<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
February 5, 1998 (January 21, 1998)
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-22825 22-3498533
(State or other (Commission File (IRS Employer
jurisdictionof Number) Identification No.)
incorporation)
105 Carnegie Center, Princeton, NJ 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(609) 734-3700
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
On January 21, 1998, the Company entered into the Agreement and Plan of
Merger (the "Erols Merger Agreement") among the Company, Erols Internet, Inc.
("Erols"), Erol Onaran, Gold & Appel Transfer, S.A. and ENET Holding, Inc., a
wholly owned subsidiary of the Company, to acquire all of the outstanding shares
of common stock of Erols. Erols will merge with and into ENET (the "Erols
Merger"), with ENET as the surviving corporation. On the same day, the Company,
UNET Holding, Inc., a wholly owned subsidiary of the Company, and Ultranet
Communications, Inc. ("Ultranet") entered into an Agreement and Plan of Merger
(the "Ultranet Merger Agreement"). The consummation of the Erols and Ultranet
acquisitions are each expected to occur in the first quarter of 1998. With these
acquisitions, the Company will become a leading Internet service provider
("ISP") in the Boston to Washington corridor, serving over 325,000 Internet
service customers.
Merger with Erols Internet, Inc.
Erols is a leading regional ISP with approximately 293,000 residential and
business subscribers as of December 31, 1997 in targeted markets, including New
York City, Philadelphia, Washington, D.C. and Boston. The Company expects to
contribute to Starpower Communications, LLC ("Starpower"), a joint venture with
Pepco Communications, L.L.C., an indirect wholly owned subsidiary of Potomac
Electric Power Company, the majority of the subscribers acquired in the
acquisition of Erols. Erols currently operates 56 physical points of presence
("POPs") throughout its geographic markets, and also currently utilizes 28
"Virtual POPs," which permit subscribers located adjacent to, but outside of the
local calling areas of, physical POPs to dial into the Erols network on a local
basis through arrangements with the relevant local exchange carrier. It offers
a broad range of Internet-based services, including (i) Global Trader, 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. The Company has agreed to acquire
Erols for an aggregate purchase price of approximately $77.8 million, consisting
of cash, shares of the Company's Common Stock and the in-the-money value of
options to purchase the Company's Common Stock plus the assumption and repayment
of $5.7 million of debt, subject to certain conditions.
The Erols Merger Agreement contains customary representations, warranties,
and covenants by each party, and consummation of the Erols Merger is subject to
the satisfaction of certain conditions, including, but not limited to, receipt
of consents to assign certain agreements to which Erols is a party, and consent
of each of RCN-BECOCOM (the Company's joint venture with Boston Edison Company
("BECO")) and Starpower to the Erols Merger and to the
<PAGE>
transactions contemplated by the Erols Merger Agreement. There can be no
assurance that such acquisition will be consummated.
Merger with Ultranet Communications, Inc.
Ultranet is a leading ISP in the Boston area with more than 32,000
residential and business customers in New England. The Company expects to
contribute to RCN-BECOCOM the majority of the subscribers acquired in the
acquisition of Ultranet. 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 27 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. The Company has agreed to acquire Ultranet for an
aggregate purchase price of approximately $27.3 million, consisting of cash,
shares of the Company's Common Stock and the value of existing options to buy
Ultranet common stock held by certain holders, subject to certain conditions.
Ultranet had total revenues of approximately $6.7 million for the year ended
June 30, 1997.
The consummation of the Ultranet acquisition is subject to the satisfaction
of certain conditions, including but not limited to, receipt of the necessary
approval from Ultranet stockholders and other parties, receipt of governmental
and regulatory approvals, the absence of injunctions or restraints, receipt of
consent of RCN-BECOCOM to the Ultranet Merger and to the transactions
contemplated by the Ultranet Merger Agreement and approval of shares of RCN
Common Stock for quotation on the Nasdaq Stock Market. There can be no assurance
that such acquisition will be consummated.
In addition, on October 17, 1997, the Company issued 10% Senior Notes due
2007 in the aggregate principal amount of $225,000,000 and 11 1/8% Senior
Discount Notes due 2007 in the aggregate principal amount at maturity of
$601,045,000. The 11 1/8% Senior Discount Notes due 2007 were issued at a
discount to yield gross proceeds of $350,000,524. In February 1998, the Company
expects to issue 9.8% Senior Discount Notes due 2008 in the aggregate principal
amount at maturity of $567,000,000. The 9.80% Senior Discount Notes are expected
to be issued at a discount to yield gross proceeds of $350,587,440.
Set forth below is certain unaudited summary pro forma financial
information for the Company, giving effect to the acquisition of Erols and the
issuance of the Company's 9.80% Senior Discount Notes due 2008.
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
LIBERTY/ ADJUSTMENTS
ADJUSTMENTS PRO FORMA ADJUSTMENTS FREEDOM FOR ISSUANCE
RCN FOR FOR FOR LIBERTY/ ACQUISITIONS OF THE 1997 EROLS
HISTORICAL DISTRIBUTION DISTRIBUTION FREEDOM ADJUSTMENTS NOTES HISTORICAL(11)
---------- ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........... $ 104,910 $ 104,910 $ 5,206 (1) $ 10,949
Cost and
expenses,
excluding
depreciation and
amortization.... 79,107 79,107 7,463 (1) 23,797
Depreciation and
amortization.... 38,881 38,881 5,644 (2) 5,000 (3) 2,014
---------- -------- ---------- ------- ------- -------- --------
Operating
(loss).......... (13,078) (13,078) (7,901) (5,000) (14,862)
Interest income. 25,602 (15,127)(4) 10,475 5 (5) 10
Interest
expense......... (16,046) (7,461)(6) (8,380) (737)(5) (63,438)(7) (161)
15,127 (8)
Other (expense),
net............. (546) (546) (1,628)
---------- -------- ---------- ------- ------- -------- --------
(Loss) before
income taxes.... (4,068) (7,461) (11,529) (8,633) (5,000) (63,438) (16,641)
(Benefit)
provision for
income taxes.... 979 (2,611)(9) (1,632) (2,420)(10) (1,400)(10) (22,203)(7)
---------- -------- ---------- ------- ------- -------- --------
(Loss) before
minority
interest and
equity in
unconsolidated
entities........ (5,047) (4,850) (9,897) (6,213) (3,600) (41,235) (16,641)
Equity in (loss)
of
unconsolidated
entities........ (2,282) (2,282)
---------- -------- ---------- ------- ------- -------- --------
(Loss) before
extraordinary
charge and
minority
interest in loss
of consolidated
entities........ $ (7,329) $ (4,850) $ (12,179) $(6,213) $(3,600) $(41,235) $(16,641)
========== ======== ========== ======= ======= ======== ========
Unaudited pro
forma (loss)
before
extraordinary
charge and
minority
interest per
common share.... $ (0.27) $ (0.43)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 27,484,628 (22) 793,303 (23) 28,277,931
<CAPTION>
ACQUISITION ADJUSTMENTS
ADJUSTMENTS FOR ISSUANCE
FOR EROLS OF THE NOTES PRO FORMA
--------------- --------------- ------------
<S> <C> <C> <C>
Sales........... $ (6,760)(12) $ 114,305
Cost and
expenses,
excluding
depreciation and
amortization.... (14,692)(12) 95,675
Depreciation and
amortization.... 12,548 (13) 64,087
--------------- --------------- ------------
Operating
(loss).......... (4,616) (45,457)
Interest income. (6) 10,484
Interest
expense......... 99 $(34,958)(15) (107,575)
Other (expense),
net............. 1,628 (546)
--------------- --------------- ------------
(Loss) before
income taxes.... (2,895) (34,958) (143,094)
(Benefit)
provision for
income taxes.... (8,532)(14) (12,235)(15) (48,422)
--------------- --------------- ------------
(Loss) before
minority
interest and
equity in
unconsolidated
entities........ 5,637 (22,723) (94,672)
Equity in (loss)
of
unconsolidated
entities........ (9,435)(12) (11,717)
--------------- --------------- ------------
(Loss) before
extraordinary
charge and
minority
interest in loss
of consolidated
entities........ $ (3,798) $(22,723) $ (106,389)
=============== =============== ============
Unaudited pro
forma (loss)
before
extraordinary
charge and
minority
interest per
common share.... $ (3.64)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 933,935 (24) 29,211,866
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
LIBERTY/ ADJUSTMENTS
ADJUSTMENTS PRO FORMA FREEDOM FOR ISSUANCE ACQUISITION
RCN FOR FOR ACQUISITIONS OF THE 1997 EROLS ADJUSTMENTS
HISTORICAL DISTRIBUTION DISTRIBUTION ADJUSTMENTS NOTES HISTORICAL(11) FOR EROLS
---------- ------------ ------------ ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales........... $ 91,854 $ 91,854 $ 24,410 $(15,071)(12)
Cost and
expenses,
excluding
depreciation
and amortization. 91,183 91,183 36,342 (22,438)(12)
Nonrecurring
charges......... 10,000 10,000
Depreciation and
amortization.... 39,135 39,135 $ 1,250 (3) 4,360 7,651 (13)
---------- ------- ---------- ------- -------- -------- --------
Operating
(loss).......... (48,464) (48,464) (1,250) (16,292) (284)
Interest income. 13,442 $(8,686)(4) 4,756
Interest
expense......... (10,460) (5,654)(6) (5,654) $(47,578)(7) (164) 101
10,460 (8)
Other (expense)
income, net..... 229 229 9
---------- ------- ---------- ------- -------- -------- --------
(Loss) before
income taxes.... (45,253) (3,880) (49,133) (1,250) (47,578) (16,447) (183)
(Benefit) for
income taxes.... (11,907) (1,358)(9) (13,265) (437)(10) (16,652)(7) (7,226)(14)
---------- ------- ---------- ------- -------- -------- --------
(Loss) before
equity in
unconsolidated
entities and
minority
interest........ (33,346) (2,522) (35,868) (813) (30,926) (16,447) 7,043
Equity in loss
of
unconsolidated
entities........ (2,650) (2,650) (8,680)(12)
---------- ------- ---------- ------- -------- -------- --------
Income (loss)
before
extraordinary
charge
and minority
interest in loss
of
consolidated entities. $ (35,996) $(2,522) $ (38,518) $ (813) $(30,926) $(16,447) $ (1,637)
========== ======= ========== ======= ======== ======== ========
Unaudited pro
forma (loss)
before
extraordinary charge
and minority
interest per
common share.... $ (1.31) $ (1.36)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 27,481,298 (22) 793,303 (23) 28,274,601 933,935 (24)
<CAPTION>
ADJUSTMENTS
FOR ISSUANCE
OF THE NOTES PRO FORMA
--------------- ------------
<S> <C> <C>
Sales........... $ 101,193
Cost and
expenses,
excluding
depreciation
and amortization. 105,087
Nonrecurring
charges......... 10,000
Depreciation and
amortization.... 52,396
--------------- ------------
Operating
(loss).......... (66,290)
Interest income. 4,756
Interest
expense......... (26,218)(15) (79,513)
Other (expense)
income, net..... 238
--------------- ------------
(Loss) before
income taxes.... (26,218) (140,809)
(Benefit) for
income taxes.... (9,176)(15) (46,756)
--------------- ------------
(Loss) before
equity in
unconsolidated
entities and
minority
interest........ (17,042) (94,053)
Equity in loss
of
unconsolidated
entities........ (11,330)
--------------- ------------
Income (loss)
before
extraordinary
charge
and minority
interest in loss
of
consolidated entities. $(17,042) $ (105,383)
=============== ============
Unaudited pro
forma (loss)
before
extraordinary charge
and minority
interest per
common share.... $ (3.61)
Weighted average
number of common
shares and
common stock
equivalents
outstanding..... 29,208,536
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Statements
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
RCN FOR ISSUANCE OF EROLS FOR ACQUISITION FOR ISSUANCE
HISTORICAL THE 1997 NOTES HISTORICAL(11) OF EROLS OF THE NOTES PRO FORMA
---------- --------------- -------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and temporary cash
investments........... $183,337 $494,000 (16) $ 533 $(29,800)(17) $344,587 (21) $ 992,657
Accounts receivable
from related parties.. 19,985 19,985
Accounts receivable,
net of reserve for
doubtful accounts of
$1,783................ 20,665 493 21,158
Material and supply
inventory, at average
cost.................. 2,428 2,428
Prepayments and other.. 15,796 615 16,411
Cash restricted for
debt service.......... 22,500 (16) 125 22,625
Deferred income taxes.. 4,857 4,857
-------- -------- ------- -------- -------- ----------
Total current assets.... 247,068 516,500 1,766 (29,800) 344,587 1,080,121
-------- -------- ------- -------- -------- ----------
Property, Plant and
Equipment
Hybrid fiber/coaxial
plant................. 173,013 173,013
Other property, plant
and equipment......... 100,947 22,466 123,413
-------- -------- ------- -------- -------- ----------
Total property, plant
and equipment.......... 273,960 22,466 296,426
Accumulated
depreciation.......... 101,544 6,391 (6,391)(18) 101,544
-------- -------- ------- -------- -------- ----------
Net property, plant and
equipment............. 172,416 16,075 6,391 194,882
-------- -------- ------- -------- -------- ----------
Investments............. 71,752 48,000 (19) 119,752
Cash restricted for debt
service................ 38,500 (16) 758 39,258
Intangible assets, net.. 103,027 62,865 (18) 165,892
Deferred charges and
other assets........... 4,416 20,000 (16) 214 6,000 (21) 30,630
-------- -------- ------- -------- -------- ----------
Total Assets............ $598,679 $575,000 $18,813 $ 87,456 $350,587 $1,630,535
======== ======== ======= ======== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
RCN FOR ISSUANCE OF EROLS FOR ACQUISITION FOR ISSUANCE
HISTORICAL THE 1997 NOTES HISTORICAL(11) OF EROLS OF THE NOTES PRO FORMA
---------- --------------- -------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable to
related parties....... $ 12,766 $ 12,766
Accounts payable....... 22,395 $ 15,660 38,055
Advance billings and
customer deposits..... 7,982 23,676 31,658
Accrued interest....... 845 845
Accrued contract
settlements........... 3,158 3,158
Accrued cable
programming expense... 2,231 2,231
Accrued expenses and
other................. 23,064 39 23,103
Current maturities of
debt.................. 1,102 (500) 602
-------- -------- -------- ------- -------- ----------
Total current
liabilities............ 72,441 40,477 (500) 112,418
-------- -------- -------- ------- -------- ----------
Long-term debt.......... 110,000 $575,000 (16) $350,587 (21) 1,035,587
Deferred income taxes... 24,992 $22,470 (18) 47,462
Other deferred credits.. 2,570 8,622 11,192
Minority interest....... 14,916 14,916
Commitments and
contingencies
Common shareholders'
equity................. 373,760 (30,286) 65,486 (20) 408,960
-------- -------- -------- ------- -------- ----------
Total liabilities and
shareholders' equity... $598,679 $575,000 $ 18,813 $87,456 $350,587 $1,630,535
======== ======== ======== ======= ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statements of Operations and Balance
Sheet of RCN assume that the Company was an autonomous entity rather than a
wholly owned subsidiary of C-TEC for the periods shown. The Pro Forma
adjustments, as described below, are keyed to the corresponding amounts shown
in the relevant statement.
(1) Adjustment to reflect revenues of $1,330 and expenses of $2,598 of
Liberty Cable Television, Inc. ("Liberty") and affiliates for the period
January 1996 to March 1996 and revenue of $3,876 and expenses of $4,865 of
Freedom New York L.L.C. ("Freedom") for the period March 1996 to August 1996
to present information as if the acquisition of Freedom had occurred at the
beginning of 1996. See Note 4 to the Consolidated Financial Statements.
(2) Adjustment to reflect depreciation and amortization of Liberty Cable and
Freedom for the period as if the acquisition of Freedom had occurred at the
beginning of 1996 and to reflect the increase in depreciation and amortization
applicable as a result of the allocation of the purchase price paid on the
basis of the fair value of assets acquired and liabilities assumed.
(3) Adjustment to reflect the additional depreciation and amortization of
$5,000 in 1996 and $1,250 in 1997 resulting from the acquisition of the
minority interest of Freedom in March 1997 and to present the information as
if the acquisition of the minority interest of Freedom had occurred at the
beginning of 1996.
(4) Adjustment to eliminate interest income of $8,686 for the nine months
ended September 30, 1997 and $15,127 for the year ended December 31, 1996, net
of income taxes of $(3,040) for the nine months ended September 30, 1997 and
$(5,294) for the year ended December 31, 1996, on outstanding intercompany
notes payable owed to the Company of which $110,000 was repaid and the
remaining balance was treated as capital contributions from the Company to the
borrower.
(5) Adjustment to reflect interest expense and income of Liberty Cable and
Freedom as if the acquisition of Freedom occurred at the beginning of 1996.
(6) Adjustment to reflect interest expense and amortization of debt issuance
costs of $5,654 for the nine months ended September 30, 1997 and $7,461 for
the year ended December 31, 1996, net of income taxes of $(1,979) for the nine
months ended September 30, 1997 and $(2,611) for the year ended December 31,
1996, on new third party debt of $110,000 which was incurred.
(7) Adjustment to reflect interest expense and amortization of debt issuance
costs related to the issuance of the Company's 10% Senior Notes due 2007 and 11
1/8% Senior Discount Notes due 2007 aggregating $47,578 for the nine months
ended September 30, 1997 and $63,438 for the year ended December 31, 1996, net
of income taxes of $16,652 for the nine months ended September 30, 1997 and
$22,203 for the year ended December 31, 1996.
(8) Adjustment to eliminate interest expense and amortization of debt
issuance costs of $10,460 for the nine months ended September 30, 1997 and
$15,127 for the year ended December 31, 1996 and related income taxes of
$3,661 for the nine months ended September 30, 1997 and $5,294 for the year
ended December 31, 1996 on existing outstanding third party debt that was
repaid and on outstanding intercompany notes payable owned by the Company
which were treated as capital contributions to the Company from the borrower.
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) Income tax effects for the distribution adjustments are summarized as
follows:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
BENEFIT (PROVISION)
<S> <C> <C>
Elimination of interest expense and
amortization of debt issuance costs on
existing outstanding third party debt (see
Note 8)....................................... $ 5,294 $ 3,661
Incurrence of interest expense and amortization
of debt issuance costs on new third party debt
(see Note 6).................................. (2,611) (1,979)
Elimination of interest income on outstanding
intercompany notes (see Note 4)............... (5,294) (3,040)
------- -------
Total.......................................... $(2,611) $(1,358)
======= =======
</TABLE>
(10) Adjustments to income taxes for the acquisition are summarized as
follows:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Losses of Liberty Cable and Freedom for period
January 1996 to August 1996..................... $(1,757) $ --
Additional depreciation and amortization (see
Note 2)......................................... (663) --
Additional depreciation and amortization of
acquisition in 1997 of 19.9% minority interest
in March 1997 (see Note 3)...................... (1,400) (437)
------- -----
Total............................................ $(3,820) $(437)
======= =====
</TABLE>
(11) In January 1998, the Company signed a definitive agreement to acquire
Erols Internet, Inc. ("Erols"), Washington D.C.'s largest Internet service
provider for $35,000 in cash (including the repayment of approximately $5,700
of debt of Erols) and $35,200 in newly issued RCN common stock. Additionally,
the Company will issue approximately $13,300 in replacement stock options and
restricted shares to employees and management of Erols. The Company will
account 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 periods ended
December 31, 1996 and September 30, 1997. The financial information of Erols
was provided by Erols.
(12) Such adjustments include a pro forma allocation of historical operating
results of Erols to the joint venture with PEPCO (see Note 19) 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 $48,000 of the total purchase price
to the joint venture, representing the assumed value of the subscribers to be
contributed to the joint venture, are included in the adjustment for "equity
in the loss of unconsolidated entities."
(13) Such adjustment reflects the increase in depreciation and amortization
for the effect of the fair value adjustment of the net assets of Erols
acquired (see Note 18). Amortization of such excess over a five year period
has been assumed, although a shorter life may result based on the study
discussed in Note 18. Also, as discussed in Note 18, a portion of the excess
may be allocated to certain in-process research and development projects. To
the extent amounts are allocated to certain in-process research and
development projects, pro forma amortization expense would be ratably reduced.
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) Adjustment to reflect the tax effect of the pro forma adjustments,
including the tax effect of the historical results of operations of Erols.
(15) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the Notes aggregating $26,218 for
the nine months ended September 30, 1997 and $34,958 for the year ended
December 31, 1996, net of income taxes of $9,176 for the nine months ended
September 30, 1997 and $12,235 for the year ended December 31, 1996.
(16) Adjustment to reflect the issuance in October 1997 of $225,000 10%
Senior Notes due 2007 and $350,000 11 1/8% Senior Discount Notes due 2007, net
of issuance costs of approximately $20,000 and escrow collateral of
approximately $61,000, of which $22,500 has been classified as current in
accordance with the terms of the Escrow and Security Agreement. The debt
issuance costs are included in "deferred charges and other assets" and are
amortized over the term of the 1997 Notes.
(17) Adjustment to reflect $29,300 cash portion of the consideration for the
merger and $500 of debt of Erols outstanding at September 30, 1997 which the
Company intends to repay at closing. Erols incurred an additional $5,200 of
debt subsequent to September 30, 1997, which the Company also intends to repay
at closing. (See Note 11).
(18) The Company will allocate the purchase price for Erols (see Note 11) on
the basis of the fair market value of the assets acquired and liabilities
assumed. The Company expects to undertake a study to determine such fair
market values, including in-process research and development. Such fair market
values may differ from the allocations assumed in the pro forma financial
statements. The impact on deferred tax balances was included in the above-
referenced fair value adjustments. Erol's historical property, plant and
equipment has been adjusted to its estimated fair value based upon its
depreciated cost. The remaining excess of consideration over the historical
book value of Erols net assets acquired has been preliminarily allocated to
subscriber base, goodwill and other intangible assets. Additionally, to the
extent that a portion of the purchase price is allocated to in-process
research and development, a charge, which may be material, would be recognized
in the period in which the RCN/Erol's merger occurs and ratably reduce the
amounts preliminarily allocated to subscriber base, goodwill and other
intangible assets.
(19) A subsidiary of the Company is a party to a joint venture with a
subsidiary of Potomac Electric Power Company ("PEPCO"), to provide 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 will contribute to the joint venture
the subscribers acquired in the merger with Erols which are in the relevant
joint venture market. The value of such contribution for accounting purposes
is estimated to be approximately $48,000. The joint venture is accounted for
under the equity method of accounting. As a result, the Company's contribution
is reflected as an increase in "Investments."
(20) Adjustment to reflect the elimination of Erols' deficit equity and the
issuance of $35,200 in RCN stock as a portion of the consideration for the
merger (See Note 11).
(21) Adjustment to reflect the issuance in February 1998 of $350,587 of
9.80% Senior Discount Notes due 2008. The debt issuance costs of $6,000 are
included in "deferred charges and other assets" and are amortized over the
term of the Notes.
(22) The weighted average number of common shares outstanding is based on
the weighted average number of shares of C-TEC Common Stock outstanding, for
each applicable period, which approximates the actual number of Company shares
outstanding as of September 30, 1997.
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(23) Represents adjustment for dilutive stock options of the Company based
on the closing price of the Company's common stock on September 30, 1997. In
connection with the Distribution, each Commonwealth Telephone Enterprises
("CTE") (formerly C-TEC Corporation) option was adjusted so that each holder
currently holds 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 CTE options immediately prior to
the Distribution.
(24) Represents adjustment for shares to be issued in connection with the
acquisition of Erols (see Note 11) by applying the price per share (based on
the average closing price of the Company's Common Stock prior to the closing
of the Acquisition) which would have been applied had the transaction closed
on January 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RCN Corporation
By: /s/ Bruce C. Godfrey
---------------------------------
Name: Bruce C. Godfrey
Title: Executive Vice President
and Chief Financial Officer
Date: February 5, 1998
----------------
