 1998 (the "Indenture") between the Company and The Chase
Manhattan Bank, as trustee (the "Trustee").
<PAGE>
-2-
The Company understands that the Underwriters propose to make a
public offering of the Securities as soon as the Representatives deem advisable
after this Agreement has been executed and delivered and the Indenture has been
qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act").
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-55673) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the Act (the
"1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations. The information included in such prospectus that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information." Each prospectus used before such registration statement became
effective, and any prospectus that omitted the Rule 430A Information that was
used after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus," and the preliminary
prospectus dated June 4, 1998, is herein called the "Preliminary Prospectus."
Such registration statement, including the exhibits thereto and schedules
thereto at the time it became effective and including the Rule 430A Information
is herein called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the
"Rule 462(b) Registration Statement," and after such filing the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
The final prospectus in the form first furnished to the Underwriters for use in
connection with the offering of the Securities is herein called the
"Prospectus." For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
This agreement (this "Agreement" or the "Underwriting Agreement"),
the Securities and the Indenture are referred to collectively as the "Operative
Documents."
<PAGE>
-3-
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time (as defined in Section 2(b) hereof, and agrees with each
Underwriter as follows:
(i) Each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the Act and no stop
order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time, the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the Act and the 1933 Act Regulations and did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any
amendments or supplements thereto, at the time the Prospectus or any such
amendment or supplement was issued and at the Closing Time, included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
The Prospectus, when filed pursuant to Rule 424(b) under the
Act, will comply in all material respects with the 1933 Act Regulations
and the Prospectus delivered
<PAGE>
-4-
to the Underwriters for use in connection with this offering was
substantially identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii) The only Restricted Affiliates (as defined in the Indenture) as
of the date hereof are those listed on Schedule C hereto. Each of the
Company, each "significant subsidiary" (as defined in Section 210.1-02 of
Regulation S-X) of the Company (each a "Subsidiary" and collectively, the
"Subsidiaries") and the Restricted Affiliates has been duly organized and
is validly existing and in good standing under the laws of its
jurisdiction of organization, with all requisite power and authority under
such laws, and all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from regulatory or governmental officials,
bodies and tribunals, (a) to own, lease and operate their respective
properties and to conduct their respective businesses as now conducted and
as described in the Prospectus and (b), in the case of the Company, to
enter into, deliver, incur and perform its obligations under the Operative
Documents, except, in the case of the foregoing subclause (a) for
authorizations, approvals, orders, leases, certificates and permits, the
failure of which to possess could not reasonably be expected to have a
Material Adverse Effect (as defined below); and are all duly qualified to
do business and in good standing in all other jurisdictions where the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a
material adverse effect (i) on the business, condition (financial or
otherwise), results of operations, business affairs or business prospects
of the Company, the Subsidiaries and the Restricted Affiliates taken as a
whole or (ii) on the ability of the Company to perform any of its
obligations under the Operative Documents or to consummate any of the
transactions contemplated hereby or thereby (a "Material Adverse Effect").
(iii) The Securities have been duly authorized by the Company, and the
Company has all requisite corporate power and authority to execute, issue
and deliver the Securities, and to incur and perform its obligations
provided for therein.
<PAGE>
-5-
(iv) The Securities, when executed, authenticated and issued in
accordance with the terms of the Indenture (assuming the due
authorization, execution and delivery of the Indenture by the Trustee) and
when delivered against payment of the purchase price therefor as provided
in this Agreement, will constitute valid and binding obligations of the
Company, entitled to the benefits of the Indenture and enforceable against
the Company in accordance with the terms thereof; subject, in the case of
each of the foregoing, to (a) applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights
and remedies generally, (b) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law) and (c)
the discretion of the court before which any proceeding therefor may be
brought (clauses (a), (b) and (c) being referred to herein as the
"Enforceability Limitations").
(v) The Company has all requisite corporate power and authority to
execute and deliver this Agreement and the Indenture and perform its
obligations provided for therein. This Agreement has been, and, as of the
Closing Date, the Indenture will have been, duly authorized, executed and
delivered by the Company, and upon such execution by the Company (assuming
the due authorization, execution and delivery by parties thereto other
than the Company) and, as of the Closing Date, the Indenture will
constitute, the valid and binding obligation of the Company, enforceable
against the Company in accordance with the terms hereof or thereof,
subject only to the Enforceability Limitations. The Indenture has been
duly qualified under the 1939 Act.
(vi) No consent, waiver, authorization, approval, license,
qualification or order of, or filing or registration with, any court or
governmental or regulatory agency or body, is required for the issue and
sale of the Securities, the performance by the Company of its obligations
under the Operative Documents, or for the consummation of any of the
transactions contemplated hereby or thereby, including, without
limitation, the issuance and sale of the Securities hereunder, except,
such as have been obtained under the Act and such as may be required under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus.
<PAGE>
-6-
(vii) The issuance, sale and delivery of the Securities, the
execution, delivery and performance by the Company of this Agreement and
the consummation by the Company of the transactions contemplated hereby
and in the Prospectus and the compliance by the Company with the terms of
the foregoing do not, and, at the Closing Time, will not conflict with or
constitute or result in a breach or violation by the Company or any of the
Subsidiaries or the Restricted Affiliates of (A) any of the terms or
provisions of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) by any of the Company,
the Subsidiaries or the Restricted Affiliates or give rise to any right to
accelerate the maturity or require the prepayment of any indebtedness
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company, the Subsidiaries
or the Restricted Affiliates under any contract, indenture, mortgage, deed
of trust, loan agreement, note, lease, license, franchise agreement,
authorization, permit, certificate or other agreement or document to which
any of the Company, the Subsidiaries or the Restricted Affiliates is a
party or by which any of them may be bound, or to which any of them or any
of their respective assets or businesses is subject (collectively,
"Contracts") (and the Company has no knowledge of any conflict, breach or
violation of such terms or provisions or of any such default, in any such
case, which has occurred or will so result), (B) the articles of
incorporation, by-laws or similar organizational documents (each, an
"Organizational Document") of each of the Company, the Subsidiaries and
the Restricted Affiliates or (C) any law, statute, rule or regulation, or
any judgment, decree or order, in any such case, of any domestic or
foreign court or governmental or regulatory agency or other body having
jurisdiction over the Company or any of the Subsidiaries or the Restricted
Affiliates or any of their respective properties or assets.
(viii) The Securities and the Indenture will each conform in all
material respects to the descriptions thereof in the Prospectus.
(ix) The audited and unaudited consolidated financial statements of
the Company included in the Prospectus, including the notes thereto,
present fairly in all material respects the financial position of the
Company and its consolidated subsidiaries at the dates indicated, and the
statement of operations, stockholders' equity and cash
<PAGE>
-7-
flows of the Company and its consolidated subsidiaries for the periods
have been prepared in conformity with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. Coopers & Lybrand L.L.P., which has examined certain
of such financial statements as set forth in its report included in the
Prospectus, is an independent public accounting firm with respect to the
Company and its Subsidiaries within the meaning of Regulation S-X under
the Act. The audited and unaudited consolidated financial statements
included in the Prospectus of Erols Internet, Inc. ("Erols"), including
the notes thereto, present fairly in all material respects the financial
position of Erols and its consolidated subsidiaries, at the dates
indicated, and the statement of operations, stockholders' equity and cash
flows of Erols and its consolidated subsidiaries for the periods have been
prepared in conformity with United States GAAP applied on a consistent
basis throughout the periods involved. The selected financial data and the
summary financial information included in the Prospectus present fairly in
all material respects the information shown therein and have been compiled
on a basis consistent with that of the financial statements included in
the Prospectus. Ernst & Young LLP, which has examined certain of such
financial statements as set forth in its report included in the
Prospectus, is an independent public accounting firm with respect to Erols
and its subsidiaries within the meaning of Regulation S-X under the Act.
The pro forma financial information relating to the Company and its
Subsidiaries and the related notes thereto included in the Prospectus
present fairly in all material respects the information shown therein,
have been prepared in all material respects in accordance with the
Commission's rules and guidelines with respect to pro forma financial
adjustments and have been properly computed on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(x) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
specifically stated therein, there has been no (A) material adverse change
in the business, condition (financial or otherwise), results of
operations, business affairs or business prospects of the Company, the
Subsidiaries and the Restricted Affiliates taken as a whole, whether or
not arising in the ordinary
<PAGE>
-8-
course of business (a "Material Adverse Change"), (B) transaction entered
into by any of the Company, the Subsidiaries or the Restricted Affiliates,
other than in the ordinary course of business, that is material to the
Company, the Subsidiaries and the Restricted Affiliates, taken as a whole
or (C) dividend or distribution of any kind declared, paid or made by the
Company on its capital stock.
(xi) The Company has the authorized, issued and outstanding
capitalization set forth in the Prospectus under the column "Actual" under
the caption "Capitalization;" all of the outstanding capital stock of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable and was not issued in violation of any preemptive or similar
rights (whether provided contractually or pursuant to any Organizational
Document). Except as set forth in the Prospectus, the Company does not
own, directly or indirectly, any material amount of shares, or any other
material amount of equity or long-term debt securities or have any
material equity interest in any firm, partnership, joint venture or other
entity. Except as set forth in the Prospectus, no holder of any securities
of the Company is entitled to have such securities under the Registration
Statement or otherwise registered by the Company under the Act. All of the
outstanding capital stock or other ownership interests of each of the
Subsidiaries and the Restricted Affiliates has been duly authorized and
validly issued, is fully paid and nonassessable and was not issued in
violation of any preemptive or similar rights (whether provided
contractually or pursuant to any Organizational Document).
(xii) None of the Company, the Subsidiaries or the Restricted
Affiliates is (A) in violation of its respective Organizational Documents,
(B) in default (or, with notice or lapse of time or both, would be in
default) in the performance or observance of any obligation, agreement,
covenant or condition contained in any Contract or (C) in violation of any
law, statute, judgment, decree, order, rule or regulation of any domestic
or foreign court with jurisdiction over the Company, the Subsidiaries or
the Restricted Affiliates or any of their respective assets or properties,
or other governmental or regulatory authority, agency or other body, other
than, in the case of clause (B) or (C), such defaults or violations which
could not, individually or in the aggregate, reasonably be expected to
have or result in a Material Adverse Effect; and any
<PAGE>
-9-
real property and buildings held under lease by the Company, the
Subsidiaries or the Restricted Affiliates are held by the Company or such
Subsidiary or Restricted Affiliate, as the case may be, under valid,
subsisting and enforceable leases with such exceptions which could not,
individually or in the aggregate, reasonably be expected to have or result
in a Material Adverse Effect.
(xiii) Except as described in the Prospectus, each of the Company, the
Subsidiaries and the Restricted Affiliates has obtained all consents,
approvals, orders, certificates, licenses, permits, franchises and other
authorizations, in each case material to the operations of the Company
(collectively, the "Licenses") of and from, and has made all declarations
and filings with, all governmental and regulatory authorities, all
self-regulatory organizations and all courts and other tribunals necessary
to own, lease, license and use its properties and assets and to conduct
its businesses in the manner described in the Prospectus. None of the
Company, the Subsidiaries or the Restricted Affiliates has received any
notice of proceedings relating to the revocation or modification of, or
denial of any application for, any License which, if the subject of any
unfavorable decision, ruling or finding, could, singly or in the
aggregate, reasonably be expected to have or result in a Material Adverse
Effect; the Company, each of the Subsidiaries and each of the Restricted
Affiliates have fulfilled and performed all of their obligations with
respect to all Licenses possessed by any of them, except where the failure
to so fulfill and perform could not, singly or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect; and
no event has occurred which allows, or after notice or lapse of time, or
both, would allow, revocation or termination thereof or result in any
other material impairment of the rights of the holder of any such License,
except where such revocation or termination could not, singly or in the
aggregate, reasonably be expected to have or result in a Material Adverse
Effect; and the Licenses referred to above place no restrictions on the
Company, any of the Subsidiaries or any of the Restricted Affiliates that
are not described in the Prospectus, except where such restrictions could
not, singly or in the aggregate, reasonably be expected to have or result
in a Material Adverse Effect.
(xiv) Except as described in the Prospectus, there is no legal action,
suit, proceeding inquiry or investigation
<PAGE>
-10-
before or by any court or governmental body or agency, domestic or
foreign, now pending or, to the best knowledge of the Company, threatened
against the Company, any of the Subsidiaries or any of the Restricted
Affiliates or affecting the Company, any of the Subsidiaries or any of the
Restricted Affiliates or any of their respective properties which would be
required to be disclosed in a registration statement filed under the Act
which could, individually or in the aggregate, reasonably be expected to
have or result in a Material Adverse Effect. Except as set forth in the
Prospectus, none of the Company, any of the Subsidiaries or any of the
Restricted Affiliates has received any notice or claim of any material
default (or event, condition or omission which with notice or lapse of
time or both would result in a default) under any of its respective
Contracts or has knowledge of any material breach of any of such Contracts
by the other party or parties thereto, in each case which would,
individually or in the aggregate have a Material Adverse Effect.
(xv) Each of the Company, the Subsidiaries and the Restricted
Affiliates has filed all necessary federal, state and foreign income and
franchise tax returns, and has paid all taxes shown as due thereon; and
there is no tax deficiency that has been asserted against any of the
Company, the Subsidiaries or any Restricted Affiliate.
(xvi) Each of the Company, the Subsidiaries and the Restricted
Affiliates has good and marketable title to all real and personal property
described in the Prospectus as being owned by it and good and marketable
title to a leasehold estate in the real and personal property described in
the Prospectus as being leased by it, free and clear of all liens,
charges, encumbrances or restrictions, except to the extent the failure to
have such title or the existence of such liens, charges, encumbrances or
restrictions could not, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect.
(xvii) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds therefrom as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
<PAGE>
-11-
(xviii) No strike, labor problem, dispute, slowdown, work stoppage or
disturbance with the employees of the Company, any of the Subsidiaries or
any of the Restricted Affiliates exists or, to the best knowledge of the
Company, is threatened which could, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect.
(xix) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits thereto which have not been so described or filed as required.
(xx) The Company has insurance in such amounts and covering such
risks and liabilities as are in accordance with normal industry practice.
(xxi) Except as disclosed in the Prospectus, none of the Company, any
Subsidiary or any of the Restricted Affiliates has any material profit
sharing, deferred compensation, stock option, stock purchase, phantom
stock or similar plans, including agreements evidencing rights to purchase
securities or to share in the profits of the Company, any Subsidiary or
any Restricted Affiliate.
(xxii) The Company is, and as of the Closing Time will be, Solvent. As
used herein, the term "Solvent" means, with respect to the Company on a
particular date, that on such date (A) the fair market value of the assets
of the Company exceeds its respective liabilities (including without
limitation, stated liabilities and identified contingent liabilities), (B)
the present fair salable value of the assets of the Company will exceed
its respective probable liabilities on its debts (including without
limitation, stated liabilities and identified contingent liabilities), (C)
the fair market value of the Company's total assets exceeds its total
liabilities, including identified contingent liabilities, by an amount at
least equal to the total par value of its common stock both immediately
prior to and after the Offering, (D) the Company is and will be able to
pay its debts (including without limitation, stated liabilities and
identified contingent liabilities) as such debts mature and (E) the
Company will not have unreasonably small capital with which to conduct its
present and anticipated business.
(xxiii) Except as described in the Prospectus or as would not,
individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect (A) each of the Company, the Subsidiaries and the
Restricted Affiliates is in compliance with and not subject to any known
liability under applicable Environmental Laws (as defined below), (B) each
of the Company, the Subsidiaries and the Restricted Affiliates has made
all filings and provided all notices required under any applicable
Environmental Law, and has, and is in compliance with, all Permits
required under any applicable Environmental Laws, and each of them is in
full force and effect, (C) there is no civil, criminal or administrative
action, suit, demand, claim, hearing, notice of violation or, to the best
knowledge of the Company, investigation, proceeding, notice or demand
letter or request for information pending or threatened against the
Company, any of the Subsidiaries or any of the Restricted Affiliates under
any Environmental Law, (D) no lien, charge, encumbrance or restriction has
been recorded under any Environmental Law with respect to any assets,
facility or property owned, operated, leased or controlled by the Company,
any Subsidiary or any Restricted Affiliate, (E) none of the Company, any
Subsidiary or any Restricted Affiliate has received notice that it has
been identified as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), or any comparable state law, (F) no property or facility of
------
the Company, any Subsidiary or any Restricted Affiliate is (i) listed or,
to the best knowledge of the Company proposed for listing on the National
Priorities List under CERCLA or is (ii) listed in the Comprehensive
Environmental Response, Compensation, Liability Information System List
promulgated pursuant to CERCLA, or on any comparable list maintained by
any state or local governmental authority.
For purposes of this Agreement, "Environmental Laws" means the common law and
------------------
all applicable federal, provincial, state and local laws or regulations, codes,
orders, decrees, judgments or injunctions issued, promulgated, approved or
entered thereunder, relating to pollution or protection of public or employee
health and safety or the environment, including, without limitation, laws
relating to (i) emissions, discharges, releases or threatened releases of
hazardous materials into the environment (including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata), (ii) the
manufacture, processing, distribution, use, generation, treatment, storage,
disposal, transport or handling of hazardous materials, and (iii) underground
and above ground storage tanks and related piping, and emissions, discharges,
releases or threatened releases therefrom.
(xxiv) Except as described in the Prospectus, none of the Company, any
of the Subsidiaries or any of the Restricted Affiliates has incurred any
liability for any prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which the Company,
-----
the Subsidiaries or the Material Subsidiaries makes or ever has made a
contribution and in which any employee of the Company, any such Subsidiary
or any such Restricted Affiliate is or has ever been a participant, which,
individually in the aggregate, could reasonably be expected to have or
result in a Material Adverse Effect. With respect to such plans, each of
the Company, the Subsidiaries and the Restricted Affiliates is in
compliance in all respects with all applicable provisions of ERISA, except
where the failure to so comply could not, individually or in the
aggregate, reasonably be expected to have or a result in a Material
Adverse Effect.
(b) Any certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for
<PAGE>
-12-
the Underwriters pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Company to the Representatives as to the
matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing. (a)
Securities. On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company agrees to
sell to each Underwriter, severally and not jointly, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price set
forth in Schedule B, the aggregate principal amount at maturity of Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
additional principal amount of Securities which such Underwriter may become
obligated to purchase pursuant to Section 10.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the offices of Cahill Gordon &
Reindel, 80 Pine Street, New York, New York 10005, or at such other place as
shall be agreed upon by the Representatives and the Company, at 9:00 A.M.
(Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Securities, if any, which it has agreed to purchase. Merrill Lynch, individually
and not as representative of the Underwriters, may (but shall not be obligated
to) make payment of the purchase price for the Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time, but such payment shall not relieve such Underwriter from its obligations
hereunder.
(c) Denominations; Registration. Certificates for the Securities
shall be in such denominations ($1,000 or integral multiples thereof) and
registered in such names as the
<PAGE>
-13-
Representatives may request in writing at least one full business day before the
Closing Time. The Securities will be made available for examination and
packaging by the Representatives in The City of New York not later than 10:00
A.M. (Eastern time) on the business day prior to the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A and, prior to the completion of the distribution
of the Securities by the Underwriters, will notify the Representatives
immediately (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b)
and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was
not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. Prior to the completion of the
distribution of the Securities by the Underwriters, the Company will give
the Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under Rule
462(b)) or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectus, will furnish the Representatives with copies of any
such
<PAGE>
-14-
documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Representatives or counsel for the Underwriters shall reasonably
object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies (or duplicates thereof) of the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein)
and signed copies (or duplicates thereof) of all consents and certificates
of experts, and will also deliver to the Representatives, without charge,
a conformed copy of the Registration Statement as originally filed and of
each amendment thereto (without exhibits) for each of the Underwriters.
The copies of the Registration Statement and each amendment thereto
furnished to the Underwriters will be substantially identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
Act. The Company will furnish to each Underwriter, without charge, during
the period when the Prospectus is required to be delivered under the Act
or the Securities Exchange Act of 1934 (the "Exchange Act"), such number
of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time after the first date of
the public offering of the Common Stock and prior to the expiration of
nine months after the date of the Prospectus, a prospectus is required by
the Act to be delivered in connection with sales of the Securities, and
any event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the Underwriters or for the
<PAGE>
-15-
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if
it shall be necessary, in the opinion of such counsel, at any such time to
amend the Registration Statement or amend or supplement the Prospectus in
order to comply with the requirements of the Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(b), such amendment or supplement as may
be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements,
and the Company will furnish to the Underwriters such number of copies of
such amendment or supplement as the Underwriters may reasonably request,
and in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Common Stock at any time after nine
months or more after the date of the Prospectus, upon the request of such
Underwriter but at the expense of such Underwriter, to prepare and deliver
to such Underwriter as many copies as such Underwriter may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions (domestic or foreign) as the Representatives may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the Exchange Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the Act.
<PAGE>
-16-
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in
the Prospectus under "Use of Proceeds".
(i) Restriction on Sale of Securities. During a period of 90
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch directly or indirectly, issue,
sell, offer or contract to sell, grant any option for the sale of or
otherwise transfer or dispose of any debt securities of the Company.
(j) Reporting Requirements. The Company, during the period
when the Prospectus is required to be delivered under the Act or the
Exchange Act, will file all documents required to be filed with the
Commission pursuant to the Exchange Act within the time periods required
by the Exchange Act and the rules and regulations of the Commission
thereunder.
SECTION 4. Payment of Expenses. (a) Whether or not any sale of the
Securities is consummated, the Company agrees to pay and bear all costs and
expenses incident to the performance of all of its obligations under this
Agreement, including (i) the preparation and printing of the Registration
Statement and any amendments or supplements thereto and the cost of furnishing
copies thereof to the Underwriters, (ii) the preparation, issuance, printing and
delivery of certificates for the Securities, (iii) the fees and disbursements of
the Company's counsel and accountants, (iv) the qualification of the Securities
under the applicable state securities or "blue sky" laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and up to $10,000 in
respect of fees and disbursements of counsel to the Representatives in
connection therewith and in connection with the preparation of any survey of
state securities or "blue sky" laws or legal investment memoranda, (v) the
printing and delivery to the Underwriters of copies of each preliminary
prospectus and of the Prospectus and any amendments or supplements thereto, (vi)
the fees and expenses of the Trustee and any transfer agent or registrar for the
Securities, (vii) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities and (viii) all expenses (including travel
expenses) of the Company in connection with any meetings with prospective
investors in the Securities.
<PAGE>
-17-
(b) If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 5 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 9(a)(i) or Section 11 hereof or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by an Underwriter in payment for the Securities at
the Closing Time, the Company agrees to reimburse the Underwriters promptly upon
demand for all reasonable out-of-pocket expenses (including reasonable fees and
disbursements of their counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities.
SECTION 5. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Securities
are subject to the continued accuracy, as of the Closing Time, of the
representations and warranties of the Company herein contained, to the accuracy
of the statements of the Company and officers of the Company made in any
certificate pursuant to the provisions hereof, to the performance by the Company
of its obligations hereunder, and to the following further conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, has become effective and at the Closing Time no
stop order suspending the effectiveness of the Registration Statement
shall have been issued under the Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A).
(b) At the Closing Time, the Representatives shall have received the
opinion of Davis Polk & Wardwell, counsel to the Company, dated as of the
Closing Time, in substantially the form set forth below and otherwise
reasonably satisfactory to the Representatives and counsel for the
Representatives, to the effect that:
<PAGE>
-18-
(1) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under the
Operative Documents;
(2) No consent, waiver, approval, authorization, license,
qualification or order of or filing or registration with any court
or governmental or regulatory agency or body is required for the
execution and delivery by the Company of this Agreement, the
Indenture or for the issue and sale of the Securities, or the
performance by the Company of its obligations under the Operative
Documents, or for the consummation of any of the transactions
contemplated hereby or thereby, except such as have been obtained
under the Act and such as may be required under the blue sky laws of
any jurisdiction in connection with the purchase and distribution of
the Securities by the Underwriters in the manner contemplated in
this Agreement and in the Prospectus;
(3) The issuance, sale and delivery of the Securities and
performance by the Company of this Agreement and the Indenture
(assuming due authorization and execution by each party other than
the Company), and the consummation by the Company of the
transactions contemplated hereby or thereby and the compliance by
the Company with the terms of the foregoing do not, and, at the
Closing Time, will not, conflict with or constitute or result in a
breach or violation by the Company, any of the "significant
subsidiaries" (as defined in Section 210.1-02 of Regulation S-X) of
the Company (each, a "Significant Subsidiary") or any of the
Restricted Affiliates of (A) any provision of the Certificate of
Incorporation or By-laws of the Company, or (B) any law, statute,
rule, or regulation or any order, decree or judgment known to such
counsel to be applicable to the Company, any Significant Subsidiary
or any Restricted Affiliate, of any court or governmental or
regulatory agency or body or arbitrator known to such counsel to
have jurisdiction over the Company, any of the Subsidiaries or any
of the Restricted Affiliates or any of their respective properties
or assets;
(4) The Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
<PAGE>
-19-
(5) The statements in the Prospectus under the headings
"Description of the Notes" insofar as such statements purport to
summarize certain provisions of the Notes and the Indenture provide
a fair summary of such provisions of such agreements and
instruments;
(6) The statements in the Prospectus under the caption
"Certain U.S. Federal Income Tax Considerations" fairly and
accurately summarize the material United States federal tax
consequences of owning the Notes;
(7) The Indenture has been duly authorized, executed and
delivered by the Company and (assuming due authorization and
execution by the Trustee) constitutes a valid and binding agreement
of the Company, enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by the
Enforceability Limitations;
(8) Each of the Securities, when executed and authenticated in
accordance with the provisions of the Indenture and delivered and
paid for in accordance with the terms of this Agreement, will be
entitled to the benefits of the Indenture and will be valid and
binding obligations of the Company, enforceable in accordance with
its terms except as the enforceability thereof may be limited by the
Enforceability Limitations;
(9) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds therefrom as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(10) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); and, to the best of our knowledge, no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Act and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission; and
<PAGE>
-20-
(11) The Registration Statement, including any Rule 462(b)
Registration Statement and the Rule 430A Information, the Prospectus
and each amendment or supplement to the Registration Statement and
Prospectus as of their respective effective or issue dates (other
than the financial statements and supporting schedules included
therein or omitted therefrom, as to which such counsel need express
no opinion) complied as to form in all material respects with the
requirements of the Act and the 1933 Act Regulations.
In addition such counsel shall state that such counsel has
participated in conferences with representatives of the Underwriters,
officers and other representatives of the Company and representatives of
the independent certified accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and the
business and affairs of the Company and the Subsidiaries were discussed,
and although such counsel has not verified and does not pass upon or
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement (except and only to
the extent set forth in clauses (5) and (6) above), on the basis of the
foregoing, no facts have come to the attention of such counsel which lead
such counsel to believe that the Registration Statement or any amendment
thereto, at the time such Registration Statement or any such amendment
became effective, 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 therein not misleading or that the
Prospectus or any amendment or supplement thereto at the time the
Prospectus was issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any comment with
respect to the financial statements, including the notes thereto and
supporting schedules, or any other financial data set forth or referred to
in the Registration Statement or Prospectus).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of
<PAGE>
-21-
Delaware and the laws of the State of New York and (B) may rely, as to
matters of fact, to the extent they deem proper on representations or
certificates of responsible officers of the Company and certificates of
public officials.
(c) At the Closing Time, the Representatives shall have
received the opinion of John Filipowicz, assistant general counsel for the
Company, dated as of the Closing Time, in the form set forth below and
otherwise reasonably satisfactory to the Representatives and counsel for
the Representatives, to the effect that:
(1) The Company has been duly incorporated and is validly
existing under the laws of the State of Delaware, with corporate
power and authority to own, lease and operate its assets and
properties and conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement;
the Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in
a Material Adverse Effect;
(2) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the column
"Actual" under the caption "Capitalization"; the shares of issued
and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable;
and none of the outstanding shares of capital stock of the Company
was issued in violation of the preemptive or other similar rights of
any securityholder of the Company.
(3) Each of the Subsidiaries and each of the Restricted
Affiliates has been duly organized and is validly existing in good
standing under the laws of the jurisdiction of its organization, has
the requisite power and authority to own, lease and operate its
properties and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which such qualification is
required,
<PAGE>
-22-
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be
in good standing individually or in the aggregate would not result
in a Material Adverse Effect; all of the issued and outstanding
capital stock or other ownership interests of each of the
Subsidiaries and each of the Restricted Affiliates has been duly
authorized and validly issued, is fully paid and non-assessable and,
to such counsel's knowledge and information, except as set forth in
the Prospectus, is owned by the Company directly, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equity;
(4) The issuance, sale and delivery of the Securities, the
execution, delivery and performance by the Company of this Agreement
and the Indenture (assuming due authorization and execution by each
party other than the Company) and the consummation by the Company of
the transactions contemplated hereby or thereby and the compliance
by the Company with the terms of the foregoing do not, and, at the
Closing Time, will not, conflict with or constitute or result in a
breach or violation by the Company, any of the Subsidiaries or any
of the Restricted Affiliates of (A) any provision of the Certificate
of Incorporation or By-laws of the Company, or (B) any of the terms
or provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) by the
Company, or give rise to any right to accelerate the maturity or
require the prepayment of any indebtedness under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, any Subsidiary or any Restricted
Affiliate under any material Contract known to such counsel, except
where any such conflict, breach, violation or default would not
result in a Material Adverse Effect;
(5) To the knowledge of such counsel, other than as described
in the Prospectus, no legal, regulatory or governmental proceedings
are pending to which the Company, any of the Subsidiaries or any of
the Restricted Affiliates is a party or to which the property or
assets of the Company, any of the Subsidiaries or any of the
Restricted Affiliates are subject which, individually or in the
aggregate, could reasonably be expected to have a Material Ad-
<PAGE>
-23-
verse Effect or which, individually or in the aggregate, could have
a material adverse effect on the power or ability of the Company to
perform its obligations under the Operative Documents or to
consummate the transactions contemplated hereby or thereby or by the
Prospectus and to the knowledge of such counsel, no such material
proceedings have been threatened against the Company, any of the
Subsidiaries or any of the Restricted Affiliates or with respect to
any of their respective assets or properties;
(6) None of the Company, the Subsidiaries or the Restricted
Affiliates is in violation of its respective Organizational
Documents; to the knowledge of such counsel, no default by the
Company, any of the Subsidiaries or any of the Restricted Affiliates
exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any
Contract; and to the knowledge of such counsel, none of the Company,
the Subsidiaries or any of the Restricted Affiliates is in breach or
violation of any law, statute, rule or regulation, or any judgment,
decree or order or governmental or regulatory agency or other body
having jurisdiction over the Company, any of the Subsidiaries or any
of the Restricted Affiliates or any of their respective properties
or assets except, in each case, violations, defaults or breaches
that individually or in the aggregate would not have a Material
Adverse Effect.
In addition such counsel shall state that such counsel has
participated in conferences with representatives of the Underwriters,
officers and other representatives of the Company and representatives of
the independent certified accountants of the Company, at which conferences
the contents of the Registration Statement and the Prospectus and the
business and affairs of the Company and the Subsidiaries were discussed,
and although such counsel has not verified and does not pass upon or
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement (except and only to
the extent set forth in clause (5) above), on the basis of the foregoing,
no facts have come to the attention of such counsel which lead such
counsel to believe that the Registration Statement or any amendment
thereto (except for financial statements and schedules and other
<PAGE>
-24-
financial data included therein or omitted therefrom, as to which such
counsel need not express any statement), at the time such Registration
Statement or any such amendment became effective, 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 therein not
misleading or that the Prospectus or any amendment or supplement thereto
at the time the Prospectus was issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need not express any
comment with respect to the financial statements, including the notes
thereto and supporting schedules, or any other financial data set forth or
referred to in the Registration Statement or Prospectus).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
(d) At the Closing Time, the Representatives shall have received the
opinion of Swidler & Berlin, regulatory counsel to the Company, dated as
of the Closing Time, in the form set forth below and otherwise reasonably
satisfactory to the Representatives and counsel for the Underwriters, to
the effect that:
(i) the issuance, sale and delivery of the Securities, the
execution, delivery and performance by the Company of this Agreement
and the Indenture (assuming due authorization and execution by each
party other than the Company) and the consummation by the Company of
the transactions contemplated hereby or thereby and the compliance
by the Company with the terms of the foregoing do not, and, at the
Closing Time, will not, conflict with or constitute or result in a
breach or violation by the Company, any of the Subsidiaries or any
of the Restricted Affiliates of
<PAGE>
-25-
the Communications Act of 1934, as amended, (the "Communications
Act"), the Telecommunications Act of 1996 (the "1996 Act"), the
Cable Communications Policy Act of 1984 (the "1984 Act") or the
Cable Television Consumer Protection Act of 1992 (the "1992 Act"
and, together with the Communications Act, the 1996 Act and the 1984
Act and rules and regulations promulgated thereunder, the
"Communications Laws") or any order, decree or judgment known to
such counsel to be applicable to the Company, any Subsidiary or any
Restricted Affiliate, of any court or governmental or regulatory
agency or body or arbitrator dealing with telecommunications
carriers (the "Communications Authorities") known to such counsel to
have jurisdiction over the Company, any of the Subsidiaries or any
of the Restricted Affiliates or any of their respective properties
or assets;
(ii) no consent, waiver, approval, authorization, license,
qualification or order of or filing or registration with any
Communications Authority is required for the execution and delivery
by the Company of this Agreement and the Indenture or for the issue
and sale of the Notes, or the performance by the Company of its
obligations under the Operative Documents, or for the consummation
of any of the transactions contemplated hereby;
(iii) the Company, the Subsidiaries and the Restricted
Affiliates are the holders of the Licenses listed on a schedule to
such opinion (the "Regulatory Licenses") issued by the
Communications Authorities, all of which are validly issued and in
full force and effect, with no material restrictions or
qualifications other than as described in the Prospectus, and such
Regulatory Licenses constitute the only Licenses necessary for the
Company, the Subsidiaries and the Restricted Affiliates to own their
properties and to conduct their businesses in the manner and to the
extent now operated or proposed to be operated in the Prospectus;
(iv) other than matters described in the Prospectus, such
counsel does not know of any proceedings threatened, pending or
contemplated before any Communications Authority against or
involving the properties, businesses or franchises of the Company,
the Subsidiaries and the Restricted Affiliates which
<PAGE>
-26-
could reasonably be expected to have a Material Adverse Effect; and
(v) the statements in the Prospectus under the captions "Risk
Factors -- Regulation" and "Business -- Regulation" insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly summarize the matters
referred to therein and such counsel does not believe that such
statements, as of the date of the Prospectus and at the Closing
Time, contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein not
misleading.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of any laws other than the
Communications Laws and (B) may rely, as to matters of fact, to the extent
they deem proper on representations or certificates of responsible
officers of the Company and certificates of public officials.
(e) The Representatives shall have received the opinion, dated as of
the Closing Time, of Cahill Gordon & Reindel, counsel for the
Underwriters, with respect to certain matters set forth in clauses 5, 7
(assuming the due authorization, execution and delivery of the Indenture
by each party thereto), 8, 10 and 11 of subsection (b) of this Section 5.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal laws of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
In addition, such counsel shall additionally state that such counsel
has participated in conferences with officers and other representatives of
the Company and representatives of the independent accountants for the
Company at which conferences the contents of the Prospectus and the
Registration Statement and related matters were discussed and, although
given the limitations inherent in the role of outside counsel and the
character of determina-
<PAGE>
-27-
tions involved in the preparation of the Registration Statement, such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement (except and only to the extent set forth in clause
(4) of subsection (b) of this Section 5) and has made no independent check
or verification thereof, on the basis of the foregoing, no facts have come
to the attention of such counsel which would lead such counsel to believe
that the Registration Statement or any amendment thereto, at the time such
Registration Statement or any such amendment became effective, 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 therein
not misleading or that the Prospectus or any amendment or supplement
thereto at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief
with respect to the financial statements, including the notes thereto, or
any other financial or statistical data found in or derived from the
internal accounting and other records of the Company and its subsidiaries
set forth or referred to in the Registration Statement or Prospectus).
(f) The following conditions contained in clauses (i) and (ii) of
this subsection (f) shall have been satisfied at and as of the Closing
Time and the Company shall have furnished to the Representatives a
certificate, signed by the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated as of the
Closing Time, to the effect that the signers of such certificate have
carefully examined the Registration Statement and Prospectus, any
amendment or supplement thereto, and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Time with the same effect as if made at the Closing
Time;
(ii) since the date of the most recent financial statements
included in the Prospectus (exclusive of
<PAGE>
-28-
any amendment or supplement thereto), there has been no Material
Adverse Change, whether or not arising in the ordinary course of
business. As used in this subparagraph, the term "Prospectus" means
the Prospectus in the form first used to confirm sales of the
Securities;
(iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior
to the Closing Time; and
(iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by
the Commission.
(g) On the date hereof and at the Closing Time, Coopers & Lybrand
L.L.P. shall have furnished to the Representatives a letter or letters,
dated respectively as of the date of this Agreement and as of the Closing
Time, in form and substance satisfactory to the Representatives,
confirming that they are independent certified public accountants within
the meaning of the Act and the applicable published rules and regulations
thereunder and containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to financial statements of the Company and certain financial
information contained in the Registration Statement, in form and substance
satisfactory to counsel for the Underwriters.
(h) On the date hereof and at the Closing Time, Ernst & Young L.L.P.
shall have furnished to the Representatives a letter or letters, dated
respectively as of the date of this Agreement and as of the Closing Time,
in form and substance satisfactory to the Representatives, confirming that
they are independent certified public accountants within the meaning of
the Act and the applicable published rules and regulations thereunder and
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to financial
statements of Erols and certain financial information contained in the
Registration Statements, in form and substance satisfactory to counsel for
the Underwriters.
<PAGE>
-29-
(i) Subsequent to the date hereof or, if earlier, the dates as of
which information is given in the Prospectus (exclusive of any amendment
or supplement thereto), there shall not have been any change, or any
development involving a prospective change, in or affecting the business
or properties of the Company, its Subsidiaries and the Restricted
Affiliates the effect of which is, in the sole judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the purchase and the delivery of the
Securities as contemplated by the Prospectus (exclusive of any amendment
or supplement thereto).
(j) At the Closing Time, counsel for the Underwriters shall have
been furnished with such information, certificates and documents as they
may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as contemplated herein and related
proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all opinions and certificates mentioned
above or elsewhere in this Agreement shall be reasonably satisfactory in
form and substance to the Representatives and counsel for the
Underwriters.
(k) The Company and the Trustee shall have entered into the
Indenture.
If any condition specified in this Section 5 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Representatives by notice to the Company, and such termination shall be
without liability of any party to any other party except as provided in Section
6. Notwithstanding any such termination, the provisions of Sections 8, 9, 13 and
16 shall remain in effect. Notice of such cancellation shall be given to the
Company in writing or by telephone, facsimile transmission or telegraph
confirmed in writing. The Company shall furnish to the Representatives such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
SECTION 6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriters, their respective affiliates, and each
<PAGE>
-30-
person, if any, who controls any Underwriter or their respective affiliates
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and their respective directors, officers, employees and agents, 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
Registration Statement (or any amendment thereto) including the Rule 430A
Information, 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 included in any preliminary prospectus
or the 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 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 6(e) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
reasonable fees and disbursements of one counsel chosen by Merrill Lynch
(in addition to any local counsel)), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any 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 (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by
<PAGE>
-31-
any Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment), including the Rule 430A Information or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, each of its officers who signed
the Registration Statement and each person, if any, who controls the Company
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 described in the
indemnity contained in subsection (a) of this Section 6, as incurred, but only
with respect untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(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, enclosing a
copy of all papers properly served on such indemnified party, 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 6(a) or (b) above, one counsel to the
indemnified parties shall be selected by Merrill Lynch, and, in the case of
parties indemnified pursuant to Section 6(c) above, counsel to 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, 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 ap-
<PAGE>
-32-
proval 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 the fees and expenses of more than one counsel (in addition to local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction 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 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an 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 Securities 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 fees and expenses of
counsel as to which such indemnified party is liable pursuant to Section 6(a),
(b) or (c), as the case may be, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by Section 6(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.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in re-
<PAGE>
-33-
spect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and of the Underwriters 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 benefits received by the Company on the one hand and
the Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters,
bear to the aggregate initial offering price of the Securities.
The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any gov-
<PAGE>
-34-
ernmental agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue or alleged untrue statement or omission or alleged
omission.
Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each 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 Act or Section 20 of the Exchange Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Securities set forth opposite their respective names
in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements To Survive
Delivery. All representations, warranties, indemnities, agreements and other
statements of the Company and its officers contained in or made pursuant to this
Agreement shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or controlling person, by
or on behalf of the Company, and shall survive delivery and payment for the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination: General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
if (i) there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus and on
<PAGE>
-35-
or prior to the Closing Time, any Material Adverse Change with respect to the
Company, the Subsidiaries and the Restricted Affiliates, taken as a whole and
whether or not arising in the ordinary course of business, or (ii) since the
date of this Agreement and on or prior to the Closing Time, (A) there has
occurred any outbreak of hostilities or escalation of existing hostilities or
other national or international calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case, the effect of which on the financial
securities markets of the United States is such as to make it, in the judgment
of the Representatives, impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (B) trading in any securities of
the Company has been suspended or limited by the Commission or trading generally
on the New York Stock Exchange, the American Stock Exchange or the
over-the-counter market has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities generally
have been required, by any such exchange or by order of the Commission, the NASD
or any other governmental authority or (C) a general banking moratorium has been
declared by either Federal or New York authorities. As used in this Section
9(a), the term "Prospectus" means the Prospectus in the form first used to
confirm sales of the Securities.
(b) If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, provided that Sections 1, 6, 7, and 8 shall
survive such termination and remain in full force and effect.
(c) This Agreement may also terminate pursuant to the provisions of
Section 5, with the effect stated in such Section.
SECTION 10. Default by One or More of the Underwriters. If one or
more of the Underwriters shall fail at the Closing Time to purchase the
Securities which it is obligated to purchase under this Agreement (the
"Defaulted Securities"), the other Representatives shall have the right, but not
the obligation, within 24 hours thereafter, to make arrangements for one or more
of the non-defaulting Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
<PAGE>
-36-
(a) if the aggregate principal amount at maturity of Defaulted
Securities does not exceed 10% of the aggregate principal amount at
maturity of Securities to be purchased hereunder, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(b) if the aggregate principal amount at maturity of Defaulted
Securities exceeds 10% of the aggregate principal amount at maturity of
Securities to be purchased hereunder, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement either the Representatives or the Company shall
have the right to postpone Closing Time, for a period not exceeding seven days
in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives c/o Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, North Tower, World Financial
Center, New York, New York 10281-1305, attention: Greg Margolies, Vice
President; notices to the Company shall be directed to RCN Corporation, 105
Carnegie Center, Princeton, NJ 08540, attention: Chief Executive Officer, with a
copy to John Filipowicz, Esq.
SECTION 12. Information Supplied by the Underwriters. The statements
set forth in the last paragraph on the front cover page, in the last two
paragraphs on page [i] and in the fifth paragraph under the heading
"Underwriting" in the Prospectus (to the extent such statements relate to the
Underwriters) constitute the only information furnished by the Underwriters to
the Company for the purposes of Sections 1 and 6 hereof.
<PAGE>
-37-
SECTION 13. Parties. This Agreement shall inure to the benefit of
and be binding upon the Underwriters, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, their respective affiliates and the Company and its successors and
legal representatives and the controlling persons and officers, directors,
employees and agents referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under, by virtue
of or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters their respective affiliates and
the Company and its successors and legal representatives, and said controlling
persons and officers, directors, employees and agents and their heirs and legal
representatives, and said controlling persons and officers, directors, employees
and agents and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. Governing Law and Time. 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 time.
SECTION 15. Counterparts. This Agreement may be executed in one or
more counterparts and, when each party has executed a counterpart, all such
counterparts taken together shall constitute one and the same agreement.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriters and the Company in accordance with its terms.
Very truly yours,
RCN CORPORATION
By:_______________________________
Name: Bruce C. Godfrey
Title: Executive Vice President
and Chief Financial
Officer
Confirmed and accepted as of
the date first above writ-
ten:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: ________________________________
Name:
Title:
<PAGE>
SCHEDULE A
Principal
Amount at Ma-
turity of
Name of Underwriter Securities
- ------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................
Salomon Brothers Inc...............................
Donaldson, Lufkin & Jenrette Securities Corporation
NationsBanc Montgomery Securities, LLC.............
------------------
Total ................................. [ ]
<PAGE>
SCHEDULE B
RCN CORPORATION
[ ]% Senior Discount Notes due 2008
1. The initial public offering price for the Securities shall be
[ ]% of the principal amount thereof, plus accrued interest, if any, from the
date of issuance.
2. The purchase price to be paid by the Underwriters for the
Securities shall be [ ]% of the principal amount thereof.
3. The interest rate on the Securities shall be [ ]% per annum.
<PAGE>
SCHEDULE C
Restricted Affiliates
---------------------
Starpower Communication LLC
RCN-BecoCom LLC
<PAGE>
Exhibit 4.8
================================================================================
RCN CORPORATION, as Issuer
and
THE CHASE MANHATTAN BANK, as Trustee
---------------------
INDENTURE
Dated as of June [ ], 1998
--------------------
$[ ] Principal Amount at Maturity
[ ]% Senior Discount Notes due 2008
================================================================================
<PAGE>
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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PARTIES................................................................................. 1
RECITALS................................................................................ 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions .............................................................. 1
Section 1.02. Other Definitions ........................................................ 28
Section 1.03. Rules of Construction .................................................... 29
Section 1.04. Form of Documents Delivered to Trustee ................................... 30
Section 1.05. Acts of Holders .......................................................... 30
Section 1.06. Notices, etc., to the Trustee and the Company ............................ 31
Section 1.07. Notice to Holders; Waiver ................................................ 32
Section 1.08. Conflict with Trust Indenture Act ........................................ 32
Section 1.09. Effect of Headings and Table of Contents ................................. 33
Section 1.10. Successors and Assigns ................................................... 33
Section 1.11. Separability Clause ...................................................... 33
Section 1.12. Benefits of Indenture .................................................... 33
Section 1.13. GOVERNING LAW ............................................................ 33
Section 1.14. No Recourse Against Others ............................................... 34
Section 1.15. Independence of Covenants ................................................ 34
Section 1.16. Exhibits ................................................................. 34
Section 1.17. Counterparts ............................................................. 34
Section 1.18. Duplicate Originals ...................................................... 34
ARTICLE TWO
NOTE FORMS
Section 2.01. Form and Dating .......................................................... 34
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms .......................................................... 35
Section 3.02. Registrar and Paying Agent ............................................... 36
Section 3.03. Execution and Authentication ............................................. 36
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.04. Temporary Notes .......................................................... 38
Section 3.05. Transfer and Exchange .................................................... 38
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes .............................. 39
Section 3.07. Payment of Interest; Interest Rights Preserved ........................... 40
Section 3.08. Persons Deemed Owners .................................................... 42
Section 3.09. Cancellation ............................................................. 42
Section 3.10. Computation of Interest .................................................. 42
Section 3.11. Legal Holidays ........................................................... 42
Section 3.12. CUSIP and CINS Numbers ................................................... 43
Section 3.13. Paying Agent To Hold Money in Trust ...................................... 43
Section 3.14. Treasury Notes ........................................................... 44
Section 3.15. Deposits of Monies ....................................................... 44
Section 3.16. Book-Entry Provisions for Global Notes ................................... 44
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance .............. 46
Section 4.02. Defeasance and Discharge .................................................. 46
Section 4.03. Covenant Defeasance ....................................................... 47
Section 4.04. Conditions to Defeasance or Covenant Defeasance ........................... 47
Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other
Miscellaneous Provisions .................................. 50
Section 4.06. Reinstatement ............................................................. 51
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default ......................................................... 51
Section 5.02. Acceleration of Maturity Rescission and Annulment ......................... 53
Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee ........... 54
Section 5.04. Trustee May File Proofs of Claims ......................................... 55
Section 5.05. Trustee May Enforce Claims Without Possession of Notes .................... 56
Section 5.06. Application of Money Collected ............................................ 56
Section 5.07. Limitation on Suits ....................................................... 57
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 5.08. Unconditional Right of Holders To Re- ceive Principal, Premium and Interest 58
Section 5.09. Restoration of Rights and Remedies ........................................ 58
Section 5.10. Rights and Remedies Cumulative ............................................ 58
Section 5.11. Delay or Omission Not Waiver .............................................. 59
Section 5.12. Control by Majority ....................................................... 59
Section 5.13. Waiver of Past Defaults ................................................... 59
Section 5.14. Undertaking for Costs ..................................................... 60
Section 5.15. Waiver of Stay, Extension or Usury Laws ................................... 60
Section 5.16. Unconditional Right of Holders To Receive Payment ......................... 61
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities ....................................... 61
Section 6.02. Notice of Defaults ........................................................ 62
Section 6.03. Certain Rights of Trustee ................................................. 62
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Notes or Application
of Proceeds Thereof ....................................... 64
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc ....................... 64
Section 6.06. Money Held in Trust ....................................................... 65
Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim ........... 65
Section 6.08. Conflicting Interests ..................................................... 66
Section 6.09. Corporate Trustee Required; Eligibility ................................... 66
Section 6.10. Resignation and Removal; Appointment of Successor Trustee ................. 66
Section 6.11. Acceptance of Appointment by Successor .................................... 68
Section 6.12. Merger, Conversion, Amalgamation, Con-solidation or Succession to Business 69
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 ................................................ 70
Section 7.02. Communications of Holders ................................................. 71
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 7.03. Reports by Trustee ......................................................... 71
Section 7.04. Reports by Company ......................................................... 71
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC
Section 8.01. Company May Consolidate, etc., Only on Certain Terms ....................... 72
Section 8.02. Successor Substituted ...................................................... 73
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders . 74
Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders .... 75
Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers ............... 76
Section 9.04. Effect of Supplemental Indentures .......................................... 77
Section 9.05. Conformity with Trust Indenture Act ........................................ 77
Section 9.06. Reference in Notes to Supplemental Indentures .............................. 77
Section 9.07. Record Date ................................................................ 77
Section 9.08. Revocation and Effect of Consents .......................................... 78
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest ................................ 78
Section 10.02. Maintenance of Office or Agency ........................................... 78
Section 10.03. Money for Note Payments To Be Held in Trust .............................. 79
Section 10.04. Corporate Existence ....................................................... 81
Section 10.05. Payment of Taxes and Other Claims ......................................... 81
Section 10.06. Maintenance of Properties ................................................. 81
Section 10.07. Insurance ................................................................. 82
Section 10.08. Books and Records ......................................................... 82
Section 10.09. Provision of Financial Statements ......................................... 82
Section 10.10. Change of Control ......................................................... 82
Section 10.11. Limitation on Additional Indebtedness ..................................... 85
Section 10.12. Statement by Officers as to Default ....................................... 86
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 10.13. Limitation on Restricted Payments ......................................... 87
Section 10.14. Limitation on Transactions with Affiliates ............................... 90
Section 10.15. Disposition of Proceeds of Asset Sales .................................... 91
Section 10.16. Limitation on Liens Securing Certain Indebtedness ........................ 95
Section 10.17. Limitation on Business .................................................... 96
Section 10.18. Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries and Restricted Affiliates .................... 96
Section 10.19. Limitation on Issuances and Sales of Preferred Stock by Restricted
Sub-sidiaries and Restricted Affiliates ................................ 97
Section 10.20. Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries or Restricted Affiliates .................................. 97
Section 10.21. Designations of Unrestricted Subsidiaries ................................. 98
Section 10.22. Designations of Restricted Affiliates ..................................... 100
Section 10.23. Compliance Certificates and Opinions ...................................... 101
Section 10.24. Reports ................................................................... 102
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture ................................... 102
Section 11.02. Application of Trust Money ................................................ 103
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee .................................................... 104
Section 12.02. Selection of Notes To Be Redeemed ......................................... 104
Section 12.03. Notice of Redemption ...................................................... 104
Section 12.04. Effect of Notice of Redemption ............................................ 105
Section 12.05. Deposit of Redemption Price ............................................... 106
Section 12.06. Notes Redeemed or Purchased in Part ....................................... 106
Exhibit A - Form of Note
Exhibit B - Form of Legend for Book-Entry Securities
</TABLE>
-v-
<PAGE>
INDENTURE, dated as of [______], 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 [___]% Senior
Discount Notes due 2008 (the "Notes"), 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:
<PAGE>
-2-
<TABLE>
<CAPTION>
Semi-Annual
Accrual Date
------------
<S> <C> <C>
Issue Date ........................................ $
[ ], 1998 $
[ ], 1999 $
[ ], 1999 $
[ ], 2000 $
[ ], 2000 $
[ ], 2001 $
[ ], 2001 $
[ ], 2002 $
[ ], 2002 $
[ ], 2003 $
[ ], 2003 $1,000.00
</TABLE>
(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 [____], 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,
<PAGE>
-3-
"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,
<PAGE>
-4-
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
<PAGE>
-5-
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.
<PAGE>
-6-
"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 insti-
<PAGE>
-7-
tutions 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).
<PAGE>
-8-
"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
<PAGE>
-9-
the Issue Date, and includes, without limitation, all series and classes of such
common stock.
"Common Stock Offering" means the issue and sale by the Company of [_____]
shares of Common Stock of the Company on or about the Issue Date.
"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 Re-
<PAGE>
-10-
stricted 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
<PAGE>
-11-
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
<PAGE>
-12-
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.
<PAGE>
-13-
"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.
"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
<PAGE>
-14-
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 permanent global notes in registered form
representing the aggregate principal amount of 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
<PAGE>
-15-
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
<PAGE>
-16-
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.
"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
<PAGE>
-17-
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.
<PAGE>
-18-
"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.
"9.80% Notes Issue Date" means February 6, 1998.
"Notes" shall have the meaning specified in the recitals of this Indenture.
"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,
<PAGE>
-19-
the Treasurer or an Assistant Treasurer, of the Company and delivered to the
Trustee.
"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;
<PAGE>
-20-
(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.
<PAGE>
-21-
"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
<PAGE>
-22-
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
<PAGE>
-23-
Indebtedness may be incurred under this clause (g) on any date on or after
June 1, 2003;
(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.
<PAGE>
-24-
"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 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."
"Regular Record Date" means the Regular Record Date specified in the Notes.
"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.
<PAGE>
-25-
"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.
"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.
<PAGE>
-26-
"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
<PAGE>
-27-
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 the Common Stock
Offering and 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 9.80% Notes 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 9.80%
Notes 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 9.80% Notes Issue Date plus (v) in the case of the JV
Designation after the 9.80 % Notes 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 9.80% Notes 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 9.80% Notes Issue
Date.
<PAGE>
-28-
"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.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Act" 1.05
"Affiliate Transaction" 10.14
"Agent Member" 3.16
"Asset Sale Offer" 10.15
</TABLE>
<PAGE>
-29-
<TABLE>
<CAPTION>
<S> <C>
"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
</TABLE>
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
<PAGE>
-30-
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
<PAGE>
-31-
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
<PAGE>
-32-
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
<PAGE>
-33-
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.
<PAGE>
-34-
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 annexed hereto, with
<PAGE>
-35-
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 $[_____], 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 [____], 2008. The Notes shall be issued at a
discount to yield gross proceeds of $250,000,000. The Notes shall not bear cash
interest prior to [____], 2003. Commencing on [_____], 2003, interest on the
Notes will be payable in cash at a rate of [ ]% 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 [____], 2003. Interest on any overdue
principal, interest (to the extent lawful) or premium, if any, shall be payable
on demand.
<PAGE>
-36-
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 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 Exhibit A
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.
<PAGE>
-37-
Except as provided in Section 3.16 hereof, the Notes shall be issued only
in the form of one or more Global Notes, substantially in the form set forth in
Exhibit A, 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.
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 Notes for aggregate principal amount of the
Notes at maturity not to exceed $[______] at any time 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 (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
$[______], 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
<PAGE>
-38-
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
<PAGE>
-39-
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
<PAGE>
-40-
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:
<PAGE>
-41-
(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.
<PAGE>
-42-
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
<PAGE>
-43-
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.
<PAGE>
-44-
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
<PAGE>
-45-
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.
Notes issued in permanent certificated form ("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) 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.
<PAGE>
-46-
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.
<PAGE>
-47-
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
<PAGE>
-48-
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;
<PAGE>
-49-
(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
<PAGE>
-50-
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.
<PAGE>
-51-
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
<PAGE>
-52-
(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
<PAGE>
-53-
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
<PAGE>
-54-
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
<PAGE>
-55-
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
<PAGE>
-56-
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,
<PAGE>
-57-
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
<PAGE>
-58-
(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
<PAGE>
-59-
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.
<PAGE>
-60-
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.
<PAGE>
-61-
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
<PAGE>
-62-
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;
<PAGE>
-63-
(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;
<PAGE>
-64-
(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
<PAGE>
-65-
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.
<PAGE>
-66-
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.
<PAGE>
-67-
(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
<PAGE>
-68-
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
<PAGE>
-69-
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, Con-solidation 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
<PAGE>
-70-
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).
<PAGE>
-71-
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
<PAGE>
-72-
(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
<PAGE>
-73-
(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
<PAGE>
-74-
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
<PAGE>
-75-
(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,
<PAGE>
-76-
(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
<PAGE>
-77-
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.
<PAGE>
-78-
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.
<PAGE>
-79-
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;
<PAGE>
-80-
(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.
<PAGE>
-81-
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
<PAGE>
-82-
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
<PAGE>
-83-
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;
<PAGE>
-84-
(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
<PAGE>
-85-
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 June 1,
2001 or 5.0 to 1.0 if such Indebtedness
<PAGE>
-86-
is incurred on or after June 1, 2001 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 June 1, 2003, 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
<PAGE>
-87-
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 9.80% Notes 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 9.80%
Notes Issue Date (including, without duplication, the Common Stock Offering
and 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 9.80% Notes 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)
<PAGE>
-88-
or (g) of the following paragraph made after the 9.80% Notes 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 9.80% Notes Issue Date plus (f) in the
case of the JV Designation after the 9.80% Notes 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 9.80% Notes 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
<PAGE>
-89-
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
<PAGE>
-90-
(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
<PAGE>
-91-
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
<PAGE>
-92-
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
<PAGE>
-93-
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
<PAGE>
-94-
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
<PAGE>
-95-
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
<PAGE>
-96-
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.
<PAGE>
-97-
Section 10.19. Limitation on Issuances and Sales of Preferred Stock by
Restricted Sub-sidiaries 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)
<PAGE>
-98-
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
<PAGE>
-99-
(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.
<PAGE>
-100-
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
<PAGE>
-101-
$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;
<PAGE>
-102-
(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:
<PAGE>
-103-
(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.
<PAGE>
-104-
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee.
If the Company elects to redeem Notes pursuant to Paragraph 2 of the 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
<PAGE>
-105-
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
<PAGE>
-106-
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.
<PAGE>
-107-
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:
Title:
THE CHASE MANHATTAN BANK,
as Trustee
By:
----------------------------
Name:
Title:
<PAGE>
EXHIBIT A
RCN CORPORATION
-----------------
[__]% SENIOR DISCOUNT NOTES DUE 2008
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 $[_____] and the amount of original issue
discount is $[_____]. The issue date of this Note is [_______], 1998 and the
yield to maturity is [_____]%.
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 [____], 2008, at the office or agency of the
Company referred to below, and to pay interest thereon on [____] and [_____]
(each an "Interest Payment Date"), of each year, commencing on [_____], 2003,
accruing from [____], 2003 or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, at the rate of [__]% 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)
A-1
<PAGE>
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]
A-2
<PAGE>
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 [__]% Senior Discount Notes due 2008 referred to in the
within-mentioned Indenture.
The Chase Manhattan Bank, as
Trustee
By:________________________
Authorized Signatory
A-3
<PAGE>
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of the
Company designated as its [___]% Senior Discount Notes due 2008 (herein called
the "Notes"). The Notes are limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount at maturity to
$[_____], which may be issued under an indenture (herein called the "Indenture")
dated as of [_____], 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.
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 [____], 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 [____] of each of the years indicated
below:
A-4
<PAGE>
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003 .............. [ ]%
2004 .............. [ ]%
2005 .............. [ ]%
2006 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date and
prior to [____], 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 [___]% 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
A-5
<PAGE>
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.
A-6
<PAGE>
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.
A-7
<PAGE>
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:____________________
A-8
<PAGE>
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:________________
A-9
<PAGE>
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.
B-1
<PAGE>
[LETTERHEAD OF DAVIS POLK & WARDELL]
EXHIBIT 5.1
June 12, 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
("RCN"), in connection with the preparation of a Registration Statement
(Commission File No. 333-55673) on Form S-1 (the "Registration Statement") filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the registration of RCN's %
Senior Discount Notes Due 2008 (the "Notes"). The Notes will be issued under an
indenture, substantially in the form filed as an exhibit to the Registration
Statement (the "Indenture"), between RCN and The Chase Manhattan Bank, as
trustee (the "Trustee"). 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 RCN, 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
<PAGE>
RCN Corporation 2 June 12, 1998
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 RCN and others.
Based upon the foregoing and subject to the other limitations,
qualifications and assumptions set forth herein, we are of the opinion that when
the Company has duly executed and delivered the Indenture and the Notes have
been duly executed by the Company and authenticated by the Trustee in accordance
with the terms of the Indenture, the 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 any related supplemental Registration Statement
filed pursuant to Rule 462 (b) of the Securities Act and to the reference to
this firm under the captions "Legal Matters" and "Certain U.S. Federal Income
Tax Considerations" in the Prospectus.
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
<PAGE>
EXHIBIT 12.1
RCN CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER
FOR THE YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations $ 10,711 $ 6,171 $ 6,838 $(4,068) $(73,522) $(81,527)
before income taxes........................ -------- -------- -------- -------- -------- --------
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 22,735
-------- -------- -------- -------- -------- --------
Total fixed charges........................ 1,167 16,669 16,517 16,046 25,602 22,735
-------- -------- -------- -------- -------- --------
Earnings before income taxes and
fixed charges.............................. $ 11,793 $ 22,745 $ 23,221 $ 11,978 $(47,920) $(58,792)
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges............ 10.11 1.36 1.41 0.75 1.87 (2.59)
</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. The ratio of earnings to
fixed charges for the quarter ended March 31, 1998 is less than 1 and therefore
the earnings are inadequate to cover the fixed charges by $81,527.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement of RCN Corporation on
Form S-1 (File No. 333-55673) 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."
/s/ COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
June 11, 1998
<PAGE>
EXHIBIT 23.2
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, with respect to the financial statements of
Erols Internet, Inc. included in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-55673) to be filed on or about June 12, 1998 and related
Prospectus of RCN Corporation for the registration of __% Senior Discount Notes
due 2008.
/s/ Ernst Young LLP
Vienna, Virginia
June 12, 1998
<PAGE>
EXHIBIT 25.1
------------------------------------------------------------
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)
-----------
__% SENIOR DISCOUNT NOTES DUE 2008
(Title of the indenture securities)
<PAGE>
-2-
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.
<PAGE>
- 3 -
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 11th day of June, 1998.
THE CHASE MANHATTAN BANK
By /s/ James P. Freeman
-------------------------------
James P. Freeman
Assistant Vice President
<PAGE>
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 March 31, 1998, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin................................ $ 12,037
Interest-bearing balances........................ 4,054
Securities:........................................
Held to maturity securities........................ 2,340
Available for sale securities...................... 50,134
Federal funds sold and securities purchased under
agreements to resell............................. 24,982
Loans and lease financing receivables:
Loans and leases, net of unearned income $127,958
Less: Allowance for loan and lease losses 2,797
Less: Allocated transfer risk reserve............ 0
--------
Loans and leases, net of unearned income,
allowance, and reserve........................... 125,161
Trading Assets..................................... 61,820
Premises and fixed assets (including capitalized
leases).......................................... 2,961
Other real estate owned............................ 347
Investments in unconsolidated subsidiaries and
associated companies............................. 242
Customers' liability to this bank on acceptances
outstanding...................................... 1,380
Intangible assets.................................. 1,549
Other assets....................................... 11,727
--------
TOTAL ASSETS....................................... $298,734
===========
</TABLE>
-4-
<PAGE>
LIABILITIES
<TABLE>
<S> <C>
Deposits
In domestic offices................................. $ 96,682
Noninterest-bearing.........................$38,074
Interest-bearing............................ 58,608
In foreign offices, Edge and Agreement,
subsidiaries and IBF's.............................. 72,630
Noninterest-bearing................................. $ 3,289
Interest-bearing.................................... 69,341
Federal funds purchased and securities sold under
agreements to repurchase............................. 42,735
Demand notes issued to the U.S. Treasury.............. 872
Trading liabilities................................... 45,545
Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less....... 4,454
With a remaining maturity of more than one year
through three years............................ 231
With a remaining maturity of more than three
years.......................................... 106
Bank's liability on acceptances executed and
outstanding 1,380
Subordinated notes and debentures..................... 5,708
Other liabilities..................................... 11,295
TOTAL LIABILITIES..................................... 281,638
--------
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............... 5,579
Net unrealized holding gains (losses)
on available-for-sale securities..................... (1)
Cumulative foreign currency translation adjustments.. 16
TOTAL EQUITY CAPITAL................................. 17,096
--------
TOTAL LIABILITIES AND EQUITY CAPITAL................. $298,734
========
</TABLE>
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 in-
structions issued by the appropriate Federal regulatory
authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR.)
-5-
