As filed with the Securities and Exchange Commission on May 8, 1998
Registration No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 4813 22-3498533
(State or other jurisdiction Primary Standard (I.R.S. Employer
of incorporation (Industrial Classification Identification No.)
or organization) Code Number)
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address and telephone number of Registrant's principal executive offices)
Bruce C. Godfrey
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address and telephone number of agent for service)
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Copies to:
William L. Taylor Anthony J. Carroll
Davis Polk & Wardwell Christy & Viener
450 Lexington Avenue 620 Fifth Avenue
New York, New York 10017 New York, New York 10020
(212) 450-4000 (212) 632-5500
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this Registration
Statement becomes effective and the effective time (the "Effective Time") of
the merger (the "Merger") of a wholly-owned subsidiary of the Registrant
with and into Lancit Media Entertainment, Ltd. ("Lancit"), as described in
the Agreement and Plan of Merger dated as of February 27, 1998, as amended.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _____
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Aggregate Registration
Securities to be Registered Registered(1) Price Per Unit Offering Price(2) Fee(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $1.00 per share..... 331,738 N/A $5,598,071 $490
===========================================================================================================================
</TABLE>
(1) Represents the maximum number of shares of Common Stock, par value $1.00 per
share ("RCN Common Stock"), of RCN Corporation ("RCN") to be issued in
connection with the Merger (as hereinafter defined) in exchange for shares
of Common Stock, par value $0.001 per share ("Lancit Common Stock"), of
Lancit, determined on the basis of the maximum exchange ratio applicable in
the Merger (which is 0.05 of a share of RCN Common Stock for each share of
Lancit Common Stock) and the number of outstanding shares of Lancit Common
Stock on May 5, 1998 which was 6,634,750.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act of 1933, as
amended (the "Securities Act"), by multiplying (i) the average high ask and
low bid prices of the Lancit Common Stock on May 6, 1998 on The Nasdaq Stock
Market ("NASDAQ"), which was $0.84375, by (ii) the number of outstanding
shares of Lancit Common Stock on May 5, 1998, which was 6,634,750.
(3) The total registration fee due is $1,652 (calculated by multiplying 0.000295
by $5,598,071). A fee of $1,162 (calculated pursuant to Rules 14a-6(i)(4)
and O-11 of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act")), has been previously paid in connection with the filing of
the preliminary Proxy Statement--Prospectus on Schedule 14A pursuant to
Section 14(a) of the Exchange Act. The remaining registration fee for the
securities registered hereby of $490 (calculated by subtracting $1,162 from
$1,652, the total registration fee) is being paid herewith.
--------------
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.
===============================================================================
LANCIT MEDIA ENTERTAINMENT, LTD.
601 West 50th Street
New York, New York 10019
May 12, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of
Shareholders of Lancit Media Entertainment, Ltd. ("Lancit") to be held at 3:30
P.M. local time, on June 11, 1998, at the principal offices of Lancit, 601
West 50th Street, New York, New York. I hope that you will be present or
represented by proxy at this important meeting.
At the Special Meeting, you will be asked to approve the
Agreement and Plan of Merger, dated as of February 27, 1998, as amended on
April 6, 1998 (as it may be further amended, supplemented or modified from
time to time, the "Merger Agreement"), among RCN Corporation ("RCN"), LME
Acquisition Corporation ("LME") and Lancit. Pursuant to the Merger Agreement,
LME will be merged with and into Lancit, with Lancit to be the surviving
corporation and a wholly owned subsidiary of RCN (the "Merger"). Upon
effectiveness of the Merger, each outstanding share of common stock of Lancit,
par value $.001 per share (the "Lancit Common Stock"), outstanding at the
effective time of the Merger will be converted into the right to receive
merger consideration in the form of a fraction of a share of common stock of
RCN, par value $1.00 per share (the "RCN Common Stock"), the numerator of
which will have a value of $1.20 (subject to a possible adjustment as
described in the accompanying Proxy Statement--Prospectus which adjustment, if
applicable, will not in any event be material), and the denominator of which
will equal the average of the closing price (last sale) of RCN Common Stock on
The NASDAQ Stock Market for the five trading day period ending one day prior
to the effective date of the Merger; provided, that, if such average closing
price exceeds $29, the value of such fraction of a share will be calculated as
if the average closing price were $29, and if such average closing price is
less than $24, the value of such fraction of a share will be calculated as if
the average closing price were $24.
The Merger is intended to be a tax-free transaction for federal
income tax purposes. See "The Merger--Certain Federal Income Tax
Consequences" in the accompanying Proxy Statement--Prospectus.
The Merger (including the merger consideration and the possible
adjustment thereto) is described in greater detail in the enclosed Proxy
Statement--Prospectus.
Following the Merger, the former shareholders of Lancit are
expected to own approximately 0.0057% of the outstanding RCN Common Stock.
The aggregate value of the RCN Common Stock being issued in the Merger is
approximately $8 million, assuming an average closing price of the RCN Common
Stock of between $24 and $29. The number of shares of RCN Common Stock that
will be issued in the Merger will be between 274,541 and 331,738, assuming no
transaction expenses adjustment as described in the accompanying Proxy
Statement--Prospectus. The exact number of shares will be dependent upon
the trading price of RCN Common Stock and certain other factors at the time
of the Merger, as described above and in the accompanying Proxy Statement--
Prospectus. If the exchange value were calculated on the basis of the
average closing price of RCN Common Stock on The NASDAQ Stock Market for
the five trading day period ending one day prior to May 8, 1998, and
assuming no other adjustments in the merger consideration (as described in
the accompanying Proxy Statement--Prospectus), each outstanding share of
Lancit Common Stock would be exchanged for 0.05 shares of RCN Common Stock.
In order to provide Lancit Shareholders with current information during the
period prior to the effective time of the Merger regarding the fraction of
a share of RCN Common Stock issuable in the Merger (based on recent closing
prices of RCN Common Stock), Lancit has established a toll-free telephone
number at (800) 253-3814 that interested parties may call.
The Board of Directors of Lancit has received the written
opinion, dated February 27, 1998 (the "February 27 Opinion"), of its financial
advisor, Schroder & Co. Inc., to the effect that, as of such date and based upon
and subject to certain matters stated therein, the consideration to be received
by the holders of Lancit Common Stock in the Merger is fair to such holders from
a financial point of view. Schroder & Co. Inc. has delivered to Lancit a
subsequent opinion, dated May 7, 1998 (the "May 7 Opinion" and together with the
February 27 Opinion, the "Schroders' Opinion"), reiterating the February 27
Opinion. See "The Merger--Opinion of Financial Advisor" in the accompanying
Proxy Statement--Prospectus. A copy of the Schroders' Opinion is included as
Annex III to the accompanying Proxy Statement--Prospectus and should be read
carefully in its entirety.
Your Board of Directors, after careful consideration, has
approved the Merger and determined that the Merger is fair to and in the best
interests of Lancit's shareholders. See "The Merger--Recommendation of the
Lancit Board" in the accompanying Proxy Statement--Prospectus. Copies of the
Merger Agreement and the Voting Agreement are attached as Annexes I and II,
respectively, to the accompanying Proxy Statement--Prospectus.
Your Board of Directors unanimously recommends that you vote
"FOR" approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger.
Approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger, to be voted on at the
Special Meeting requires a favorable vote of two-thirds of the outstanding
shares of Lancit Common Stock. Accordingly, failure to vote has the effect of
a vote against the Merger. Moreover, under The NASDAQ Stock Market rules,
brokers cannot vote at the Special Meeting without instructions from
shareholders. Shareholders whose shares are held in brokerage accounts
("street names") are urged to instruct their brokers to vote their shares in
favor of the Merger. Laurence A. Lancit and Cecily Truett, co-presidents,
directors and co-founders of Lancit, and a trust established for the benefit
of the minor children of Mr. Lancit and Ms. Truett, collectively own
approximately 17.3% of the shares of Lancit Common Stock expected to be
outstanding at the time of the Special Meeting and have entered into an
agreement with RCN, LME and Lancit whereby each of them has agreed to vote the
shares owned by them "for" the approval and adoption of the Merger Agreement
and the transactions contemplated thereby, including the Merger. See "The
Voting Agreement" in the accompanying Proxy Statement--Prospectus. The Voting
Agreement is attached as Annex II to the accompanying Proxy Statement--
Prospectus. Additionally, the remaining directors and executive officers
of Lancit have indicated that they intend to vote any shares of Lancit
Common Stock owned by them "for" approval and adoption of the Merger
Agreement and the transactions contemplated thereby, including the Merger.
Unless otherwise indicated on the proxy form, properly executed
proxies that are timely returned will be voted in accordance with the judgment
of the person or persons voting the proxies on any other matter that may
properly be brought before the Special Meeting, including, among other things,
a motion to adjourn or postpone the Special Meeting to another time and/or
place for the purpose of soliciting additional proxies or votes or otherwise;
provided, however, that no proxy which is voted against the proposal to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger, will be voted in favor of any such adjournment
or postponement.
Shareholders are entitled to vote all shares of Lancit Common
Stock held by them on May 5, 1998, which is the record date for the Special
Meeting.
WE URGE YOU TO CONSIDER CAREFULLY THESE IMPORTANT MATTERS,
WHICH ARE DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT--PROSPECTUS. In order
to ensure that your vote is represented at the Special Meeting, please
indicate your choice on the proxy form, date and sign it, and return it in the
enclosed envelope. A prompt response will be appreciated.
Please do not send in any share certificates at this time. If
the Merger Agreement and the transactions contemplated thereby, including the
Merger, are approved and adopted by the Shareholders at the Special Meeting,
you will receive separate instructions as to how to exchange your share
certificates.
Sincerely,
SUSAN L. SOLOMON
Chief Executive Officer and
Chairman of the Board of Directors
LANCIT MEDIA ENTERTAINMENT, LTD.
601 West 50th Street
New York, New York 10019
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held June 11, 1998
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NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders
of Lancit Media Entertainment, Ltd., a New York corporation ("Lancit"), has
been called by the Board of Directors of Lancit and will be held at the
offices of Lancit, 601 West 50th Street, New York, New York at 3:30 P.M. local
time on June 11, 1998, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of February 27, 1998, as amended
on April 6, 1998 (as it may be further amended, supplemented or modified
from time to time, the "Merger Agreement"), among RCN Corporation, a
Delaware corporation ("RCN"), LME Acquisition Corporation, a New York
corporation and wholly owned subsidiary of RCN ("LME"), and Lancit, and
the transactions contemplated by the Merger Agreement, pursuant to which:
(a) LME will be merged with and into Lancit upon the terms and
subject to the conditions set forth in the Merger Agreement (the
"Merger"), such that Lancit will be the surviving corporation and a
wholly owned subsidiary of RCN; and
(b) Each outstanding share of common stock of Lancit, par value $.001
per share (the "Lancit Common Stock"), outstanding at the effective
time of the Merger will be converted into the right to receive merger
consideration in the form of a fraction of a share of common stock of
RCN, par value $1.00 per share (the "RCN Common Stock"), the
numerator of which will have a value of $1.20 (subject to a possible
additional adjustment as described in the accompanying Proxy
Statement--Prospectus, which adjustment, if applicable, will not in
any event be material) and the denominator of which will equal the
average of the closing price (last sale) of RCN Common Stock on The
NASDAQ Stock Market for the five trading day period ending one day
prior to the effective date of the Merger, provided, that if such
average closing price exceeds $29, the value of such fraction of a
share will be calculated as if the average closing price were $29,
and if such average closing price is less than $24, the value of such
fraction of a share will be calculated as if the average closing
price were $24, as more fully described in the accompanying Proxy
Statement--Prospectus;
subject to and as more fully described in the Merger Agreement, the full
text of which is attached as Annex I to the accompanying Proxy
Statement--Prospectus; and
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only holders of Lancit Common Stock of record at the close of
business on May 5, 1998 (the "Record Date") are entitled to notice of and to
vote at the Special Meeting or any adjournments or postponements thereof.
Approval of the matters to be voted upon in connection with the Merger
Agreement and the transactions contemplated thereby, including the Merger,
requires the affirmative vote of two-thirds of the outstanding shares of
Lancit Common Stock.
Unless otherwise indicated on the proxy form, properly executed
proxies that are timely returned will be voted in accordance with the judgment
of the person or persons voting the proxies on any other matter that may
properly be brought before the Special Meeting, including, among other things,
a motion to adjourn or postpone the Special Meeting to another time and/or
place for the purpose of soliciting additional proxies or votes or otherwise;
provided, however, that no proxy which is voted against the proposal to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger, will be voted in favor of any such adjournment
or postponement.
By Order of the Board Directors
MARC L. BAILIN
Secretary
New York, New York
May 12, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY FORM PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR
PROXY, EITHER IN WRITING OR BY VOTING IN PERSON AT THE SPECIAL MEETING, AT ANY
TIME PRIOR TO ITS EXERCISE.
THE BOARD OF DIRECTORS OF LANCIT UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER.
PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME.
[RCN LOGO] [LANCIT LOGO]
LANCIT MEDIA ENTERTAINMENT, LTD.
601 West 50th Street
New York, NY 10019
(212) 977-9100
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 11, 1998
-------------------
RCN CORPORATION
105 Carnegie Center
Princeton, NJ 08540
(609) 734-3700
PROSPECTUS
-------------------
This Proxy Statement--Prospectus is being furnished to the
holders of common stock, par value $0.001 per share ("Lancit Common Stock"),
of Lancit Media Entertainment, Ltd., a New York corporation ("Lancit"), in
connection with the solicitation of proxies by the Board of Directors of
Lancit (the "Lancit Board") for use at a special meeting of Lancit's
shareholders to be held at 3:30 P.M. local time on June 11, 1998, at the
principal offices of Lancit, 601 West 50th Street, New York, New York, and at
any adjournment or postponement thereof (the "Special Meeting").
At the Special Meeting, the holders of Lancit Common Stock will
consider and vote upon a proposal to approve the Agreement and Plan of Merger
dated as of February 27, 1998, as amended on April 6, 1998 (as it may be
further amended, supplemented or modified from time to time, the "Merger
Agreement"), between RCN Corporation, a Delaware corporation ("RCN"), LME
Acquisition Corporation, a New York corporation and a wholly owned subsidiary
of RCN ("LME"), and Lancit, pursuant to which LME will be merged with and into
Lancit (the "Merger"), and Lancit will be the surviving corporation and a
wholly owned subsidiary of RCN. At the Special Meeting, the shareholders of
Lancit will be asked to approve and adopt the Merger Agreement, which approval
and adoption will also constitute approval of the transactions contemplated
thereby, including the Merger.
On February 27, 1998, the Lancit Board approved the Merger
Agreement and determined that the Merger is fair to and in the best interests of
Lancit's shareholders. The Lancit Board has received the written opinion, dated
February 27, 1998 (the "February 27 Opinion"), of its financial advisor,
Schroder & Co. Inc. ("Schroders"), to the effect that, as of such date and based
upon and subject to certain matters stated therein, the consideration to be
received by the holders of Lancit Common Stock in the Merger is fair to such
holders from a financial point of view. Schroders has delivered to Lancit a
subsequent opinion, dated May 7, 1998 (the "May 7 Opinion" and together with the
February 27 Opinion, the "Schroders' Opinion"), reiterating the February 27
Opinion. See "The Merger--Opinion of Financial Advisor." A copy of the
Schroders' Opinion is included as Annex III hereto and should be read carefully
in its entirety.
(continued on next page)
See "Risk Factors" beginning on page 15 for a discussion of
certain risk factors that should be considered by holders of Lancit Common
Stock in considering whether to approve and adopt the Merger Agreement and the
transactions contemplated thereby, including the Merger.
-------------------
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 PROXY STATEMENT--PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Proxy Statement--Prospectus is May 8, 1998.
The Merger Agreement provides that, upon consummation of the
Merger, each outstanding share of Lancit Common Stock will become and be
converted into the right to receive merger consideration ("Merger
Consideration") in the form of a fraction (the "Stock Exchange Ratio") of a
share of common stock of RCN, par value $1.00 per share ("RCN Common Stock"),
the numerator of which will have a value of $1.20 (subject to an adjustment if
Lancit's transaction expenses exceed a specified amount (the "Transaction
Expenses Adjustment"), which adjustment, if applicable, will not in any event be
material) and the denominator of which will equal the average closing price
(last sale) (the "Average Closing Price") of the RCN Common Stock on The NASDAQ
Stock Market (the "NASDAQ") for the five trading day period ending one trading
day prior to the effective time of the Merger (the "Effective Time"); provided,
that if such Average Closing Price exceeds $29, the value of such fraction of a
share will be calculated as if the Average Closing Price were $29, and if such
Average Closing Price is less than $24, the value of such fraction of a share
will be calculated as if the Average Closing Price were $24. For each $1 that
the Average Closing Price exceeds $29, the effective exchange value of a share
of Lancit Common Stock will increase by approximately $0.04138 and for each $1
that the Average Closing Price is less than $24, the effective exchange value of
a share of Lancit Common Stock will decrease by approximately $0.05. There is
no provision for termination of the Merger Agreement in the event that the
Average Closing Price is less than or exceeds any specified amounts. Under the
terms of the Merger Agreement, cash will be paid in lieu of fractional shares of
RCN Common Stock that would otherwise be issued to a holder of Lancit Common
Stock after aggregating all RCN Common Stock to be received in respect of all
shares of Lancit Common Stock held by such holder. Had the Merger become
effective on May 8, 1998, the Average Closing Price would have been $23.8937
yielding a conversion rate of 0.05 shares of RCN Common Stock for each share of
Lancit Common Stock (calculated, pursuant to the Merger Agreement, as if the
Average Closing Price had been $24 and assuming no Transaction Expenses
Adjustment), resulting in an effective exchange value (based on the Average
Closing Price of $23.8937) of $1.1946 per share of Lancit Common Stock. Upon
consummation of the Merger, LME will be merged with and into Lancit and Lancit
will be the surviving corporation and a wholly owned subsidiary of RCN. Holders
of Lancit Common Stock will not be entitled to dissenters' rights of appraisal
in connection with the Merger.
The aggregate value of the RCN Common Stock being issued in the
Merger is approximately $8 million, assuming an Average Closing Price of the
RCN Common Stock of between $24 and $29. The number of shares of RCN Common
Stock that will be issued in the Merger will be between 274,541 and 331,738,
assuming no Transaction Expenses Adjustment.
For a description of the Merger Agreement, which is included in
its entirety as Annex I to this Proxy Statement--Prospectus, see "The Merger."
The Merger is intended to be a tax-free transaction for federal income tax
purposes. See "The Merger--Certain Federal Income Tax Consequences."
Only shareholders of record of Lancit Common Stock (the "Lancit
Shareholders") at the close of business on May 5, 1998 (the "Record Date"),
will be entitled to notice of, and to vote at, the Special Meeting. Shares of
Lancit Common Stock represented by duly executed proxies received by Lancit
will be voted in accordance with the instructions contained therein and, in
the absence of specific instructions, will be voted for the approval and
adoption of the Merger Agreement and the transactions contemplated thereby,
including the Merger. In addition, properly executed proxies that are timely
received will be voted in accordance with the judgment of the person or
persons voting the proxies on any other matter that may properly be brought
before the Lancit Shareholders, including, among other things, a motion to
adjourn or postpone the Special Meeting for the purpose of soliciting
additional proxies or votes or otherwise; provided, however, that no proxy
which is voted against the proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby, including the Merger, will be voted
in favor of any such adjournment or postponement. The execution of a proxy
will in no way affect a Lancit Shareholder's right to attend the Special
Meeting and to vote in person. Any proxy executed and returned by a Lancit
Shareholder may be revoked at any time thereafter except as to any matter or
matters upon which, prior to such revocation, a vote shall have been cast
pursuant to the authority conferred by such proxy.
This Proxy Statement--Prospectus also constitutes a prospectus
of RCN with respect to the shares of RCN Common Stock to be issued in exchange
for Lancit Common Stock upon consummation of the Merger pursuant to the terms
of the Merger Agreement (the "Merger Shares"). On March 9, 1998, the Board of
Directors of RCN (the "RCN Board") approved a one-for-one stock dividend on
the RCN Common Stock (the "RCN Stock Dividend"). The record date for the RCN
Stock Dividend was March 20, 1998. Shareholders of record of RCN at the
market close on that date received an additional share of RCN Common Stock for
each share held. The distribution date for the RCN Stock Dividend was April
3, 1998. All share and per share data, stock option data and market prices
(including historical trading prices) of RCN Common Stock in this Proxy
Statement--Prospectus have been restated to reflect this RCN Stock Dividend,
except as otherwise set forth herein.
Shares of RCN Common Stock are currently, and the Merger Shares
will be, traded on NASDAQ under the symbol "RCNC." Shares of Lancit Common
Stock are currently traded on NASDAQ under the symbol "LNCT." The last
reported sale price per share of RCN Common Stock as reported on the NASDAQ on
February 26, 1998, the last business day preceding public announcement of the
signing of the Merger Agreement, was $28 15/16 and on May 7, 1998 was
$23 31/32. The last reported sale price per share of Lancit Common Stock as
reported on the NASDAQ on February 26, 1998, the last business day preceding
public announcement of the signing of the Merger Agreement, was $1 9/16 and
on May 7, 1998 was $ 7/8. This Proxy Statement--Prospectus and the
accompanying proxy card are being mailed on or about May 12, 1998 to Lancit
Shareholders entitled to vote at the Special Meeting.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROXY STATEMENT--PROSPECTUS
UNDER "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RCN," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF LANCIT," "THE MERGER,"
"DESCRIPTION OF BUSINESS CONDUCTED BY RCN," AND "DESCRIPTION OF BUSINESS
CONDUCTED BY LANCIT" IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT--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, (I) AS TO
RCN: STATEMENTS MADE AS TO EXPECTED EFFICIENCIES TO BE REALIZED FROM THE
MERGER, PLANS TO ACQUIRE LANCIT, PLANS TO DEVELOP NETWORKS AND UPGRADE
FACILITIES, THE MARKET OPPORTUNITY PRESENTED BY MARKETS TARGETED BY RCN, RCN'S
INTENTION TO CONNECT CERTAIN WIRELESS VIDEO, RESALE TELEPHONE AND INTERNET
SERVICE CUSTOMERS TO ITS ADVANCED FIBER OPTIC NETWORKS, THE DEVELOPMENT OF RCN'S
BUSINESSES, THE MARKETS FOR RCN'S SERVICES AND PRODUCTS, RCN'S ANTICIPATED
CAPITAL EXPENDITURES, RCN'S ANTICIPATED SOURCES OF CAPITAL AND EFFECTS OF
REGULATORY REFORM AND COMPETITIVE AND TECHNOLOGICAL DEVELOPMENTS (SEE "RISK
FACTORS--RCN RISK FACTORS"), AND (II) AS TO LANCIT: STATEMENTS MADE AS TO
LANCIT'S PLANS TO ACQUIRE PROPERTIES AND PRODUCE PROGRAMS, LANCIT'S INTENTIONS
TO BEGIN PRODUCTION ON PROGRAMS ALREADY OWNED AND LANCIT'S FINANCIAL OUTLOOK
(SEE "RISK FACTORS--LANCIT RISK FACTORS"). NO ASSURANCE CAN BE GIVEN THAT THE
FUTURE RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. SUCH
STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS,
UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "RISK FACTORS,"
BEGINNING ON PAGE 15 OF THIS PROXY STATEMENT--PROSPECTUS, AND HOLDERS OF LANCIT
COMMON STOCK ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROXY
STATEMENT--PROSPECTUS, IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RCN OR LANCIT, OR ANY
OTHER PERSON. NEITHER THE DELIVERY OF THIS PROXY STATEMENT--PROSPECTUS NOR ANY
DISTRIBUTION MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF RCN OR LANCIT SINCE
THE DATE HEREOF. THIS PROXY STATEMENT--PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY, OR
THE SOLICITATION OF A PROXY, BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
-------------------
TABLE OF CONTENTS
-------------------
Page
----
Summary..................................................................1
The Special Meeting....................................................1
The Merger and the Companies...........................................1
Structure, Merger Consideration and
Lancit Shareholder Approval........................................1
The Companies........................................................3
Reasons for the Merger...............................................4
Recommendation of the Lancit Board...................................4
Opinion of Financial Advisor.........................................4
Effective Time of the Merger.........................................4
Consequence of Failure to Approve the
Merger.............................................................4
Certain Other Terms and Conditions...................................5
Comparative Rights of Shareholders...................................7
Fractional Shares....................................................7
Certain Federal Income Tax Consequences..............................7
Appraisal Rights.....................................................7
Management After the Merger............................................7
Interests of Certain Persons in the Merger.............................7
Risk Factors...........................................................8
Summary Historical Consolidated
Financial Data of RCN................................................9
Summary Pro Forma Financial Data
of RCN..............................................................11
Summary Historical Consolidated
Financial Data of Lancit............................................12
Market Price and Comparative Per Share Data...........................13
Risk Factors............................................................15
RCN Risk Factors......................................................15
Stock Exchange Ratio................................................15
Limited Operating History; Negative
Cash Flow; Operating Losses.......................................15
Further Capital Requirements........................................16
Substantial Indebtedness; Effect of
Financial Leverage................................................16
Ability to Manage Growth; Risks Related
to Acquisitions...................................................17
Rapid Technological Changes.........................................17
Dependence on Strategic Relationships;
Terms of Joint Venture Arrangements...............................17
Competition.........................................................18
Regulation..........................................................20
Need to Obtain and Maintain Permits,
Building Access Agreements and
Rights-of-Way.....................................................24
Ability to Procure Programming Services...........................24
Liabilities for Unearned Revenues.................................24
Variability of Operating Results..................................24
Risks Relating to Provision of Internet
Services........................................................25
Potential Liabilities Associated with Internet
Businesses......................................................26
Reliance on Key Personnel.........................................26
Dividend Policy...................................................26
Control by Level 3 Telecom Holdings,
Inc.; Conflicts of Interest.....................................27
Anti-takeover Effects of Certain Statutory, Charter, Bylaw and
Contractual Provisions..........................................28
Lancit Risk Factors.................................................28
Introduction............................................................30
Solicitation of Proxies...............................................30
Purpose of the Special Meeting........................................30
Voting and Revocation of Proxy........................................30
Record Date; Voting Rights............................................31
Quorum................................................................31
Vote Required.........................................................31
Matters Deemed Adopted, Approved or Ratified by Lancit
Shareholders........................................................31
Appraisal Rights......................................................31
The Merger..............................................................32
Structure and Terms of the Merger.....................................32
Background of the Merger..............................................33
Reasons for the Merger--Lancit........................................39
Consequence of Failure to Approve the Merger..........................40
Recommendation of the Lancit
Board...............................................................41
Reasons for the Merger--RCN...........................................41
Opinion of Financial Advisor..........................................41
Fractional Shares.....................................................45
Lancit Stock Options and Warrants.....................................45
Effective Time of the Merger..........................................45
Resale of RCN Common Stock Issued in the Merger; Affiliates...........45
Rule 145 Restrictions.................................................46
Certain Federal Income Tax Consequences...............................46
Accounting Treatment..................................................47
Management After the Merger...........................................47
Interests of Certain Persons in the Merger............................47
Possible Transaction Expenses Adjustment in the Merger
Consideration.......................................................48
Other Conditions to Consummation of the Merger........................49
Representations and Warranties........................................49
Amendment, Waiver and Termination.....................................50
Expenses; Termination Fees............................................50
Consideration of Other Proposals......................................51
Conduct of Business Pending the Merger................................52
The Voting Agreement....................................................53
Trading Market..........................................................54
Dividends...............................................................54
Unaudited Pro Forma Consolidated Financial Statements of RCN............55
Selected Historical Consolidated Financial Data of RCN..................62
Management's Discussion and Analysis
of Financial Condition and Results of
Operations of RCN.....................................................63
General...............................................................63
Results of Operations.................................................65
Liquidity and Capital Resources.......................................69
Selected Historical Consolidated Financial Data of Lancit...............73
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Lancit..................................................74
Results of Operations.................................................74
Liquidity and Capital Resources.......................................78
Description of Business Conducted by RCN................................80
Overview..............................................................80
Business Strategy.....................................................81
RCN Services..........................................................82
Strategic Relationships...............................................83
Recent Acquisition Transactions.......................................87
Hybrid Fiber/Coaxial Cable Systems....................................89
Interconnection.......................................................90
Resale Arrangements...................................................90
Customer Service and Billing..........................................91
Programming and Suppliers.............................................91
RCN Long Distance Company.............................................92
International.........................................................92
Relationship Among RCN, Commonwealth Telephone and Cable
Michigan.............................................................92
Competition...........................................................95
Regulation............................................................98
Employees............................................................104
Properties...........................................................104
Legal Proceedings....................................................107
Description of Business Conducted by Lancit............................109
Introduction.........................................................109
Overview of Business.................................................109
Restructuring; Corporate Transaction.................................110
Strategic Programming Alliance with Discovery Communications,
Inc.................................................................111
Productions..........................................................111
Development..........................................................114
Licensing Agent Activities...........................................114
Post Production Services.............................................115
Trademarks, Service Marks and Copyrights.............................115
Competition..........................................................116
Employees............................................................116
Properties...........................................................116
Management of RCN......................................................118
Structure of RCN's Board of Directors................................118
Executive Officers and Directors.....................................118
Executive Compensation...............................................121
Effect of Distribution on Equity-Related
Benefits...........................................................124
Pension Benefits.....................................................124
Directors' Compensation..............................................124
Compensation Committee Interlocks and
Insider Participation...............................................124
Transactions with Management and
Certain Concerns.....................................................124
Security Ownership of Certain Beneficial
Owners and Management of RCN.........................................126
Security Ownership of Certain Beneficial
Owners and Management of Lancit......................................129
Description of Capital Stock of RCN....................................131
Authorized Capital Stock.............................................131
RCN Common Stock.....................................................131
RCN Class B Stock....................................................131
Preferred Stock......................................................132
Exchange Agent.......................................................132
Certain Statutory, Charter and Bylaw
Provisions for RCN...................................................133
Charter and Bylaw Provisions.........................................133
Delaware Takeover Statute............................................134
Liability and Indemnification of Directors
and Officers........................................................134
Comparison of Shareholders' Rights.....................................136
General..............................................................136
Authorized Capital Stock.............................................131
Directors............................................................137
Annual and Special Meetings of
Shareholders........................................................137
Voting; Written Consents of Shareholders.............................137
Notice of Business...................................................138
Nomination of Directors..............................................138
Amendment of Bylaws..................................................139
Amendment of Certificate of Incorporation............................139
Mergers and Business Combinations;
Sales of Assets.....................................................140
Dividends, Redemptions and Repurchases...............................140
Shareholders Lists; Inspections Rights...............................141
Indemnification; Limitation of Liability.............................141
Appraisal Rights.....................................................142
Exchange Procedures....................................................144
Legal Matters..........................................................144
Experts................................................................144
Additional Information.................................................146
Index to Financial Statements..........................................F-i
Index of Defined Terms.............................................INDEX-1
Annex I - Agreement and Plan of Merger, as amended
Annex II - Voting Agreement
Annex III - Opinions of Schroder & Co. Inc.
SUMMARY
The following is a brief summary of the matters covered by this
Proxy Statement--Prospectus and is qualified in its entirety by the more
detailed information (including the financial statements and the notes thereto)
included elsewhere herein and in the attached annexes. Lancit Shareholders are
urged to review carefully the entire Proxy Statement--Prospectus and the Annexes
hereto. Unless the context indicates otherwise, "RCN" means RCN Corporation and
its subsidiaries and those joint ventures in which RCN exercises control and
"Lancit" means Lancit Media Entertainment, Ltd. and its subsidiaries and those
joint ventures in which Lancit exercises control.
The Special Meeting
The Special Meeting of Shareholders of Lancit will be held at
3:30 P.M. local time, on June 11, 1998, at the principal offices of Lancit, 601
West 50th Street, New York, New York. Only shareholders of record of Lancit
Common Stock at the close of business on the Record Date, will be entitled to
notice of, and to vote at, the Special Meeting. At the Special Meeting, the
Lancit Shareholders will consider and vote upon a proposal to approve the Merger
Agreement and the transactions contemplated thereby, including the Merger. The
presence in person or by proxy of shares representing a majority of shares
outstanding and entitled to vote shall constitute a quorum. Approval of the
matters related to the Merger to be voted on at the Special Meeting requires a
favorable vote of two-thirds of the outstanding shares of Lancit Common Stock.
Accordingly, failure to vote has the effect of a vote against the Merger.
Moreover, under the NASDAQ rules, brokers cannot vote at the Special Meeting
without instructions from shareholders.
Laurence A. Lancit and Cecily Truett, co-presidents, directors
and co-founders of Lancit, and The Lancit Children's Trust (the "Children's
Trust"), a trust established for the benefit of the minor children of Mr.
Lancit and Ms. Truett, collectively own approximately 17.3% of the shares of
Lancit Common Stock expected to be outstanding at the time of the Special
Meeting and have entered into a voting agreement, dated as of February 27,
1998, with RCN, LME and Lancit (the "Voting Agreement") whereby each of them
agreed to vote the shares owned by them "for" the approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the
Merger. See "The Voting Agreement." The Voting Agreement is attached as Annex
II hereto. Additionally, the remaining directors and executive officers of
Lancit and persons related to any of them, who beneficially own, in the
aggregate, approximately 0.3% of the shares of Lancit Common Stock expected to
be outstanding at the time of the Special Meeting, have indicated that they
intend to vote "for" approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger. See
"Introduction--Vote Required."
The Merger and the Companies
Structure, Merger Consideration and Lancit Shareholder Approval
Each share of Lancit Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will be converted into the
right to receive Merger Consideration in the form of a fraction of a validly
issued, fully paid and non-assessable share of RCN Common Stock, the numerator
of which will have a value of $1.20 (subject to the possible Transaction
Expenses Adjustment, which adjustment, if applicable, will not in any event be
material) and the denominator of which will equal the Average Closing Price;
provided, that if the Average Closing Price exceeds $29, the value of such
fraction of a share will be calculated as if the Average Closing Price were $29,
and if the Average Closing Price is less than $24, the value of such fraction of
a share will be calculated as if the Average Closing Price were $24. For each
$1 that the Average Closing Price exceeds $29, the effective exchange value of a
share of Lancit Common Stock will increase by approximately $0.04138 and for
each $1 that the Average Closing Price is less than $24, the effective exchange
value of a share of Lancit Common Stock will decrease by approximately $0.05.
Under the terms of the Merger Agreement, cash will be paid in lieu of fractional
shares of RCN Common Stock that would otherwise be issued to a holder of Lancit
Common Stock after aggregating all RCN Common Stock to be received in respect of
all shares of Lancit Common Stock held by such holder. There is no provision
for termination of the Merger Agreement in the event that the Average Closing
Price is less than or exceeds any specified amounts. Had the Effective Time
occurred on May 8, 1998, the Average Closing Price would have been $23.8937,
yielding a conversion ratio of 0.05 shares of RCN Common Stock for each share of
Lancit Common Stock (calculated, pursuant to the Merger Agreement, as if the
Average Closing Price had been $24 and assuming no Transaction Expenses
Adjustment), resulting in an effective exchange value (based on the Average
Closing Price of $23.8937) of $1.1946 per share of Lancit Common Stock. In
order to provide Lancit Shareholders with current information during the period
prior to the Effective Time of the Merger regarding the conversion ratio (based
on recent closing prices of RCN Common Stock), Lancit has established a
toll-free telephone number at (800) 253-3814 that interested parties may call.
Lancit Shareholders do not have any dissenters' rights of appraisal with respect
to the Merger as the Lancit Common Stock is admitted for trading on the NASDAQ.
See "Comparison of Shareholders' Rights -- Appraisal Rights."
Based on a range of assumed Average Closing Prices of $23 to
$30, following is a table setting forth the applicable conversion rate per
share of Lancit Common Stock and the applicable effective exchange value of a
share of Lancit Common Stock.
<TABLE>
<CAPTION>
Effective Exchange Value per
Average Closing Price Conversion Rate(1) Share of Lancit Common Stock(2)
- --------------------- ------------------ -------------------------------
<S> <C> <C>
$23 0.050000 $1.15
$24 0.050000 $1.20
$25 0.048000 $1.20
$26 0.046154 $1.20
$27 0.044444 $1.20
$28 0.042857 $1.20
$29 0.041379 $1.20
$30 0.041379 $1.24
</TABLE>
- ----------
(1) Each share of Lancit Common Stock will be converted into a fraction of a
share of RCN Common Stock equal to the conversion rate.
(2) Determined by multiplying the Average Closing Price by the Conversion Rate.
The Merger is intended to be a tax-free transaction for federal
income tax purposes. Accordingly, the Lancit Shareholders should not recognize
any gain or loss as a result of the Merger, except with respect to any cash
received in lieu of fractional shares of RCN Common Stock. See "The
Merger--Certain Federal Income Tax Consequences."
Upon consummation of the Merger, LME will be merged with and
into Lancit, the separate existence of LME will cease and Lancit will continue
as the surviving corporation (the "Surviving Corporation") and as a wholly
owned subsidiary of RCN.
As a result of the Merger, based on the Average Closing Price
as of May 8, 1998, the Lancit Shareholders will own approximately 0.0057% of
the issued and outstanding shares of RCN Common Stock. The aggregate value of
the RCN Common Stock being issued in the Merger is approximately $8 million,
assuming an Average Closing Price of the RCN Common Stock of between $24 and
$29. The number of shares of RCN Common Stock that will be issued in the
Merger will be between 274,541 and 331,738, assuming no Transaction Expenses
Adjustment. The exact number of shares issued pursuant to the Merger will be
dependent upon factors in effect at the time of the Merger, including the
Average Closing Price and the possible Transaction Expenses Adjustment. In the
event Lancit's transaction expenses exceed $602,000, the $1.20 numerator used
to calculate the stock exchange ratio will be reduced by an amount equal to
such excess divided by the number of outstanding shares of Lancit Common Stock
immediately prior to the Effective Time. If a Transaction Expenses Adjustment
is made, such adjustment is not expected to be material. See "The
Merger--Possible Transaction Expenses Adjustment in the Merger Consideration."
On March 9, 1998, the RCN Board approved the RCN Stock
Dividend. The record date for the RCN Stock Dividend was March 20, 1998.
Shareholders of record of RCN at the market close on that date received an
additional share of RCN Common Stock for each share held. The distribution
date for the RCN Stock Dividend was April 3, 1998. All share and per share
data, stock option data and market prices (including historical trading
prices) of RCN Common Stock in this Proxy Statement--Prospectus have been
restated to reflect this RCN Stock Dividend, except as otherwise set forth
herein.
The Companies
RCN. RCN is developing advanced fiber optic networks to
provide a wide range of telecommunications services including local and long
distance telephone, video programming and data services (including high speed
Internet access), primarily to residential customers in selected markets in
the Boston to Washington, D.C. corridor. The region, one of the most densely
populated in the United States, represents approximately 4% of the geography
of the U.S., but accounts for over 26% of the telecommunications market based
upon the number of telephone access lines. RCN believes that of the estimated
22 million homes in the Boston to Washington, D.C. corridor, approximately 9
million homes are located in high-density urban and suburban residential areas
that will support development of an advanced fiber optic network on an
attractive economic basis. RCN believes that its capability to deliver
multiple services (telephone, video programming and Internet access) to any
given customer on its networks will provide it with competitive advantages
over other competitors. RCN's strategy is to become the leading single-source
provider of voice, video and data services to residential customers in each of
its markets by offering individual or bundled service options, superior
customer service and competitive prices.
Prior to September 30, 1997, RCN was operated as part of C-TEC
Corporation ("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, 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 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"). Cable Michigan consists
of C-TEC's Michigan Cable operations, including its 62% ownership in Mercom,
Inc. C-TEC, RCN and Cable Michigan have entered into certain agreements
providing for the Distribution, and governing various ongoing relationships
between the three companies, including a distribution agreement and a
tax-sharing agreement. See "Description of Business Conducted by RCN."
Following the Distribution, C-TEC changed its name to Commonwealth Telephone
Enterprises, Inc. (referred to herein as "Commonwealth Telephone" or "C-TEC").
RCN's principal executive offices are located at 105 Carnegie
Center, Princeton, New Jersey 08540 and its telephone number is (609) 734-3700.
LME. LME, a New York corporation, is a wholly owned subsidiary
of RCN formed solely for the purpose of effecting the Merger. LME's principal
executive offices are located at 105 Carnegie Center, Princeton, New Jersey
08540 and its telephone number is (609) 734-3700.
Lancit. Lancit creates, acquires, develops and produces
high-quality children's "edutainment" and family programming, including the
11-time Emmy Award-winning Reading Rainbow[Registered] (including 1997 and
1996 Emmys for "Outstanding Children's Series"), which is now in its fifteenth
year on the Public Broadcasting Service ("PBS"), and The Puzzle
Place[Registered], the award-winning children's program, produced in
cooperation with KCET/Southern California ("KCET"), now in its fourth year on
PBS. Reading Rainbow has received seven 1998 Emmy nominations. The Puzzle
Place has received over 20 broadcast awards, plus four Emmy Award nominations,
including one for 1997's "Outstanding Children's Preschool Series." Lancit
seeks to reach consumers for its productions via traditional commercial and
public broadcast television, cable television, motion pictures, home video,
and interactive media products. See "Description of Business Conducted by
Lancit."
Lancit was incorporated as a New York corporation in 1979.
Lancit's principal executive offices are located at 601 West 50th Street, New
York, New York 10019 and its telephone number is (212) 977-9100.
Reasons for the Merger
Lancit; Recommendation of Lancit Board. The Lancit Board has
determined that the terms of the Merger are fair and in the best interests of
the Lancit Shareholders. The Lancit Board has unanimously recommended that
the Lancit Shareholders approve and adopt the Merger Agreement and the
transactions contemplated thereby, including the Merger. See "The
Merger--Background of the Merger" and "--Reasons for the Merger--Lancit" for a
description of the various factors considered by the Lancit Board in making
its decision.
RCN. RCN believes that Lancit will provide it with high
quality, proprietary programming at a relatively low cost. RCN also
anticipates that as a result of the Merger, RCN will be able to meet its local
production obligations more efficiently. See "The Merger--Reasons for the
Merger--RCN."
Recommendation of the Lancit Board
The Lancit Board believes that the terms of the Merger are fair
to, and in the best interests of, the Lancit Shareholders, has unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Merger, and recommends that the Lancit Shareholders approve and
adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger. The conclusions of the Lancit Board with respect to the
Merger are based upon a number of factors. See "The Merger--Background of the
Merger," "--Reasons for the Merger--Lancit," "--Recommendation of the Lancit
Board" and "--Opinion of Financial Advisor."
Opinion of Financial Advisor
Schroders has delivered the Schroders' Opinion to the Lancit
Board to the effect that, as of the date of each of the February 27 Opinion
and the May 7 Opinion and based upon and subject to certain matters stated
therein, the consideration to be received by the Lancit Shareholders in the
Merger is fair, from a financial point of view, to such holders. A copy of
the Schroders' Opinion, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached to this Proxy
Statement--Prospectus as Annex III and each should be read carefully by the
Lancit Shareholders in its entirety. See "The Merger--Opinion of Financial
Advisor."
Effective Time of the Merger
The Merger will become effective as of the time of the filing
of a certificate of merger (the "Certificate of Merger") with the Secretary of
State of New York (i.e., the Effective Time). Such filing will occur when all
conditions to the Merger contained in the Merger Agreement, including the
requisite approval of the Lancit Shareholders, have been satisfied or waived.
RCN and Lancit currently anticipate that the Effective Time will occur as soon
as practicable after the Special Meeting. See "The Merger--Other Conditions
to Consummation of the Merger."
Consequence of Failure to Approve the Merger
As of the expected date of the Special Meeting of Lancit
Shareholders to consider the Merger Agreement and the Merger, it is
anticipated that Lancit will have minimal, if any, further cash resources or
access to such resources. Accordingly, if the Merger is not approved by the
Lancit Shareholders, it is unlikely that Lancit would be able to sustain its
operations, whether in order to pursue an alternative transaction or
otherwise, for any significant period beyond the date of such meeting, absent
a source of additional funding which does not currently exist. In such event,
Lancit would have to consider seeking protection from its creditors under the
Federal bankruptcy laws and/or liquidating. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lancit --
Liquidity and Capital Resources."
Certain Other Terms and Conditions
In addition to the foregoing matters, certain other terms and
conditions of the Merger Agreement are as follows:
Other Conditions to the Merger. In addition to the approval of
the Merger and the Merger Agreement by the Lancit Shareholders, the
consummation of the Merger is conditioned upon the satisfaction of certain
other conditions set forth in the Merger Agreement, including: (i) the receipt
by each party of various legal opinions, certificates, consents, resolutions
and reports from the other and from third parties; (ii) the effectiveness of
the Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), and the absence of any stop order suspending such
effectiveness or the institution or threat of proceedings for such purpose;
(iii) the approval for listing on the NASDAQ, subject to official notice of
issuance, of the shares of RCN Common Stock issuable to the Lancit
Shareholders pursuant to the Merger Agreement; and (iv) the accuracy of the
representations and warranties of each of Lancit and RCN, except to the extent
that such representations and warranties relate to matters which, singly or in
the aggregate, did not have and could not reasonably be expected to have a
material adverse effect. See "The Merger--Other Conditions to Consummation of
the Merger."
Consideration of Other Proposals. The Merger Agreement
provides that neither Lancit nor any of its subsidiaries shall (whether
directly or indirectly through advisors, agents or other intermediaries), nor
shall Lancit or any of its subsidiaries authorize or permit any of its or
their officers, directors, agents, representatives, advisors or subsidiaries
to, solicit, initiate or take any action knowingly to facilitate the
submission of inquiries, proposals or offers from any person or group as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), other than RCN or LME (each, a "Third Party") relating
to (A) any acquisition or purchase of 20% or more of the consolidated assets
of Lancit and its subsidiaries or of over 20% of any class of equity
securities of Lancit or any of its subsidiaries, (B) any tender offer
(including a self tender offer) or exchange offer that if consummated would
result in any Third Party beneficially owning 20% or more of any class of
equity securities of Lancit or any of its subsidiaries, (C) any merger,
consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving
Lancit or any of its subsidiaries whose assets, individually or in the
aggregate, constitute more than 20% of the consolidated assets of Lancit other
than the transactions contemplated by the Merger Agreement, or (D) any other
transaction the consummation of which would or could reasonably be expected
to impede, interfere with, prevent or materially delay the Merger or which
would or could reasonably be expected to materially dilute the benefits to RCN
of the transactions contemplated by the Merger Agreement (each, an "Acquisition
Proposal"), or otherwise participate in such a proposal or offer.
Notwithstanding the foregoing, Lancit is permitted to, among other things, (i)
furnish information concerning its business, properties or assets to a person
or group that makes a bona fide inquiry or proposal concerning any Acquisition
Proposal, subject to a confidentiality agreement on terms substantially the
same as that entered into between RCN and Lancit, and (ii) enter into
discussions or negotiations with any such person or group concerning any
proposed Acquisition Proposal; provided that the Lancit Board shall have
concluded, following consultation with outside counsel, that failure to take
the relevant action would result in a breach of the Lancit Board's fiduciary
duties to the shareholders of Lancit. Since the announcement of the Merger
Agreement, no such inquiry, offer or proposal has been received by Lancit, nor
is Lancit engaged in any such discussions or negotiations.
Amendment, Waiver and Termination. The Merger Agreement
(including any Exhibits thereto) may be amended at any time before or after
its approval by the Lancit Shareholders, to the extent permitted under the
Business Corporation Law of the State of New York, as amended (the "NYBCL").
In addition, the Merger Agreement provides that any of RCN, LME or Lancit may
waive, in whole or in part, any of the conditions to the other's performance
set forth in the Merger Agreement.
The Merger Agreement may be terminated at any time prior to the
Effective Time (a) by mutual written consent of Lancit and RCN; (b) by either
Lancit or RCN, if the Merger has not been consummated by June 30, 1998,
provided that the party seeking to exercise such termination right is not then
in breach in any material respect of any of its obligations under the Merger
Agreement, and provided, further, that if the Merger has not been consummated
by June 30, 1998 because of a delay caused by RCN (even if such delay does not
constitute a material breach by RCN of its obligations under the Merger
Agreement), RCN shall not be permitted to terminate the Merger Agreement under
the termination provision described in this clause (b) prior to August 1,
1998; (c) by either Lancit or RCN if the other party shall have breached in
any material respect, any of its obligations under the Merger Agreement, or,
subject to notice and an opportunity to cure, if any representation and
warranty shall have been incorrect in any material respect when made or,
except as to representations made as of a specific date, at any time prior to
the Effective Time, except to the extent that any such incorrect
representations or warranties relate to matters which, singly or in the
aggregate, did not have and could not reasonably be expected to have a
material adverse effect on the other party; (d) by either Lancit or RCN, if
there shall be any law or regulation that makes consummation of the Merger
illegal or otherwise prohibited or if any judgment, injunction, order or
decree enjoining RCN or Lancit from consummating the Merger is entered and
such judgment, injunction, order or decree shall become final and
nonappealable; (e) by RCN if the Lancit Board shall have withdrawn or modified
or amended, in a manner adverse to RCN, its approval or recommendation of the
Merger Agreement and the Merger, or its recommendation that the Lancit
Shareholders approve and adopt the Merger Agreement and Merger, or approved,
recommended or endorsed any Acquisition Proposal for a transaction other than
the Merger or if Lancit has failed to call the Special Meeting or failed as
promptly as practicable after the RCN Registration Statement is declared
effective to mail the Proxy Statement to the Lancit Shareholders or failed to
include in such Proxy Statement the recommendation referred to above, (f)
subject to payment by Lancit of certain fees and expenses (see "The
Merger--Expenses; Termination Fees") and prior to approval of the Merger by
the Lancit Shareholders, by Lancit, if prior to the Effective Time, and based
on a good faith determination (following consultation with outside counsel)
that failure to take such action would result in a breach of the Lancit
Board's fiduciary duties, the Lancit Board shall have withdrawn or modified or
amended, in a manner adverse to RCN, its approval or recommendation of the
Merger Agreement and the Merger or its recommendation that the Lancit
Shareholders approve and adopt the Merger Agreement and Merger in order to
permit Lancit to execute a definitive agreement providing for the acquisition
of Lancit or in order to approve a tender or exchange offer for any or all of
the Lancit Common Stock, in either case, that is determined by the Lancit
Board to be on financial terms more favorable to the Lancit Shareholders than
the Merger; or (g) by either Lancit or RCN, if the Merger Agreement shall have
been voted upon by the Lancit Shareholders at the Special Meeting (which
includes any adjournment or postponement thereof) without the requisite
shareholder approval being obtained. See "The Merger--Amendment, Waiver and
Termination."
Termination Fees. If the Merger Agreement is terminated by (a)
RCN, if the Lancit Board withdraws or modifies or amends, in a manner adverse
to RCN, its approval or recommendation of the Merger Agreement or its
recommendation that the Lancit Shareholders adopt and approve the Merger
Agreement, or approves, recommends or endorses any Acquisition Proposal for a
transaction other than the Merger (including a tender or exchange offer for
Lancit Common Stock) or if Lancit fails promptly to call the Special Meeting
or fails as promptly as practicable to mail this Proxy Statement--Prospectus
to the Lancit Shareholders or fails to include in such statement the
recommendation referred to above; (b) Lancit, in contemplation of a merger
agreement or tender offer or exchange offer or any transaction of the type
listed in clause (d) below, if, prior to the Effective Time and prior to
approval of the Merger by the Lancit Shareholders, and based on a good faith
determination (following consultation with outside counsel) that failure to
take such action would result in a breach of the Lancit Board's fiduciary
duties, the Lancit Board withdraws or modifies or amends, in a manner adverse
to RCN, its approval or recommendation of the Merger Agreement or its
recommendation that Lancit Shareholders adopt and approve the Merger Agreement
in order to permit Lancit to execute a definitive agreement providing for the
acquisition of Lancit or in order to approve a tender or exchange offer for any
or all of the Lancit Common Stock, in either case, that is determined by the
Lancit Board to be on financial terms more favorable to the Lancit's
Shareholders than the Merger; (c) RCN, if Lancit willfully breaches in any
material respect any of its obligations under the Merger Agreement; or (d) any
of the following events occurs within 12 months of the termination of the
Merger Agreement, because the requisite shareholder approval of the Merger was
not obtained: Lancit is acquired by merger or otherwise by a Third Party; a
Third Party acquires more than 50% of the total assets of Lancit and its
subsidiaries, taken as a whole; a Third Party acquires more than 50% of the
outstanding Lancit Common Stock or Lancit adopts and implements a plan of
liquidation, recapitalization or share repurchase relating to more than 50% of
the outstanding Lancit Common Stock or an extraordinary dividend relating to
more than 50% of the outstanding Lancit Common Stock or 50% of the assets of
Lancit and its subsidiaries, taken as a whole, and in each case, the Lancit
Shareholders receive, pursuant to such event, cash, securities or other
consideration having an aggregate value, when taken together with the value of
any securities of Lancit or its subsidiaries otherwise held by the Lancit
Shareholders after such event, in excess of $1.20 per share of Lancit Common
Stock, then in each case Lancit has agreed to pay to LME, within two business
days thereafter, a fee of $500,000 in cash. See "The Merger--Expenses;
Termination Fees."
Comparative Rights of Shareholders
If the Merger is consummated, the shareholders of Lancit, a New
York corporation, will become shareholders of RCN, a Delaware corporation,
which will result in their rights as shareholders being governed by Delaware
law and RCN's Amended and Restated Certificate of Incorporation (the "RCN
Certificate of Incorporation") and Bylaws (the "RCN Bylaws"), rather than New
York law and Lancit's Certificate of Incorporation, as amended (the "Lancit
Certificate of Incorporation"), and Bylaws, as amended (the "Lancit Bylaws").
It is not practical to describe all the differences between each of Delaware
law and New York law and between RCN's governing documents and Lancit's
governing documents. A summary of certain of such differences is set forth in
"Comparison of Shareholders' Rights," including, without limitation,
differences with respect to the size of the board of directors, nomination of
directors, the calling of special meetings of shareholders, the required
shareholder vote for the approval of certain transactions, the amendment of
the governing documents, state anti-takeover statues and appraisal rights.
See "Description of Capital Stock of RCN--RCN Common Stock,"
"Certain Statutory, Charter and Bylaw Provisions for RCN" and "Comparison of
Shareholders' Rights" for a detailed description of the rights of holders of
RCN Common Stock and related matters.
Fractional Shares
No fractional shares of RCN Common Stock will be issued in
connection with the Merger. In lieu thereof, each Lancit Shareholder
otherwise entitled to a fraction of a share of RCN Common Stock pursuant to
the terms of the Merger Agreement (after aggregating the Merger Consideration
to be paid to such Lancit Shareholder in respect of all shares of Lancit
Common Stock held by such Lancit Shareholder) will be paid, in cash, an amount
equal to such fraction multiplied by the Average Closing Price as soon as
practicable following the effective time of the Merger.
Certain Federal Income Tax Consequences
Lancit has received an opinion of its counsel, Christy &
Viener, to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) RCN, LME and Lancit each will be a party to the
reorganization within the meaning of Section 368(b) of the Code and (iii) no
gain or loss will be recognized by RCN, LME or Lancit as a result of the
Merger. See "The Merger--Certain Federal Income Tax Consequences."
Appraisal Rights
Lancit Shareholders do not have any dissenters' rights of
appraisal with respect to the Merger.
Management After the Merger
At the Effective Time, the Board of Directors and the officers
of the Surviving Corporation will consist of the current directors and
officers of LME. See "The Merger--Management After the Merger."
Interests of Certain Persons in the Merger
Laurence A. Lancit and Cecily Truett, co-presidents, directors
and co-founders of Lancit, and the Children's Trust, a trust established for
the benefit of the minor children of Mr. Lancit and Ms. Truett, collectively
own an aggregate of approximately 17.3% of the shares of Lancit Common Stock
expected to be outstanding at the time of the Special Meeting and have entered
into the Voting Agreement whereby each of them has agreed to vote the shares
owned by them "for" the approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger, and to vote against
certain competing transactions. See "The Voting Agreement."
The remaining directors and executive officers of Lancit have
indicated that they intend to vote any shares of Lancit Common Stock owned by
them "for" approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger. All shares held by the foregoing
parties will be converted in the Merger on the same terms and conditions as
apply to all shares of Lancit Common Stock. See "Introduction--Vote Required."
Pursuant to the terms of the employment agreement between Susan
L. Solomon and Lancit, upon consummation of the Merger, Ms. Solomon's
employment with Lancit will terminate and she would be entitled to receive a
payment equal to twice her annual salary ($350,000, subject to New York
consumer price index adjustments), plus accrued and unpaid bonus compensation
of $50,000, together with certain additional amounts. Effective upon
consummation of the Merger, Ms. Solomon has agreed to waive her right to
receive such cash amount and certain other benefits and to accept, in full
satisfaction thereof, registered RCN Common Stock having a value at the time
of the Merger of $750,000. At RCN's request, Ms. Solomon entered into a
consulting agreement with RCN, terminable at will by either party upon 45
days' prior notice, pursuant to which she will act as a consultant to RCN
following the Effective Time of the Merger for compensation at a monthly rate
approximately equal to her current Lancit salary.
Upon consummation of the Merger, pursuant to the terms of their
respective employment agreements, each of Mr. Lancit and Ms. Truett would be
entitled to terminate his or her employment with Lancit prior to its scheduled
termination in October 1998 and to be released from his or her respective
noncompete covenant under his or her employment agreement. Each of them has
agreed with RCN to waive the rights to terminate his or her employment and to
be released from the noncompete covenant by reason of the Merger. See "The
Merger--Interests of Certain Persons in the Merger."
All outstanding stock options to purchase Lancit Common Stock
that are held by the foregoing persons and the other directors and officers of
Lancit will be canceled in accordance with the terms of the Merger Agreement.
See "The Merger--Lancit Stock Options and Warrants."
Risk Factors
In considering whether to approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger,
Lancit Shareholders should carefully consider those factors described under
"Risk Factors" beginning on page 15. The price of the RCN Common Stock at the
Effective Time may vary from the price as of the date of the Proxy
Statement--Prospectus or the date on which Lancit Shareholders vote on the
Merger due to changes in the business, operations or prospects of RCN, market
assessments of the likelihood that the Merger will be consummated and the
timing thereof, general market and economic conditions and other factors.
Summary Historical Consolidated Financial Data of RCN
Prior to September 30, 1997, RCN operated as part of C-TEC. The
table below sets forth selected historical consolidated financial data for
RCN. The historical financial data presented below reflect periods during
which RCN 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 RCN had operated as a separate, independent company
during such periods, and are not necessarily indicative of RCN'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 RCN's unaudited historical consolidated financial
statements not included in this Proxy Statement--Prospectus. The selected
historical consolidated financial data of RCN 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 RCN's audited historical consolidated
financial statements (the "RCN Financial Statements") included elsewhere in
this Proxy Statement--Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of RCN" and the RCN Financial
Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
(dollars in thousands)
1993 1994 1995(1) 1996 1997
-------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales........................................................... $49,504 $59,500 $91,997 $104,910 $127,297
Costs and expenses, excluding depreciation and amortization.....
30,821 49,747 75,003 79,107 134,967
Nonrecurring charges(2)......................................... -- -- -- -- 10,000
Depreciation and amortization................................... 9,922 9,803 22,336 38,881 53,205
-------- -------- --------- -------- ----------
Operating (loss) income......................................... 8,761 (50) (5,342) (13,078) (70,875)
Interest income................................................. 17,882 21,547 29,001 25,602 22,824
Interest expense................................................ (17,127) (16,669) (16,517) (16,046) (25,602)
Other income (expense), net..................................... 1,195 1,343 (304) (546) 131
(Benefit) provision for income taxes............................ 167 2,340 1,119 979 (20,849)
Equity in loss of unconsolidated entities(3).................... -- -- (3,461) (2,282) (3,804)
Minority interest in (income) loss of consolidated entities(4).. (85) (95) (144) 1,340 7,296
Cumulative effect of changes in accounting principles(5)........ 1,628 (83) -- -- --
Extraordinary charge--debt prepayment penalty, net of tax of
$1,728(6)...................................................... -- -- -- -- (3,210)
-------- -------- --------- -------- ----------
Net income (loss)............................................... $12,087 $3,653 $2,114 $(5,989) $ (52,391)
======== ======== ========= ======== ==========
Balance Sheet Data (at end of period):
Total assets.................................................... $291,634 $568,586 (7) $649,610 $628,085 $1,150,992
Long-term debt.................................................. 181,500 154,000 135,250 131,250 686,103
Shareholders' equity............................................ 74,329 372,847 (7) 394,069 390,765 356,584
</TABLE>
- ----------
(1) Certain of RCN's businesses were acquired by C-TEC and transferred to RCN
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 RCN Financial Statements since the date
of acquisition. See Note 4 to the Consolidated Financial Statements of RCN.
(2) Nonrecurring charges of $10,000 represent costs incurred with respect to the
termination of a marketing services agreement related to RCN's wireless
video services.
(3) Equity in loss of unconsolidated entities primarily consists of RCN's
proportionate share of income (losses) and amortization of excess cost over
net assets of Megacable. RCN purchased its 40% equity interest in Megacable
in January 1995 and accounts for its investment by the equity method of
accounting.
(4) In 1997, the minority interest in (income) loss of consolidated entities
consists of minority losses of the RCN-BECOCOM, 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. Prior to 1996, the minority interest represents minority income
earned by a cable television partnership.
(5) The cumulative effect of changes in accounting principles reflects the
adoption of Statement of Financial Accounting Standards No. 109--"Accounting
for Income Taxes" in 1993 and the accounting for benefits under Statement of
Financial Accounting Standards No. 112--"Employers' Accounting for
Postemployment Benefits" in 1994.
(6) Extraordinary charge represents the fee, net of taxes, paid in connection
with the early prepayment of 9.65% Senior Secured Notes of C-TEC Cable
Systems, Inc. (the "Senior Secured Notes"). The Senior Secured Notes were
prepaid in connection with RCN's acquisition of a new $125,000 credit
agreement comprised of a five year revolving credit facility in the amount
of $25,000 and a $100,000 term credit facility which is to be repaid over
six years in quarterly installments from September 30, 1997 through June 30,
2005.
(7) During 1994, C-TEC transferred to RCN an equity contribution of $298,759
primarily representing net proceeds from a C-TEC common stock rights
offering.
Summary Pro Forma Financial Data of RCN
The following unaudited summary pro forma financial data
include adjustments to the historical statements of operations of RCN for the
years ended December 31, 1997 and 1996 as if the Distribution, the acquisition
of a 19.9% minority interest in Freedom, borrowings of $110 million under the
Credit Agreement dated as of July 1, 1997 between certain subsidiaries of RCN
and a group of lenders for which First Union National Bank acts as agent (the
"Credit Agreement"), the offering (the "1997 Notes Offering") of RCN's 10%
Senior Notes due 2007 ("10% Senior Notes") and 11 1/8% Senior Discount
Notes due 2007 ("11 1/8% Senior Discount Notes," and together with the 10%
Senior Notes, the "1997 Notes"), the acquisition (the "Erols Acquisition") of
Erols Internet, Inc. ("Erols") and the offering (the "1998 Notes Offering") of
RCN's 9.80% Senior Discount Notes due 2008 (the "9.80% Senior Discount Notes"
or the "1998 Notes") had occurred on the first day of the period. Such
adjustments result primarily from changes in the capital structure of RCN and
accounting for the Erols Acquisition. The following unaudited summary pro
forma financial data have not been adjusted for the acquisition of Lancit
because the acquisition is not material to RCN. See "Unaudited Pro Forma
Consolidated Financial Statements of RCN" and the notes thereto. The following
unaudited pro forma financial data are provided for information purposes only
and should not be construed to be indicative of RCN's results of operations or
financial condition had the Distribution, borrowings of $110 million under the
Credit Agreement, the 1997 Notes Offering, the Erols Acquisition and the 1998
Notes Offering occurred on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had RCN been
operated as a separate, independent company during such period, and are not
necessarily indicative of RCN's future results of operations or financial
condition.
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
---------------------
(dollars in thousands)
<S> <C>
Statement of Operations Data:
Sales......................................................................................... $141,273
Costs and expenses, excluding depreciation and amortization................................... 154,032
Nonrecurring charges.......................................................................... 10,000
Depreciation and amortization................................................................. 61,421
----------
Operating (loss).............................................................................. (84,180)
Interest income............................................................................... 14,138
Interest expense.............................................................................. (106,037)
Other (expense) income, net................................................................... 82
----------
(Loss) before income taxes.................................................................... (175,997)
(Benefit) for income taxes.................................................................... (61,794)
----------
Income (loss) before equity in unconsolidated entities and minority interest.................. (114,203)
Equity in loss of unconsolidated entities..................................................... (17,224)
----------
(Loss) before extraordinary charge and minority interest in loss of consolidated entities.......... $(131,427)
==========
Other Data:
EBITDA before nonrecurring charges (1)........................................................ $(12,759)
Capital expenditures.......................................................................... $90,392
Connections................................................................................... 593,646
Employees..................................................................................... 1,150
</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. generally accepted accounting principles ("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.
Summary Historical Consolidated Financial Data of Lancit
The selected historical consolidated financial data for the
fiscal years ended June 30, 1994 and 1993, and as of June 30, 1995, 1994 and
1993 are derived from Lancit's audited historical consolidated financial
statements not included in this Proxy Statement--Prospectus. The selected
historical consolidated financial data for the fiscal years ended June 30,
1997, 1996 and 1995, and as of June 30, 1997 and 1996 are derived from and
should be read in conjunction with Lancit's audited consolidated financial
statements (the "Lancit Audited Financial Statements") included elsewhere in
this Proxy Statement--Prospectus. The summary consolidated financial data for
the six-month periods ended December 31, 1997 and 1996 are derived from and
should be read in conjunction with the unaudited consolidated condensed
financial statements of Lancit (the "Lancit Unaudited Financial Statements";
together with the Lancit Audited Financial Statements, the "Lancit Financial
Statements") included elsewhere in this Proxy Statement--Prospectus. The Lancit
Unaudited Financial Statements include, in management's opinion, all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the results for such periods. Results for the six months ended
December 31, 1997 are not necessarily indicative of results to be expected for
the entire year ending June 30, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lancit" and the
Lancit Financial Statements.
<TABLE>
<CAPTION>
Six Months
Fiscal Year Ended June 30, Ended December 31,
------------------------------------------------------------------------- --------------------------
1997 1996 1995 1994 1993 1997 1996
------------- ------------ ----------- ----------- -------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of (unaudited)
Operations Data:
Revenues................ $ 3,152,057 $ 9,061,213 $ 17,882,479 $8,914,698 $ 3,670,990 $ 832,520 $ 1,389,883
Net income (loss)(1).... $(10,078,908) $ (3,700,713) $ 1,247,499 $ 34,874 $ (996,823) $ (2,635,753) $(1,467,914)
Basic income (loss) per
common share(1)....... $ (1.54) $ (.60) $ .20 $ .01 $ (.25) $ (.40) $ (.23)
Basic weighted average
shares used in
computation........... 6,538,851 6,177,051 6,127,551 5,560,999 3,944,010 6,634,750 6,443,952
Diluted income (loss)
per common share(1)... $ (1.54) $ (.60) $ .20 $ .01 $ (.25) $ (.40) $ (.23)
Diluted weighted
average shares used
in computation........ 6,538,851 6,177,051 6,365,741 6,154,223 3,944,010 6,634,750 6,443,952
Balance Sheet
Data:
Total assets............ $ 9,199,313 $14,388,166 $22,395,858 $16,926,998 $ 5,494,714 $ 6,692,888 $17,235,497
</TABLE>
- ----------
(1) Net income (loss) for fiscal 1997 includes a charge of $5,456,180, or $0.83
per share, for a non-cash write-down related to projects and, for fiscal
1996, includes a charge of $2,650,000, or $0.43 per share, for a non-cash
write-down related to a project and a restructuring charge. See the Lancit
Financial Statements and related notes thereto.
Market Price and Comparative Per Share Data
Both the RCN Common Stock (symbol: RCNC) and the Lancit Common
Stock (symbol: LNCT) are admitted for trading on the NASDAQ.
The following table sets forth the high and low bid prices per
share of the RCN Common Stock and the Lancit Common Stock on the NASDAQ for
the periods indicated.
<TABLE>
<CAPTION>
RCN Common Stock(1) Lancit Common Stock
---------------------------------------------- ------------------------------------
Market Price Cash Market Price Cash
------------------------------ Dividends --------------------- Dividends
High Low Declared High Low Declared
--------------- ------------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Quarter ended September 30.... $16 3/4 $12 1/2 $0
Quarter ended December 31..... 13 3/8 10 5/8 0
1996
Quarter ended March 31........ 13 8 7/8 0
Quarter ended June 30......... 14 9 1/2 0
Quarter ended September 30.... 12 7/8 9 1/4 0
Quarter ended December 31... 10 1/2 4 1/4 0
1997
Quarter ended March 31........ 7 1/8 4 5/8 0
Quarter ended June 30......... 5 1/8 2 22/32 0
Quarter ended September 30.... $15 11/16 (2) $10 9/16 (2) $0 4 2 1/2 0
Quarter ended December 31..... 21 1/2 12 1/2 0 3 5/8 3/4 0
1998
Quarter ended March 31........ 30 9/16 15 7/8 0 1 15/16 27/32 0
</TABLE>
- ----------
(1) Because RCN Common Stock was distributed on September 30, 1997 to holders of
record of C-TEC Common Stock on September 19, 1997, market price and
dividend information have only been set forth for the quarters ending
September 30, 1997, December 31, 1997 and March 31, 1998. RCN Common Stock
information has been restated to reflect the RCN Stock Dividend.
(2) The prices reflect the partial period between September 19, 1997 through
September 30, 1997. There was no market for RCN Common Stock prior to this
period.
The following table sets forth the high ask, low bid and
closing bid price per share of RCN Common Stock and Lancit Common Stock (on a
historical and equivalent per share basis) on (i) February 26, 1998, the last
business day preceding public announcement of the signing of the Merger
Agreement and (ii) May 7, 1998, the last practicable date prior to the mailing
of this Proxy Statement--Prospectus:
<TABLE>
<CAPTION>
RCN Common Stock Lancit Common Stock
----------------------------------- -------------------------------
High Low Close High Low Close
-------- --------- --------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
February 26, 1998.................. $28 3/8 $28 5/16 $28 7/16 $ 1 5/8 $ 1 3/16 $ 1 9/16
Equivalent share basis on February
26, 1998 (1)...................... -- -- -- $ 1.2882 $ 1.2854 $ 1.2911
May 7, 1998........................ $24 3/8 $22 1/2 $23 31/32 $ 7/8 $ 27/32 $ 7/8
Equivalent share basis on May 7,
1998 (1).......................... -- -- -- $ 1.2187 $ 1.125 $ 1.1984
</TABLE>
- ----------
(1) Equivalent share basis is determined by multiplying the applicable price of
the RCN Common Stock by 0.05 (the exchange ratio that would have been
applied if the Merger had become effective on May 8, 1998) to reflect the
terms of the Merger Agreement.
Lancit Shareholders are urged to obtain current market quotations
prior to making any decision with respect to the Merger. In order to provide
Lancit Shareholders with current information during the period prior to the
Effective Time of the Merger regarding the conversion ratio (based on recent
closing prices of RCN Common Stock), Lancit has established a toll-free
telephone number at (800) 253-3814 that interested parties may call.
<TABLE>
<CAPTION>
RCN Lancit
-------------- ------------------------------------
Year Ended Six Months
December 31, Year Ended Ended December
1997 June 30, 1997 31, 1997
-------------- --------------- ------------------
<S> <C> <C> <C>
Book value per share..................................... $ 6.49 $ 0.62 $ 0.24
Cash dividends declared per share........................ $ 0.00 $ 0.00 $ 0.00
Income (loss) per share from continuing operations....... $ (0.95) $ (1.54) $ (0.40)
</TABLE>
On May 5, 1998, the last practicable date prior to the mailing of
this Proxy Statement--Prospectus, there were approximately 2,720 holders of RCN
Common Stock, no holders of RCN's Class B Non-Voting Common Stock, par value
$1.00 per share (the "RCN Class B Stock," and together with the RCN Common
Stock, the "RCN Common Equity"), and no holders of RCN's preferred stock, par
value $1.00 per share (the "RCN Preferred Stock").
There is only one beneficial owner of more than 5% of the RCN
Common Stock and the issuance of the Merger Shares will not materially affect
the present holdings of this holder:
<TABLE>
<CAPTION>
Holding as of March 1, 1998 Holding following the Merger
--------------------------------- -----------------------------------
Number of Number of
Shares Percent of Shares Percent of
Beneficially Outstanding Beneficially Outstanding
Owned Shares Owned Shares
--------------- ------------ ------------------- -------------
<S> <C> <C> <C> <C>
Level 3 Telecom Holdings, Inc....... 26,640,970 46 26,640,970 46
</TABLE>
Level 3 Communications, Inc. ("LCI") owns 90% of the common stock
and all of the preferred stock of Level 3 Telecom Holdings, Inc. ("Level 3
Telecom"), formerly Kiewit Telecom Holdings, Inc. David C. McCourt, Chairman
and Chief Executive Officer of RCN, owns the remaining 10% of the common stock
of Level 3 Telecom. No director, nor all of the directors as a group, holds
more than 1% of the outstanding RCN Common Stock; therefore, RCN believes that
the issuance of the Merger Shares will not materially affect the holdings by
such directors or group of directors nor RCN's commitments to such persons with
respect to the issuance of RCN Common Equity. See "Security Ownership of
Certain Beneficial Owners and Management of RCN."
As of the Record Date, there were 2,720 holders of record of RCN
Common Stock. RCN has not paid any cash dividends in the past. RCN anticipates
that future revenues will be used principally to support operations and finance
growth of the business and, thus, RCN does not intend to pay cash dividends on
the RCN Common Stock in the foreseeable future. The payment of any cash
dividends in the future will be at the discretion of the RCN Board. The
declaration of any dividends and the amount thereof will depend on a number of
factors, including RCN's financial condition, capital requirements, funds from
operations, future business prospects, covenant restrictions and such other
factors as the RCN Board may deem relevant.
As of the Record Date, there were approximately 189 holders of
record of Lancit Common Stock. Lancit has not paid any dividends in the past
and has no present intention to declare or pay dividends.
RISK FACTORS
In addition to the other information contained in this Proxy
Statement--Prospectus, holders of Lancit Common Stock should carefully review
the following factors in evaluating whether to approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger.
RCN RISK FACTORS
This Proxy Statement--Prospectus contains certain
forward-looking statements regarding RCN'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 RCN, RCN's intention to connect certain wireless video
and resale telephone customers to its advanced fiber optic networks, the
development of RCN's businesses, the markets for RCN's services and products,
RCN's anticipated capital expenditures, RCN'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 Proxy Statement--Prospectus. Such risks
include, but are not limited to, RCN's ability to realize expected benefits
from the Merger, RCN's proposed acquisition of Lancit and RCN'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.
Stock Exchange Ratio
In considering whether to approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger,
holders of Lancit Common Stock should carefully consider that (i) the Stock
Exchange Ratio will only be adjusted, based on changes in the market price of
the RCN Common Stock during the five trading day period ending one trading day
prior to the Effective Time, to the extent the price per share of the RCN
Common Stock is between $24 and $29, (ii) the price per share of the RCN
Common Stock may vary from the price as of the date of this Proxy
Statement--Prospectus or the date on which holders of Lancit Common Stock vote
on the Merger Agreement due to changes in the business, operations or
prospects of RCN, general market and economic conditions and other factors and
(iii) there can be no assurance that the Average Closing Price will be between
$24 and $29 and for every dollar that the Average Closing Price is less than
$24, the value received by Lancit Shareholders for each share of Lancit Common
Stock will decrease by $0.05 (and for every dollar that the Average Closing
Price is more than $29, the value received by Lancit Shareholders for each
share of Lancit Common Stock will increase by $0.04138). Lancit does not have
the right to terminate the Merger Agreement based on the Average Closing Price
being below $24.
Limited Operating History; Negative Cash Flow; Operating Losses
RCN 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, RCN 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 it continues to experience negative cash
flow in the future will be affected by a variety of factors, including the
pace of its entry into new markets, the time and expense required for building
out its planned network, its success in marketing its services, the intensity
of the competition experienced by RCN and the availability of additional
capital to pursue its business plans. RCN had operating losses after
depreciation and amortization and nonrecurring charges of $70,875,000,
$13,078,000 and $5,342,000 for the years ended December 31, 1997, 1996 and
1995. On a pro forma basis, after giving effect to the Distribution, the
acquisition of a 19.9% interest in Freedom, the 1997 Notes Offering, the Erols
Acquisition and the 1998 Notes Offering, RCN had operating losses after
depreciation and amortization and nonrecurring charges of $84,180,000 for the
year ended December 31, 1997. There can be no assurance that RCN will achieve
or sustain profitability or positive cash flows from operating activities in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of RCN."
Further Capital Requirements
RCN expects that it will require a substantial amount of
capital to fund the development and operations of business in the Boston to
Washington, D.C. corridor, including to fund its advanced fiber optic
networks, the upgrade of hybrid fiber/coaxial plant, the funding of operating
losses and debt service requirements. RCN currently estimates that its capital
requirements for the period from January 1, 1998 through December 31, 1999
will be approximately $785 million, which includes capital expenditures
(including connection costs which will only be incurred as RCN obtains revenue
generating customer connections) of approximately $300 million in 1998 and
approximately $485 million through 1999. These capital expenditures will be
used principally to fund the buildout of RCN's fiber optic network in high
density areas in the Boston, New York and Washington, D.C. markets and
represent only RCN's proportionate share of the funding requirements of the
Boston and Washington, D.C. joint ventures. RCN 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." RCN expects that its
joint venture partners will each contribute approximately $150 million in
capital to the joint ventures in the period from September 30, 1997 through
2000 in order to fund capital expenditures at the joint venture company level.
RCN expects to contribute to Starpower Communications, LLC ("Starpower"), the
joint venture with Pepco Communications, L.L.C. ("Pepco Communications"), an
indirect wholly owned subsidiary of Potomac Electric Power Company ("PEPCO"),
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 RCN.
RCN 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 RCN's network and to fund operating losses may
vary materially from RCN's estimates and additional funds will be required in
the event of significant departures from the current business plan, unforeseen
delays, cost overruns, engineering design changes and other technological
risks or to meet other unanticipated expenses. RCN 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 RCN'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 RCN 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 RCN's
development and expansion plans and expenditures. Any of these events could
impair RCN'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 of RCN."
Substantial Indebtedness; Effect of Financial Leverage
RCN has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. As of December 31, 1997, on a pro forma
basis, after giving effect to the Distribution, the acquisition of a 19.9%
minority interest in Freedom, the 1997 Notes Offering, the Erols Acquisition
and the 1998 Notes Offering, RCN had an aggregate of approximately $1,039
million of indebtedness outstanding, representing 73.8% 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
RCN, RCN's fixed charges are expected to exceed its earnings for the
foreseeable future and there can be no assurance that RCN's operating cash
flow will be sufficient to pay interest on the 1997 Notes or the 1998 Notes
(together the "Notes"). In addition, RCN will require substantial additional
indebtedness, particularly in connection with the buildout of RCN's networks
and the introduction of its telecommunications services to new markets. The
leveraged nature of RCN could limit its ability to effect future financings or
may otherwise restrict RCN's business activities.
The extent of RCN's leverage may have the following
consequences: (i) limit the ability of RCN 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
RCN'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 RCN's flexibility in planning for, or reacting to,
changes in its business; (iv) place RCN at a competitive disadvantage as
compared with less leveraged competitors; and (v) render RCN more vulnerable
in the event of a downturn in its business.
Ability to Manage Growth; Risks Related to Acquisitions
The expansion and development of RCN's operations (including
the construction and development of additional networks) will depend on, among
other things, RCN's ability to assess markets, design fiber optic network
backbone routes, install or lease fiber optic cable and other facilities,
including switches, and obtain rights-of-way, building access rights and any
required government authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. There
can be no assurance that RCN will be able to expand its existing network.
Furthermore, RCN'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 RCN were not able to manage its
planned expansion effectively it could have a material adverse effect on RCN.
Although RCN's acquisitions of Erols and Ultranet
Communications, Inc. ("Ultranet") were consummated in February, 1998, the
process of integrating the business of these Internet service providers
("ISPs") into RCN may take a significant period of time, may place a
significant strain on RCN's resources, and could subject RCN to additional
expenses during the integration process. In addition, RCN expects that it will
need to upgrade the systems and controls of the companies being acquired. As a
result, there can be no assurance that RCN will be able to successfully
integrate these ISPs successfully or in a timely manner. See "--Risks Relating
to Provision of Internet Services."
Rapid Technological Changes
The telecommunication industry is subject to rapid and
significant changes in technology. While RCN 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
RCN cannot be predicted. There can be no assurance that technological
developments in telecommunications will not have a material adverse effect on
RCN.
Dependence on Strategic Relationships; Terms of Joint Venture Arrangements
RCN 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 RCN's network is further developed, it will be
dependent on these arrangements to provide the full range of its
telecommunication service offerings. The key strategic relationships include
(1) RCN's arrangements with MFS Communications Company, Inc. ("MFS/WorldCom")
(which is now a subsidiary of WorldCom Inc. ("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 Boston Edison Company ("BECO") under
which RCN 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 "Description of Business Conducted by RCN--Strategic
Relationships." RCN 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 RCN. RCN 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
RCN has targeted as its initial geographic markets. RCN 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 RCN will
successfully negotiate such other agreements for interconnection with the
incumbent local exchange carrier or renewals of existing interconnection
agreements. The failure to negotiate or renew required interconnection
agreements could have a material adverse effect on RCN.
The agreements governing RCN'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
"Description of Business Conducted by RCN--Strategic Relationships") provides,
among other things, that (1) certain fundamental business actions, such as
material capital expenditures, debt incurrences and distributions to RCN and
BECO, require the joint approval of RCN and BECO; (2) neither RCN nor BECO may
transfer their interests in the joint venture for a period of three years
without the other's consent and, thereafter, may only do so while observing
certain rights of first offer and tag-along rights; (3) upon a change of
control (as defined 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 RCN in meeting a capital call, BECO may dilute RCN'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 RCN, 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 RCN's liquidity or future prospects or that, if necessary,
RCN 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 "Description of Business Conducted by
RCN--Strategic Relationships." In addition, although certain covenants
contained in the indentures applicable to the Notes (the "Indentures") are
applicable to the joint venture companies, neither the joint venture companies
nor RCN'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 local exchange carriers ("LECs"), and alternative service providers
including competitive local exchange carriers ("CLECs") and cellular and other
wireless telephone service providers. With respect to long distance telephone
services, RCN faces, and expects to continue to face, significant competition
from the interexchange carriers ("IXCs"), including AT&T, Sprint and MCI, which
account for the majority of all long distance revenue. Certain of the IXCs,
including AT&T, MCI and Sprint, have announced their intention to offer local
services in major U.S. markets using their existing infrastructure in
combination with resale of incumbent LEC service, lease of unbundled local
loops or other providers' services.
All of RCN'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. RCN expects that its
video programming service will face growing competition from current and new
DBS service providers.
RCN believes that among the existing competitors, the incumbent
LECs and the incumbent cable providers provide the most direct competition to
RCN in the delivery of "last mile" connections to residential consumers for
voice and video services. In each of its target markets for advanced fiber
optic networks, RCN faces, and expects to continue to face, significant
competition from the incumbent LECs (including Bell Atlantic in New York City
and Boston), which currently dominate their local telephone markets. RCN
competes with the incumbent LECs in its markets for local exchange services on
the basis of product offerings (including the ability to offer bundled voice
and video services), reliability, state-of-the-art technology and superior
customer service, as well as price. The incumbent LECs have begun to expand
the amount of fiber facilities in their networks and to prepare to re-enter
into the long distance telephone services market and, in addition, have
long-standing relationships with their customers. RCN expects that the
increased competition made possible by regulatory reform will result in
certain pricing and margin pressures in the telecommunications services
business.
The Telecommunications Act of 1996 (the "1996 Act") permits the
incumbent LECs and others to provide a wide variety of video services directly
to subscribers in competition with RCN. Various LECs currently are providing
video services within and outside their telephone service areas through a
variety of distribution methods, including both the deployment of broadband
wire facilities and the use of wireless transmission facilities. RCN cannot
predict the likelihood of success of video service ventures by LECs or the
impact on RCN of such competitive ventures.
Certain of RCN's video programming service businesses compete
with incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes with Time Warner Cable, Cablevision
Systems and Comcast. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric Cable TV,
which also holds a franchise for the relevant service area.
RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs, such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for commercial customers. In addition, potential competitors capable of
offering private line and special access services also include other smaller
long distance carriers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end-users, including Winstar, Dualstar and New Vision.
Cellularvision, a provider of local multipoint distribution service ("LMDS"),
offers wireless Internet and video programming services in New York City and
has announced plans to offer telephone service in the future.
The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
accordingly competition in this market is expected to intensify. RCN 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 RCN. Certain of RCN'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
RCN operates, see "Description of Business Conducted by RCN--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. RCN 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 RCN 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 RCN operates.
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses, preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations,
and sets basic standards for relationships between telecommunications
providers.
Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow Regional Bell
Operating Companies ("RBOCs") to enter the long distance market within their
own local service regions.
Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. Numerous parties appealed certain aspects of these
regulations, and the appeals were consolidated in the United States Court of
Appeals for the Eighth Circuit. On July 18, 1997, the Eighth Circuit found
constitutional challenges to certain practices implementing cost provisions of
the Telecommunications Act that were ordered by certain state public utility
commissions ("PUCs") to be premature; vacated significant portions of the
FCC's nationwide pricing rules; and confined the use of combined unbundled
network elements to instances where the requesting carrier itself would do the
combining. On October 14, 1997, the Eighth Circuit issued a decision vacating
additional FCC rules that will likely have the effect of increasing the cost
of obtaining the use of combinations of an incumbent LEC's unbundled network
elements. On January 26, 1998, the Supreme Court granted a writ of certiorari
under which it will review the July 18 Eighth Circuit decision; it is expected
(but not yet certain) that the Court will hear arguments on this case in the
fall of 1998. The Eighth Circuit decisions create uncertainty about the rules
governing pricing and terms and conditions of interconnection agreements, and
could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements. Prior to the
Eighth Circuit decisions, RCN 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 RCN will be able to obtain or enforce future interconnection
agreements, or obtain renewal of existing agreements, on terms acceptable to
RCN.
Certain RBOCs have also raised constitutional challenges to
restrictions in the 1996 Act preventing Bell Operating Companies ("BOCs") from
entering the long distance market in their home region. On December 31, 1997,
the U.S. District Court for the Northern District of Texas issued a decision
(the "SBC Decision") finding that Sections 271 to 275 of the
Telecommunications Act of 1996 are unconstitutional. SBC Communications, Inc.,
et. al v. Federal Communications Commission, et. al., Civil Action No.
7:97-CV-163-X. These sections of the 1996 Act impose restrictions on the lines
of business in which the RBOCs may engage, including establishing the
conditions they must satisfy before they may provide in-region interLATA
(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 RCN 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
RCN'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 RCN's ability to compete in local exchange markets. Second, RCN 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 RCN a marketing advantage that it would no longer
enjoy if the SBC Decision were upheld on appeal. RCN cannot predict either the
outcome of these or future challenges to the 1996 Act, any related appeal of
regulation or court decision, or the eventual effect on its business or the
industry in general.
The 1996 Act also makes far-reaching changes in the regulation
of the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new "open video systems" ("OVS") regulatory structure for
telephone companies and others to offer such services. Under the 1996 Act,
local telephone companies, including both incumbent LECs such as Bell
Atlantic, and CLECs such as RCN, may provide service as traditional cable
television operators subject to municipal cable television franchises, or they
may opt to provide their programming over non-franchised open video systems
subject to certain conditions, including, but not limited to, making available
a portion of their channel capacity for use by unaffiliated program
distributors and satisfying certain other requirements, including providing
capacity for public, educational and government channels, and payment of a
gross receipts fee equivalent to the franchise fee paid by the incumbent cable
television operator. RCN is one of the first CLECs to provide television
programming over an advanced fiber optic network pursuant to the OVS
regulations implemented by the FCC under the 1996 Act. As discussed below, RCN
is currently providing OVS service in the City of Boston and the City of New
York, and has entered into an OVS agreement to allow it to provide OVS
services in a number of communities surrounding Boston. Starpower is
negotiating similar agreements in Washington and surrounding communities.
RCN's voice business is subject to regulation by the FCC at the
federal level with respect to interstate telephone services (i.e., those that
originate in one state and terminate in separate states). State regulatory
commissions have jurisdiction over intrastate communications (i.e., those that
originate and terminate in the same state). See "Description of Business
Conducted by RCN--Regulation--Regulation of Voice Services." Municipalities
also regulate limited aspects of RCN's voice business by, for example,
imposing various zoning requirements and, in some instances, requiring
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
RCN will be required to obtain a telephone franchise in order to provide voice
services using its advanced fiber optic network facilities located in the
streets of New York City.
In February 1997, RCN subsidiaries were certified to operate
OVS networks in the five boroughs of New York City and, as part of a joint
venture with Boston Edison, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to negotiation of certain agreements
with local governments. RCN executed an agreement with the City of Boston on
June 2, 1997, and initiated OVS service in the City on that day. Pursuant to
its agreement with the City of Boston, RCN will be required to pay a fee to
the City equal to 5% of video revenues. RCN has entered into similar OVS
agreements or is in the process of negotiating agreements with certain other
Boston-area municipalities, either to offer OVS services or franchised cable
television services. It executed an agreement with the City of New York on
December 29, 1997, and has initiated OVS service in the Borough of Manhattan
pursuant to that agreement.
In areas where it offers video programming services as an OVS
operator, RCN is required to hold a 90-day open enrollment period every three
years, during which times RCN will be required to offer capacity on its
network to other video programming providers ("VPPs"). Under the OVS
regulations, RCN must offer at least two-thirds of its capacity to
unaffiliated parties, if demand for such capacity exists during the open
enrollment period. In certain areas, RCN is in discussions with local
municipal authorities to explore the feasibility of obtaining a cable
franchise in lieu of an OVS agreement, and will consider providing RCN video
service pursuant to franchise agreements rather than OVS certification, if
franchise agreements can be obtained on terms and conditions acceptable to
RCN. However, RCN will consider the relative benefits of OVS certification
versus local franchise agreements, including the possible imposition of
universal service requirements, before making any such decisions. In addition,
the current FCC rules concerning OVS are subject to appeal in the United
States Court of Appeals and, to the extent that certain favorable aspects of
the FCC's rules are overturned on appeal, the determination of whether to
operate as an OVS provider versus as a franchised cable television operator
may be affected. Moreover, the incumbent cable television provider in Boston,
Cablevision Systems, has requested that the FCC permit it to obtain capacity
on RCN's Boston area OVS network, and Time Warner, the incumbent cable
television provider in certain communities in the Boston area, has made a
similar filing at the FCC with respect to its request for capacity on the
Boston OVS network. RCN will continue to oppose these requests made to the
FCC, but to the extent that the FCC were to grant any such request(s), such a
result would likely affect RCN's determination as to whether to operate as an
OVS provider versus as a franchised cable television operator.
Prior to its certification as an OVS provider, RCN offered
limited video programming services using the video dialtone ("VDT") services
offered by MFS/WorldCom in Manhattan and the City of Boston. In February, 1997,
the FCC held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly-adopted OVS
rules; nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease video
programming distribution operations over the MFS/WorldCom platform. One of the
incumbent cable television companies in New York City has filed a complaint with
the New York Public Service Commission challenging the former (pre-OVS)
operations of RCN and WorldCom under the VDT framework, which remains pending
before that commission.
RCN's 18 GHz wireless video services in New York City are
distributed using microwave facilities provided by Bartholdi Cable Company
("Bartholdi Cable") pursuant to temporary authorizations issued to Bartholdi
Cable by the FCC. Bartholdi Cable has agreed to provide transmission services
to RCN until RCN has either converted the wireless video subscribers to its
advanced fiber optic network facilities or has obtained FCC authority to
provide such services pursuant to its own wireless radio licenses. In
addition, Bartholdi Cable has agreed to transfer to RCN the transmission
equipment on demand. Bartholdi Cable's obligation to provide transmission
services is subject to Bartholdi Cable having licenses from the FCC to provide
such services. The qualifications of Bartholdi Cable to hold certain of the
licenses needed to provide transmission services to RCN are at issue in an FCC
proceeding in which an initial decision (the "Initial Decision") was released
on March 6, 1998. In the Initial Decision, the Administrative Law Judge found
Bartholdi Cable unqualified with respect to 15 such licenses. The
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, RCN 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, RCN expects now actively to pursue its license
applications. While RCN 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 RCN'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, RCN was notified by the FCC
that it has ruled that certain of RCN's upper levels of service for its New
Jersey systems are regulated levels of service and that RCN'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. RCN had
treated these levels of service as unregulated. RCN is contesting this
decision. RCN does not believe that the ultimate resolution of this matter will
have a material impact on its results of operations or financial condition.
With the passage of the 1996 Act all cable systems rates will be deregulated
as effective competition is shown to exist in the franchise area, or by March
31, 1999, whichever date is sooner. RCN anticipates that the remaining
provisions of the 1992 Act that do not relate to rate regulation, such as the
provisions relating to retransmission consent and customer service standards,
will remain in place and may serve to reduce the future operating margins of
RCN's hybrid fiber/coaxial cable television businesses as video programming
competition develops in its cable television service markets. Federal
requirements also impose certain broadcast signal carriage requirements that
allow local commercial television broadcast stations to require a cable system
to carry the station, and that require cable operators to set aside certain
channels for public, educational and governmental access programming. Because
a cable communications system uses local streets and rights-of-way, such cable
systems are generally subject to state and local regulation, typically imposed
through the franchising process. The terms and conditions of state or local
government franchises vary materially from jurisdiction to jurisdiction and
generally contain provisions governing cable service rates, franchise fees,
franchise term, system construction and maintenance obligations, customer
service standards, franchise renewal, sale or transfer of the franchise,
territory of the franchisee and use and occupancy of public streets and types
of cable services provided.
RCN's ability to provide franchised cable television services
is dependent on its ability to obtain and renew its franchise agreements from
local government authorities on generally acceptable terms. RCN currently has
91 franchise agreements relating to the hybrid fiber/coaxial cable systems'
networks in New York (outside New York City), New Jersey and Pennsylvania.
These franchises typically contain many conditions, such as time limitations on
commencement and completion of construction, conditions of service, including
the number of channels, the provision of free service to schools and certain
other public institutions, and the maintenance of insurance and indemnity
bonds. These franchises provide for the payment of fees to the issuing
authorities and generally range from 3% to 5% of revenues. The duration of
these outstanding franchises presently varies up to the year 2011. To date,
all of RCN's cable franchises have been renewed or extended, generally at or
prior to their stated expirations and on acceptable terms. Approximately 39 of
RCN's hybrid fiber/coaxial cable system's franchises are due for renewal
within the next three years. No assurances can be given that RCN will be able
to renew its franchises on acceptable terms. No one franchise accounts for
more than 7% of RCN's total revenue. RCN's five largest franchises account for
approximately 27% of RCN's total revenue.
The data services business, including Internet access, is
largely unregulated at this time (apart from Federal, state, and local laws
and regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers
of data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue
to be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data
services to the extent they use local exchange telephone network facilities for
access to their customers, similar proposals may well be considered by the FCC
or Congress in the future. See "--Potential Liabilities Associated with
Internet Businesses."
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone and video programming industries. Other existing federal
regulations, copyright licensing, and, in many jurisdictions, state and local
franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the manner in which communications companies operate. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted pursuant to the new law on RCN or its
businesses cannot be determined at this time. For additional information on
the regulatory environment in which RCN operates, see "Business Conducted by
RCN--Regulation."
Need to Obtain and Maintain Permits, Building Access Agreements and
Rights-of-Way
In order to develop its networks, RCN 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 RCN 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 RCN
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 RCN'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 RCN's ability to
acquire or develop that network.
Ability to Procure Programming Services
RCN's video programming services are dependent upon
management's ability to procure programming that is attractive to its
customers at reasonable commercial rates. RCN is dependent upon third parties
for the development and delivery of programming services. These programming
suppliers charge RCN for the right to distribute the channels to RCN's
customers. The costs to RCN 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
RCN's future success. There can be no assurance that RCN will have access to
programming services or that management can secure rights to such programming
on commercially acceptable terms.
Liabilities for Unearned Revenues
Erols offers one-, two- and three-year subscriptions for
Internet access, which generally are paid for in advance. Such subscriptions
are subject to cancellation with a full refund for the first 30 days and to
cancellation with a pro-rated refund thereafter. Such revenues will be
recognized over the term of each such subscription, resulting in material
short- and long-term liabilities for unearned revenues. As of December 31,
1996, Erols had short- and long-term liabilities for unearned revenues of
approximately $12.9 million and $3.4 million, respectively and, as of December
31, 1997, of approximately $25.6 million and $8.9 million, respectively.
Cancellation by a significant number of the subscribers under such contracts
could require cash payment of material sums.
Variability of Operating Results
As a result of factors such as the significant expenses
associated with the development of its networks and services, RCN 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. RCN'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 RCN'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 RCN'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. RCN's ability
to provide Internet service will depend in part on its ability to provide
sufficient capacity, both at the level of a particular point of presence
("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, RCN 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 RCN, as
well as corruption of RCN's or its subscribers' computer systems. In addition,
there can be no assurance that subscribers or others will not assert claims of
liability against RCN as a result of events such as computer viruses, other
inappropriate uses or security breaches.
Proprietary Rights; Risk of Infringement. Erols relies on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect its proprietary technology. However,
there can be no assurance that Erols' technology will not be misappropriated
or that equivalent or superior technologies will not be developed. In
addition, there can be no assurance that third parties will not assert that
the Erols' services or its users' content infringe their proprietary rights.
RCN 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. RCN plans to maintain or negotiate renewals of existing software
licenses and authorizations. RCN may want or need to license other
applications in the future.
State and Local Taxes on Internet Services. RCN is currently
subject to certain state and local taxes on certain of its telecommunications,
data and Internet access services. RCN 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.
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 on-line services. The National
Governors' Association has proposed, among other things, that a single
statewide sales tax rate be established on all taxable electronic commerce
under the Internet Development Act. RCN believes that either of these
proposals, if enacted, could reduce certain state or local taxes currently
imposed on or may later be imposed on RCN'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 RCN's telecommunication, 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 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, RCN intends to exercise editorial control over Internet
postings to the extent of blocking Web sites and Usenet News groups when RCN
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 RCN for information carried on and disseminated through
its network could require RCN 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
RCN believes that its continued success will depend in large
part on its ability to attract and retain highly skilled and qualified
personnel. RCN believes that the Distribution will, among other things, permit
RCN to offer equity-based compensation that is more directly linked to RCN's
performance, which RCN believes will facilitate the attraction, retention and
motivation of highly skilled and qualified personnel. In this regard, RCN 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 RCN will retain or, as necessary, attract qualified
management personnel.
Dividend Policy
RCN anticipates that future revenues will be used principally
to support operations and finance growth of the business and, thus, RCN does
not intend to pay cash dividends on the RCN Common Stock in the foreseeable
future. The payment of any cash dividends in the future will be at the
discretion of the RCN Board. The declaration of any dividends and the amount
thereof will depend on a number of factors, including RCN's financial
condition, capital requirements, funds from operations, future business
prospects, covenant restrictions and such other factors as the RCN Board may
deem relevant. RCN is a holding company and its ability to pay cash dividends
is dependent on its ability to receive cash dividends, advances and other
payments from its subsidiaries. In addition, the Credit Agreement (as defined
below) into which certain of RCN's subsidiaries have entered contains
restrictions on the payment of dividends by these subsidiaries. RCN has also
issued Notes all of which are governed by indentures which restrict RCN's and
certain of its subsidiaries' ability to pay dividends. "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
RCN--Liquidity and Capital Resources" and "Dividends."
Control by Level 3 Telecom Holdings, Inc.; Conflicts of Interest
Immediately after the Effective Time, the former holders of
Lancit Common Stock will hold an aggregate of approximately 0.005% of then
outstanding shares of the RCN Common Stock and will not be able to control, as
a group, the management of RCN. In addition, Level 3 Telecom beneficially
owns approximately 46% of the RCN Common Stock. Consequently, Level 3 Telecom
effectively has the power to elect a majority of RCN's directors and to
determine the outcome of substantially all matters to be decided by a vote of
shareholders. The control of RCN by Level 3 Telecom may tend to deter
non-negotiated tender offers or other efforts to obtain control of RCN 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 RCN. The common stock of Level 3
Telecom is owned 90% by LCI and 10% by David C. McCourt, the Chairman and Chief
Executive Officer of RCN. LCI is a wholly owned subsidiary of PKS.
As a result of the Distribution, there exist relationships that
may lead to conflicts of interest. Level 3 Telecom effectively controls RCN,
Commonwealth Telephone and Cable Michigan. In addition, the majority of RCN's
named executive officers are also directors and/or executive officers of
Commonwealth Telephone or Cable Michigan. See "Management of RCN." In
particular, David C. McCourt, Chairman and Chief Executive Officer of RCN,
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 RCN. In addition, Michael J. Mahoney, who has
been President and Chief Operating Officer, as well as a director, of RCN
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 RCN. RCN's other named executive officers expect to devote the
following approximate portions of their time to managing the affairs of RCN:
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 managing the affairs of RCN.
The success of RCN may be affected by the degree of involvement of its
officers and directors in RCN's business and the abilities of RCN's officers,
directors and employees in managing both RCN and the operations of Cable
Michigan and/or Commonwealth Telephone. Potential conflicts of interest will
be dealt with on a case-by-case basis taking into consideration relevant
factors including the requirements of NASDAQ and prevailing corporate
practices.
In connection with the Distribution, Commonwealth Telephone has
agreed to provide or cause to be provided to RCN 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 RCN,
Cable Michigan and Commonwealth Telephone. See "Description of Business
Conducted by RCN--Relationship Among RCN, Commonwealth Telephone and Cable
Michigan." The aforementioned arrangements were not the result of arm's length
negotiation between unrelated parties as RCN 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 RCN would not be able to obtain better terms from
unrelated third parties. Additional or modified agreements, arrangements and
transactions may be entered into between RCN and either or both of
Commonwealth Telephone and Cable Michigan, which will be negotiated at arm's
length.
Anti-Takeover Effects of Certain Statutory, Charter, Bylaw and Contractual
Provisions
Several provisions of the RCN Certificate of Incorporation and
the RCN Bylaws and the Delaware General Corporation Law, as amended (the
"DGCL"), could discourage potential acquisition proposals and could deter or
delay unsolicited changes in control of RCN, including provisions of the RCN
Certificate of Incorporation and the RCN Bylaws creating a classified Board of
Directors, limiting the shareholders' powers to remove directors, and
prohibiting the taking of action by written consent in lieu of a shareholders'
meeting. In addition, the RCN Board has the authority, without further action
by the shareholders, to fix the rights and preference of and to issue
preferred stock. The issuance of preferred stock could adversely affect the
voting power of the owners of RCN Common Stock, including the loss of voting
control to some.
The Credit Agreement into which certain subsidiaries of RCN
have entered includes as an event of default certain changes in control of
RCN. The Indentures which govern the Notes require RCN to purchase all of the
Notes at a premium in the event of a change of control of RCN. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of RCN--Liquidity and Capital Resources." Certain of RCN's
Agreements with MFS/WorldCom permit MFS/WorldCom to terminate those agreements
on a change of control of RCN. BECO is entitled to purchase RCN's interest in
their joint venture upon change of control of RCN. In addition, upon a change
of control of RCN Washington, Pepco Communications has the right to sell to
RCN its interest, or to buy RCN's interest, in the joint venture between the
parties. See "Description of Business Conducted by RCN--Strategic
Relationships."
These provisions and others that could be adopted or entered
into in the future could discourage unsolicited acquisition proposals or delay
or prevent changes in control or management of RCN, including transactions in
which shareholders might otherwise receive a premium for their shares over
then current market prices. In addition, these provisions could limit the
ability of shareholders to approve transactions that they may deem to be in
their best interests. See "Description of Capital Stock of RCN" and "Certain
Statutory, Charter and Bylaw Provisions for RCN."
LANCIT RISK FACTORS
Lancit desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and advises
readers that this Proxy Statement--Prospectus includes forward-looking
statements that involve known and unknown risks and uncertainties which may
cause Lancit's development and financial performance in future periods to
differ materially from anticipated developments and performance expressed in
any forward-looking statements made by, or on behalf of, Lancit. These risk
factors include, among others, the following:
As previously disclosed, Lancit's management believes that
additional funding will be required to enable Lancit to continue to meet its
obligations and to sustain its operations through the fourth quarter of the
current fiscal year. Lancit has been actively seeking such funding, which
ultimately led to its entering into the Merger Agreement with RCN.
Thereafter, Lancit negotiated arrangements with certain creditors to defer
certain of its obligations until after the estimated date of the Special
Meeting.
As of the date of the Special Meeting, it is anticipated that
Lancit will have minimal, if any, further cash resources or access to
substantial such resources. Accordingly, if the Merger is not approved by the
Lancit Shareholders, it is unlikely that Lancit would be able to sustain its
operations, whether in order to pursue an alternative transaction or
otherwise, for any significant period beyond the date of such meeting, absent
a source of additional funding which does not currently exist. In such event,
Lancit would have to consider seeking protection from its creditors under the
Federal bankruptcy laws and/or liquidating. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lancit --
Liquidity and Capital Resources."
Additionally, Lancit's business generally is subject to many
risks which may cause actual results to differ materially from those projected
in this Proxy Statement--Prospectus due to a number of factors, including
those identified in this Section and elsewhere in this Proxy
Statement--Prospectus. Such risks include, without limitation, (i) the risks
generally associated with the production of a television series and other
entertainment products, including, without limitation, (a) the availability of
appropriate time slots for children's and family entertainment programming;
(b) a serious strike threat that could delay production schedules; (c)
availability of a star or other key individual(s) associated with production
of a series, movie or other project; (ii) the network and studio acceptance of
television and motion picture projects; pricing, purchasing, financing,
operational, advertising and promotional decisions by intermediaries in the
distribution channel; and the effects of vertical integration of companies in
the media and entertainment industry, the effects of which could be to reduce
the opportunities for Lancit and independent producers, suppliers and
distributors as a whole; (iii) the ability of Lancit to successfully negotiate
and enter into agreements to acquire rights, develop, produce, market and
distribute entertainment and licensing projects; (iv) difficulties or delays
in the development, production and marketing of entertainment projects and/or
licensed products, including, but not limited to, a failure to complete
production of new projects when anticipated and failures related to another
party's inability to perform, which could, for example, affect the licensees'
ability to manufacture, or consumer demand for, licensed products; (v) less
than anticipated consumer acceptance of entertainment projects or licensed
products, which could negatively affect the cycle of entertainment projects
and licensed products; (vi) the effects of, and changes in, consumer tastes,
economic and tax policies, social and economic conditions, and laws and
regulations, including governmental action or legal proceedings relating to
intellectual property rights and intellectual property licenses and the
adoption of new, or changes in, accounting policies; (vii) non-renewal of
annual contracts with production-related customers; and (viii)
underutilization of Lancit's post-production facilities resulting from, among
other things, production slowdowns or inefficiencies.
INTRODUCTION
Solicitation of Proxies
This Proxy Statement--Prospectus and the accompanying proxy
card are furnished in connection with the solicitation by the Lancit Board of
proxies to be used at the Special Meeting, which will be held on June 11,
1998, at 3:30 P.M., local time, at the principal offices of Lancit, 601 West
50th Street, New York, New York, including any adjournments or postponements
thereof. Only Lancit Shareholders at the close of business on the Record Date
are entitled to notice of, and to vote at, the Special Meeting, whether in
person or by proxy.
The expense of soliciting proxies, including the cost of
assembling and mailing this proxy material to Lancit Shareholders, will be
borne by Lancit. In addition to solicitation of proxies for the Special
Meeting by use of the mails, Lancit may use the services of its directors,
officers and employees to solicit proxies personally or by telephone, without
additional salary or compensation to them. Lancit has also retained the
services of Beacon Hill Partners, Inc. to assist in the solicitation of
proxies for a fee estimated at $22,500. Brokerage houses, custodians,
nominees and fiduciaries will be requested to forward the proxy soliciting
materials to the beneficial owners of Lancit's shares held of record by such
persons, and Lancit will reimburse such persons for reasonable out-of-pocket
expenses incurred by them in that regard.
Purpose of the Special Meeting
At the Special Meeting, the Lancit Shareholders will be asked
to consider a proposal to approve and adopt the Merger Agreement pursuant to
which LME will be merged with and into Lancit, and Lancit will continue as the
Surviving Corporation and as a wholly owned subsidiary of RCN. Approval of
the Merger Agreement will also constitute approval of the transactions
contemplated thereby, including the Merger. In the Merger, each outstanding
share of Lancit Common Stock will be converted into the right to receive the
Merger Consideration (i.e., the fraction of a share of RCN Common Stock, the
numerator of which will have a value of $1.20 and the denominator of which
will equal the Average Closing Price of RCN Common Stock, subject to a
possible Transaction Expenses Adjustment, as more fully described herein).
For a more complete description of the Merger Agreement, the manner of
determining the Merger Consideration, the other terms of the Merger and
related matters, see "The Merger."
Lancit Shareholders are requested to complete, date and sign
the enclosed proxy card and return it promptly to Lancit. Lancit Shareholders
who attend the Special Meeting in person may vote their stock personally, even
if they have previously mailed a proxy.
Voting and Revocation of Proxy
If a proxy is properly executed and timely returned, it will be
voted in accordance with the instructions contained therein and, in the
absence of specific instructions, will be voted to approve and adopt the
Merger Agreement and the transactions contemplated thereby, including the
Merger. In addition, properly executed proxies that are timely returned will
be voted in accordance with the judgment of the person or persons voting the
proxies on any other matter that may properly be brought before the Special
Meeting, including, among other things, a motion to adjourn or postpone the
Special Meeting to another time and/or place for the purpose of soliciting
additional proxies or votes or otherwise; provided, however, that no proxy
which is voted against the proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby, including the Merger, will be voted
in favor of any such adjournment or postponement. Any proxy may be revoked at
any time before it is voted by (i) attending the Special Meeting and voting
in person or (ii) delivering a written revocation or a later dated proxy to
the Secretary of Lancit at or prior to the Special Meeting.
If fewer shares of Lancit Common Stock are voted in favor of
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger, than the number required for
approval and adoption, it is expected that the Special Meeting will be
adjourned or postponed in order to allow additional time for obtaining
additional proxies or votes. At any subsequent reconvening of the Special
Meeting, all proxies obtained prior to such adjournment or postponement will
be voted in such manner as such proxies would have been voted at the original
convening of the Special Meeting (except for any proxies which shall have been
theretofore effectively revoked or withdrawn), notwithstanding that they may
have been effectively voted on the same or any other matter at a previous
meeting.
Record Date; Voting Rights
The Lancit Board has set May 5, 1998 as the Record Date to
determine those record owners of Lancit Common Stock entitled to notice of, and
to vote at, the Special Meeting. At that date, there were 189 holders of
record, all of whom are entitled to vote on the proposal to approve and adopt
the Merger Agreement and the transactions contemplated thereby, including the
Merger, who held an aggregate of 6,634,750 issued and outstanding shares of
Lancit Common Stock. Each share is entitled to one vote with respect to the
matters to be voted upon at the Special Meeting.
Quorum
The Lancit Bylaws provide that the holders of more than a
majority of the shares of Lancit Common Stock outstanding and entitled to vote
must attend the Special Meeting in person or be represented by proxy in order
for a quorum to be properly constituted at the Special Meeting. Abstentions
will be counted as present for purposes of determining whether a quorum is
present.
Vote Required
Under the NYBCL and the Lancit Certificate of Incorporation,
approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger, requires the affirmative vote of
the Lancit Shareholders owning 66 2/3% of the outstanding shares of Lancit
Common Stock as of the Record Date. Abstentions and broker non-votes will
have the same effect as negative votes.
Laurence A. Lancit and Cecily Truett, co-presidents, directors
and co-founders of Lancit, and the Children's Trust, a trust established for
the benefit of the minor children of Mr. Lancit and Ms. Truett, collectively
own approximately 17.3% of the shares of Lancit Common Stock expected to be
outstanding at the time of the Special Meeting and have entered into the
Voting Agreement whereby each of them agreed to vote the shares owned by them
"for" the approval and adoption of the Merger Agreement and the transactions
contemplated thereby, including the Merger, and to vote against certain
competing transactions. See "The Voting Agreement." Additionally, the
remaining directors and executive officers of Lancit and persons related to
any of them, who beneficially own, in the aggregate, approximately 0.3% of the
shares of Lancit Common Stock expected to be outstanding at the time of the
Special Meeting, have indicated that they intend to vote "for" approval and
adoption of the Merger Agreement and the transactions contemplated thereby,
including the Merger. No vote of the shareholders of RCN is required for the
consummation of the Merger and RCN does not intend to submit to its
shareholders a proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby, including the Merger.
Matters Deemed Adopted, Approved or Ratified by Lancit Shareholders
Approval and adoption of the Merger Agreement by the Lancit
Shareholders will also constitute approval and adoption of the transactions
contemplated thereby, including the Merger.
Appraisal Rights
Lancit Shareholders do not have any dissenters' rights of
appraisal with respect to the Merger.
THE MERGER
This section of the Proxy Statement--Prospectus describes
certain aspects of the proposed Merger. The following description does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, which is attached as Annex I to this Proxy
Statement--Prospectus and is incorporated herein by reference.
Structure and Terms of the Merger
On February 27, 1998, the Merger Agreement was executed by RCN,
LME and Lancit and was amended on April 6, 1998. Pursuant to the Merger
Agreement, at the Effective Time, each share of Lancit Common Stock issued and
outstanding immediately prior to the Effective Time will be converted into the
right to receive the Merger Consideration, which is equal to a fraction of a
share of RCN Common Stock, the numerator of which will have a value equal to
$1.20 (subject to a possible Transaction Expenses Adjustment as described
herein) and the denominator of which will equal the Average Closing Price
(i.e., the average of the closing price (last sale) of RCN Common Stock on the
NASDAQ for the five trading day period ending one day prior to the date on
which the Effective Time occurs); provided, that if such Average Closing Price
exceeds $29, the value of such fraction of a share will be calculated as if
the Average Closing Price were $29, and if the Average Closing Price is less
than $24, the value of such fraction of a share will be calculated as if the
Average Closing Price were $24. For each $1 that the Average Closing Price
exceeds $29, the effective exchange value of a share of Lancit Common Stock
will increase by approximately $0.04138 and for each $1 that the Average
Closing Price is less than $24, the effective exchange value of a share of
Lancit Common Stock will decrease by approximately $0.05. There is no
provision for termination of the Merger Agreement in the event that the
Average Closing Price is less than or exceeds specified amounts. Under the
terms of the Merger Agreement, cash will be paid in lieu of fractional shares
of RCN Common Stock that would otherwise be issued to a holder of Lancit
Common Stock after aggregating all RCN Common Stock to be received in respect
of all shares of Lancit Common Stock held by such holder. See "--Fractional
Shares." The Merger Consideration, however, could be further adjusted by the
Transaction Expenses Adjustment. See "--Possible Transaction Expenses
Adjustment in the Merger Consideration."
Based on a range of assumed Average Closing Prices from $23 to
$30, following is a table setting forth the applicable conversion rate per
share of Lancit Common Stock and the applicable effective exchange value of a
share of Lancit Common Stock.
<TABLE>
<CAPTION>
Effective Exchange Value per
Average Closing Price Conversion Rate(1) Share of Lancit Common Stock(2)
- --------------------- ------------------ -------------------------------
<S> <C> <C>
$23 0.050000 $1.15
$24 0.050000 $1.20
$25 0.048000 $1.20
$26 0.046154 $1.20
$27 0.044444 $1.20
$28 0.042857 $1.20
$29 0.041379 $1.20
$30 0.041379 $1.24
</TABLE>
- ----------
(1) Each share of Lancit Common Stock will be converted into a fraction of a
share of RCN Common Stock equal to the conversion rate.
(2) Determined by multiplying the Average Closing Price by the Conversion Rate.
The aggregate value of the RCN Common Stock being issued in the
Merger is approximately $8 million, assuming an Average Closing Price of the
RCN Common Stock of between $24 and $29 and no Transaction Expenses
Adjustment. The number of shares of RCN Common Stock that will be issued in
the Merger will be between 274,541 and 331,738, assuming no Transaction
Expenses Adjustment.
The Merger is intended to be a tax-free transaction for federal
income tax purposes. Accordingly, the Lancit Shareholders should not
recognize any gain or loss as a result of the Merger, except with respect to
any cash received in lieu of fractional shares of RCN Common Stock. See
"--Certain Federal Income Tax Consequences."
Upon and following the Effective Time, the separate existence
of LME will cease and Lancit will continue as the Surviving Corporation and a
wholly owned subsidiary of RCN.
Background of the Merger
Lancit
During the fiscal year ended June 30, 1997, Lancit determined
to implement a strategic restructuring plan, the initial phase of which
included an extensive and systematic review of Lancit's operations, cost
structure and balance sheet. As part of this process, commencing shortly
after April 1, 1997, when its new chief executive officer, Susan L. Solomon,
began her employment, Lancit conducted a comprehensive review of its
properties and of its rights in those properties. That review resulted
initially in Lancit's taking a restructuring charge for the fiscal quarter
ended March 31, 1997. See "Description of Business Conducted by Lancit -
Restructuring; Corporate Transaction" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lancit." The
review continued through the summer of 1997. In combination with marketplace
developments including the increased vertical integration of the entertainment
industry and attendant decrease in available distribution outlets and "slots"
and substantial decline in license fees, the review led Lancit's management to
conclude that Lancit would require additional funding to continue its
operations through the end of its current fiscal year.
Commencing in approximately May 1997, Lancit initiated an
extensive series of contacts with major entertainment companies, seeking
relationships which would provide substantial additional funding and committed
distribution for its products and/or additional sources of content.
Approximately 24 companies were contacted by Lancit management during the spring
and summer of 1997. A number of discussions were held, and Lancit obtained a
distribution and two-year series funding commitment from Discovery
Communications, Inc. ("DCI") and became the exclusive worldwide distribution and
licensing agent for Reading Rainbow during this period (see "Description of
Business Conducted by Lancit--Strategic Programming Alliance with Discovery
Communications, Inc." and "--Licensing Agent Activities"); however, these
initial contacts did not result in Lancit's obtaining the level of additional
funding management sought, or offers therefor, at that time.
On September 12, 1997, Lancit engaged Schroders to assist
Lancit in soliciting and evaluating potential corporate transactions involving
a strategic partner, a significant investor or a merger or sale of Lancit's
business. In determining to pursue such transactions, the Lancit Board
considered such factors as: Lancit's need for additional funding to
commercialize its properties and the lack of current sources of funding; the
continuing unprofitability of Lancit's operations and its diminishing capital
resources, which resulted in the modification of the opinion of its independent
auditors, Ernst & Young LLP, in connection with Lancit's financial statements
for the fiscal year ended June 30, 1997; the nature of Lancit's existing
properties and third-party rights therein, such that without additional
funding such properties would be unlikely to generate sufficient cash to
sustain Lancit's operations, particularly in the near term; and marketplace
developments including the increasing competitiveness of the entertainment
industry and the increasing dominance of large, vertically integrated
companies, which have their own distribution channels. As an independent
production company, Lancit lacked both a substantial pre-existing library to
license and committed distribution; it was also without credit facilities or
other sources of additional funding. The Lancit Board was also cognizant that
Lancit's stock price had declined, and the Lancit Board believed that a
corporate transaction could potentially help preserve shareholder value.
In connection with its planning relating to the cash required
to continue operating through its current fiscal year, the Lancit Board
considered preliminarily whether it would be feasible to sell certain
properties of Lancit in order to raise cash. While a number of properties
were identified for this purpose, this review also made it clear that the value
of a number of Lancit's properties, and the full value of its properties in
the aggregate, could be realized only if Lancit continued as a going concern.
This was due to the shared nature of Lancit's rights in certain properties, as
well as the importance of Lancit's development, production and merchandising
capabilities, and related management and creative personnel, in exploiting its
properties.
Lancit and/or Schroders contacted a total of 43 potential
interested parties on a confidential basis. Of those, 14 requested and
received additional information. On October 30, 1997, the Lancit Board
appointed a special committee to monitor and oversee the process of soliciting
and evaluating the corporate transactions under consideration by Lancit and to
consult with management in connection therewith. The special committee
consisted of two outside directors, John Costantino and Roger C. Faxon,
together with Ms. Solomon as an ex officio member.
On December 1, 1997, Debra Herz, the Director of Business
Development at RCN, initially contacted Lancit. The inquiry was referred to
Schroders and several telephone calls were exchanged between Schroders and
RCN; Schroders also transmitted to RCN a package of Lancit's public filings
and other publicly available information. On January 8, 1998, a meeting was
held at RCN between Paul Sigmund, Executive Vice President of RCN, Ms. Herz,
Ms. Solomon and representatives of Schroders, at which there was preliminary
discussion of a possible business combination. Mr. Sigmund and Ms. Herz
visited Lancit's offices the next day to conduct preliminary due diligence.
On January 9, 1998, Schroders requested written indications of
interest from those parties that continued to express serious interest in
Lancit. Five companies responded with written indications of interest,
including RCN. On January 16, 1998, Schroders sent written invitations to
those companies to perform final due diligence and three of such parties
(including RCN) conducted due diligence investigations of Lancit at a data
room set up by Lancit.
On January 14 and 15, a series of meeting were held at Lancit
between Mr. Sigmund and Ms. Herz and Lancit management personnel, including
Ms. Solomon, Senior Vice President - Production Orly Wiseman, Senior Vice
President and Chief Financial Officer Gary Appelbaum, Senior Vice President -
Legal and Business Affairs Jane M. Abernethy and Senior Vice President -
Marketing Irene Minett. These meetings focused on Lancit's business,
intellectual property rights and financial condition.
On January 22, 1998, a meeting was held at Lancit between Mr.
Sigmund and Ms. Herz from RCN and members of senior management of Lancit,
including Ms. Solomon, Co-Presidents Laurence A. Lancit and Cecily Truett, and
a representative of Schroders. At the meeting, there was extensive discussion
of Lancit's properties and operations. RCN and its counsel also conducted a
further due diligence investigation at Lancit on that day.
On January 23, 1998, Ms. Solomon met with Mr. Sigmund at RCN's
New York City offices. At the meeting, there were further discussions
relating to the potential for the respective businesses of Lancit and RCN to
complement each other.
During this period there were a number of telephone calls
between Mr. Sigmund, Lancit and Schroders, as well as continuing contacts with
certain of the other parties that had submitted written indications of
interest. Over the next several weeks, negotiations with several of these
other parties were either terminated or suspended as certain parties withdrew
and others failed to progress to a firm offer stage.
On January 26, 1998, Schroders distributed a draft merger
agreement that had been prepared by counsel for Lancit to RCN and the other
remaining party that had expressed an interest in a merger transaction,
inviting firm bids accompanied by comments on that draft.
On January 27, 1998, Ms. Solomon met with RCN's Chairman and
Chief Executive Officer, David C. McCourt, at RCN's offices in New York City,
which was followed by a visit to Lancit's headquarters where Mr. McCourt met
with Ms. Solomon, Mr. Lancit, Ms. Truett and certain other Lancit executives.
At these meetings, the potential for a combination between RCN and Lancit and
their respective businesses was further explored.
RCN was the first to respond in writing to the invitation for
bids, submitting on February 5, 1998 extensive comments to Lancit's draft
merger agreement and a draft of the Voting Agreement; RCN's draft proposed a
merger between Lancit and a subsidiary of RCN as is currently provided for in
the Merger Agreement and further provided that the merger consideration would
be paid in RCN Common Stock, based on the average closing prices of the RCN
Common Stock for the five trading days ending the day prior to the effective
date of the proposed merger. RCN's comments did not, however, address RCN's
proposed pricing for Lancit's stock. RCN's proposal and Lancit's preliminary
reactions thereto were reviewed through the weekend by Lancit management and
counsel in consultation with the special committee of the Lancit Board.
At a meeting on February 9, 1998 between Mr. Sigmund and Ms.
Herz from RCN, Ms. Solomon from Lancit, Schroders, and counsel for Lancit and
RCN, RCN made its preliminary pricing proposal, valuing Lancit's stock at $1.16
per share. RCN's proposal included a collar mechanism that would, among other
things, protect the value that the Lancit Shareholders would receive, except
to the extent that the market price of the RCN common stock declined by more
than $2.50 per share from its then-current market level. Conversely, the
value of the RCN Common Stock to be received by the Lancit shareholders would
not increase, except to the extent that the five-day average price of the RCN
Common Stock increased by more than $2.50 per share from its then-current
market level. As of February 9, 1998, RCN's bid represented a premium of 16%
over the closing price of Lancit's stock on February 6, 1998, the last trading
day before the meeting, and a premium of 1% to 10% over the five, ten and
thirty day averages of Lancit's closing price through that date. At the
meeting, RCN also made it clear that its bid was predicated upon termination
fees reflected in its draft, and the amount of the termination fee was
negotiated. See "The Merger--Expenses; Termination Fees." Negotiations
concerning other provisions of the draft merger agreement also took place at
the meeting. RCN also indicated a strong interest in pursuing the negotiating
process to completion, and immediately committed people and resources to the
additional due diligence and review of the schedules prepared by Lancit called
for by its comments to the draft merger agreement, while negotiations as to
the draft agreement between counsel for RCN and Lancit also moved forward.
February 9, 1998, the day of the meeting described above, was a
day of above-average trading activity in Lancit's stock, and the price per
share increased from $1.00 as of the close of trading on the previous day to
$1.75 as of the close on February 9. However, Lancit's stock declined to
$1.375 at the close of trading on February 13, 1998. Also during that week, a
number of favorable analyst's reports appeared regarding RCN, and RCN's
closing stock price increased from $21.969 per share at its opening on
February 9 to $26.5625 per share at the close of trading on February 10, 1998.
As stated above, for purposes of this discussion, each of the share price of
RCN Common Stock and the "collar" discussion has been adjusted to reflect the
RCN Stock Dividend.
Late on February 9, 1998, Lancit received a bid and merger
agreement mark-up from another bidder (the "Second Bidder"). That bid, which
was expressed as a fixed exchange ratio for the Second Bidder's stock, was
approximately 8% lower than RCN's (based on the then-current market price of
the Second Bidder's stock), did not provide for any variation based on the
Second Bidder's stock price or any collar arrangement, and was subject to a
number of conditions, including the conduct of additional due diligence and
reaching satisfactory employment arrangements with Ms. Solomon, Ms. Truett and
Mr. Lancit. The Second Bidder had been in contact with Lancit since May 1997,
and a number of possible transactions had been discussed during the summer and
fall of 1997, but these discussions had not resulted in any agreement or,
prior to February 9, 1998, in any firm bid being expressed. Schroders
contacted the Second Bidder in order to clarify the terms of its bid, and was
advised by the Second Bidder that it wished to perform its additional due
diligence and reach agreement as to the employment arrangements referred to
above before detailed negotiations regarding the merger could move forward.
The Second Bidder also expressed unwillingness to increase its bid, and
further declined to commit resources to further negotiations absent an
assurance of exclusivity, at least for some specified period. Schroders
requested that the Second Bidder provide more specific terms with respect to
the items identified by the Second Bidder as its conditions to moving forward.
On February 10, 1998, in a telephone conversation with
Schroders, RCN increased its bid to $1.20 per share of Lancit Common Stock,
with a collar at $24 and $29 (i.e., $2.50 higher and $2.50 lower than RCN's
then market price of approximately $26.50), and indicated that it was not
prepared to go higher. Negotiations regarding the draft merger agreement were
also proceeding between counsel for Lancit and RCN, as were responses to the
detailed schedules requested by RCN. On February 12, 1998, the Lancit Board
met to consider RCN's final bid and the proposal of the Second Bidder and to
determine how to proceed. Representatives of Schroders and of Lancit's
counsel, Christy & Viener, were also present at the meeting.
At the meeting, the Lancit Board considered preliminary
information compiled by Schroders showing, among other things, Lancit's
history of losses for the past two fiscal years and of substantial negative
cash flows for the each of last three fiscal years, continuing into the
current fiscal year; the decline in Lancit's stock price; the substantially
increased liquidity to Lancit's shareholders that would be afforded by a
merger with RCN, due to its greater number of publicly held shares and higher
trading volumes in comparison both with Lancit and the Second Bidder (and
noting in that connection that Lancit had been notified by NASDAQ that Lancit
would not meet NASDAQ's revised requirements for continued listing on the
NASDAQ National Market System which would take effect on February 23, 1998);
and recent favorable analyst reports regarding RCN. The Lancit Board also
reviewed the process which Lancit, together with Schroders, had gone through
in soliciting interest in a variety of transactions, including strategic
alliances and the sale of an interest in Lancit as well as the sale of Lancit,
as well as preliminary analyses prepared by Schroders which showed the
consideration proposed to be paid by RCN to be within a range of comparable
transactions.
In comparing the bids of RCN and the Second Bidder, the Lancit
Board considered, among other things, the fact that RCN's bid was higher by
approximately 13% than the Second Bidder's, based upon the closing stock
prices on February 11, 1998; the absence of a collar mechanism in the Second
Bidder's proposal; the greater market capitalization and liquidity of the RCN
Common Stock in comparison with both the Second Bidder's and Lancit's stock;
and the fact that negotiations with the Second Bidder had been proceeding
intermittently since May of 1997, without conclusion. The Lancit Board also
noted the additional conditions that had been imposed by the Second Bidder on
its proceeding with further negotiations. The Lancit Board endorsed
management's approach, as discussed above, of attempting to elicit further
detail from the Second Bidder that could lead to an unqualified bid by it.
However, in view of the uncertainties inherent in the above considerations,
the Lancit Board did not believe that the proposal of the Second Bidder and
the conditions thereto justified diverting Lancit's management from continued
intensive negotiations with RCN, particularly in view of the Second Bidder's
requirement that Lancit cease negotiations with other interested parties.
At the meeting, the Lancit Board also considered Lancit's cash
resources in relation to its obligations through the period required in order
to consummate a merger. Counsel estimated that a preliminary proxy filing
would likely be made in middle to late March at the earliest, yielding an
estimated date for the Lancit shareholders meeting and closing of the proposed
merger of middle May to middle June, allowing for SEC review and a
post-mailing solicitation period. Preliminary cash flow projections prepared
by Lancit's management and reviewed by the Lancit Board showed that Lancit
would require interim funding, deferral of certain obligations and/or other
sources of cash in order to meet its cash flow needs for the period through
June. In connection with soliciting bids on January 26, Lancit had requested
that bidders submit proposals for bridge financing; however, both RCN and the
Second Bidder expressed their unwillingness to extend such financing. While
the Lancit Board believed that Lancit's cash position gave rise to substantial
uncertainties for Lancit, including the possibility of adverse developments
that could give RCN the right not to consummate the proposed merger, the
Lancit Board also believed that the proposed merger represented a
substantially better potential outcome for Lancit's shareholders than the
likely available alternatives, which could include a liquidation or similar
outcome. The Lancit Board also believed that entering into a merger agreement
with a stronger partner such as RCN would encourage Lancit's creditors and
improve Lancit's ability to meet its cash needs, and noted that the draft
merger agreement being negotiated with RCN provided that RCN would cooperate
with Lancit in that regard.
In that connection, the Lancit Board noted that, in view of
Lancit's financial state and the unsuccessful results of Lancit's prior
efforts to obtain additional funding or a business combination, unless Lancit
were to enter into a transaction with a strong partner such as the transaction
offered by RCN, Lancit would have to consider alternatives such as seeking
protection from its creditors under the Federal bankruptcy laws or
liquidation. The Lancit Board believed that the effect of a potential
bankruptcy or liquidation was likely to be the interruption of Lancit's
operations, including ongoing production activities, and a consequent
inability to realize the value of its properties, which would likely result in
Lancit Shareholders receiving little or no value for their shares.
The Lancit Board also reviewed with its counsel certain
provisions of the draft merger agreement. Of particular note were the
conditions to RCN's obligations to close, which in general required that a
breach of representation or warranty by Lancit have a material adverse effect
on Lancit before it could constitute a failure to meet a closing condition.
It was noted that, as a condition to entering into the proposed merger
agreement, RCN was requiring that Ms. Truett, Mr. Lancit and the Children's
Trust enter into a voting agreement. The Lancit Board also noted that under
the draft agreement with RCN, Lancit could consider bona fide inquiries and
proposals received after entering into the agreement to the extent that the
Lancit Board concluded, following consultation with outside counsel, that
failure to consider any such proposal would result in a breach of the Lancit
Board's fiduciary duties to the Lancit Shareholders, provided such inquiries
were not solicited or initiated by Lancit and that the Lancit Board was
required to notify RCN promptly that it was considering any such proposal; and
that Lancit could terminate the agreement if, prior to approval of the merger
by the Lancit Shareholders, Lancit had the opportunity to enter into a
definitive agreement providing for the acquisition of Lancit or for a tender
or exchange offer that is determined by the Lancit Board to be on financial
terms more favorable to the Lancit Shareholders than those contained in the
Merger Agreement. The Lancit Board also considered that the draft agreement
provided for the payment by Lancit of $500,000 in the event that the merger
agreement were terminated under certain conditions, and noted that such fee
was required by RCN as a condition to entering into a definitive agreement
with Lancit. See "The Merger--Expenses; Termination Fees" and
"--Consideration of Other Proposals." The Lancit Board also noted in that
connection that the Second Bidder's proposal made provision for a similar
payment, although the amount of such payment had not been specified by the
Second Bidder.
The Lancit Board took particular note that the bids of both RCN
and the Second Bidder were below the market price of the Lancit Common Stock
as of the date of the meeting; however, the Lancit Board noted that RCN's bid
represented a premium over both the market price and the five, ten and 30-day
averages as of the day RCN's initial bid was made. Further, it was noted by
the Lancit Board that due to the illiquidity and generally small trading
volumes of Lancit's stock, Lancit's stock price tended to react strongly to
relatively isolated purchasing activity.
Furthermore, RCN's bid remained the highest firm bid that
Lancit had received and, as noted, was 13% above that of Second Bidder. The
Lancit Board believed that both the length and thoroughness of the
solicitation process conducted by Lancit's management and Schroders, and the
history of negotiations with the Second Bidder in particular, made it unlikely
that a higher bid than RCN's would be received. The Lancit Board also noted
the importance of reaching an agreement quickly, due to the declining
financial position of Lancit, and noted the speed and commitment shown by RCN
in moving forward with negotiations to date, particularly in contrast to the
other parties contacted by Lancit, including the Second Bidder. Accordingly,
the Lancit Board authorized management to proceed with negotiations based on
the final RCN bid.
Following the meeting, negotiations continued between counsel
for Lancit and RCN, and were monitored by Lancit management and the special
committee of the Lancit Board. Pursuant to those negotiations, most of the
issues regarding the Merger Agreement and the Voting Agreement were resolved.
The Lancit Board met again on by telephone February 17, 1998. At
that meeting, the Lancit Board again reviewed the factors reviewed at the
February 12 meeting. Schroders reported on contacts with the Second Bidder, and
noted that no material changes in the Second Bidder's position had been
communicated. Management was again authorized to proceed with an agreement with
RCN, based on the considerations noted above. It was anticipated that an
agreement could be executed shortly thereafter, although it was also noted that
RCN had requested a meeting with Ms. Solomon for later that day, and that a due
diligence call between RCN and Schroders was also scheduled.
Ms. Solomon met with Mr. McCourt at RCN's headquarters in
Princeton later on February 17, 1998, and Ms. Truett and Mr. Lancit met with
Mr. McCourt in New York City on February 18, 1998. At those meetings and in
subsequent telephone conversations between RCN and its counsel and the above
individuals and their counsel, RCN requested certain modifications and waivers
relating to the respective rights of such individuals under their employment
agreements, ultimately arriving at the arrangements described under "The
Merger--Interests of Certain Persons in the Merger."
During this period final changes to the draft agreements were
negotiated by counsel, in Lancit's case in consultation with the special
committee of the Lancit Board.
On February 27, 1998, the Lancit Board held a special meeting
by telephone to consider the final version of the Merger Agreement. The
Lancit Board was advised of the waivers and other arrangements referred to in
the second preceding paragraph and of the respective interests of Ms. Solomon,
Ms. Truett and Mr. Lancit in the proposed transaction. The Lancit Board also
enquired as to recent contacts with the Second Bidder on the part of Schroders
and Ms. Solomon, and was advised that the Second Bidder continued to require
further due diligence and agreement as to executive employment arrangements as
a condition to proceeding with negotiations, had not submitted its proposals
in that connection, and had expressed unwillingness to proceed with
negotiations absent an assurance of exclusivity. Accordingly, the Lancit
Board did not deem it warranted to delay its agreement with RCN in order to
pursue negotiations with the Second Bidder.
At the February 27, 1998 meeting, the Lancit Board also
reviewed the considerations described above in connection with the February
12, 1998 meeting. In that connection, it was noted that the market price of
the Lancit Common Stock stood at $1.625 per share, principally due to a day of
relatively heavy purchases on February 25, 1998, two trading days before, and
that the $1.20 valuation offered by RCN was approximately 6.7% below the 30-day
average of recent Lancit share prices and approximately 14.7% below the 10-day
average. However, the considerations described above in connection with the
February 12 meeting continued to apply. In particular, RCN's offer remained
both the most favorable firm offer that had been received by Lancit,
approximately 13% above that of Second Bidder, based on the closing stock
prices on February 26, 1998, and appeared to offer the greatest likelihood of
prompt consummation.
Also at the February 27, 1998 meeting, the Lancit Board
received from Schroders an oral opinion (which was subsequently confirmed in
writing) to the effect that the consideration to be received by the Lancit
Shareholders pursuant to the Merger Agreement was fair, from a financial point
of view, to the Lancit Shareholders. See "--Opinion of Financial Advisor."
The Board of Directors of Lancit unanimously approved the
Merger Agreement on February 27, 1998 and the parties entered into the Merger
Agreement on that date. RCN and Lancit issued a joint press release on that
date announcing the transactions contemplated by the Merger Agreement.
On March 9, 1998, RCN declared the RCN Stock Dividend. The
distribution date for the RCN Stock Dividend was April 3, 1998. In accordance
with the Merger Agreement, RCN, LME and Lancit entered into Amendment No. 1 to
the Merger Agreement (the "Amendment") on April 6, 1998 amending the highest
Average Closing Price from $58 to $29 and the lowest Average Closing Price
from $48 to $24 to reflect the RCN Stock Dividend.
On May 7, 1998, Schroders delivered to Lancit the May 7 Opinion,
reiterating the February 27 Opinion.
RCN
On December 1, 1997, representatives of RCN and Lancit began
preliminary discussions regarding the possibility of a merger between the two
entities. RCN began conducting preliminary due diligence review of Lancit's
business on January 9, 1998. Lancit delivered a proposed draft of the Merger
Agreement to RCN on January 26, 1998. On February 5, 1998, RCN delivered its
comments to the Merger Agreement as well as the proposed voting agreement
among RCN, LME, Lancit, Cecily Truett, Laurence A. Lancit and the Children's
Trust.
On February 9, 1998, representatives of RCN and Lancit met to
begin negotiating the terms of the Merger Agreement. Also on this date, the
parties began discussions regarding the Voting Agreement. During this week,
RCN, together with its legal advisors, completed its due diligence review of
Lancit. During the week of February 16, 1998, RCN began discussions with (i)
Cecily Truett and Laurence A. Lancit regarding their waiver of the right to be
released from their noncompete covenant if they should terminate their
existing employment agreements in connection with the Merger (respectively,
the "Truett Waiver" and the "Lancit Waiver") and (ii) Susan L. Solomon
regarding the termination of her existing employment agreement and the
amounts payable thereunder and regarding the possibility of hiring her as a
consultant to RCN after the Effective Time (the "Solomon Agreements"). These
discussions as well as the negotiation of the Merger Agreement continued until
February 27, 1998. On February 27, 1998, the Merger Agreement, the Voting
Agreement, the Truett Waiver, the Lancit Waiver and the Solomon Agreements
were finalized and the parties thereto executed and delivered such documents.
The Executive Committee of the RCN Board approved the terms of
the Merger Agreement on February 24, 1998 by unanimous written consent.
On March 9, 1998, RCN declared the RCN Stock Dividend. The
record date for the RCN Stock Dividend was March 20, 1998. Shareholders of
record of RCN at the market close on that date received an additional share of
RCN Common Stock for each share held. The distribution date for the RCN Stock
Dividend was April 3, 1998. 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 this RCN Stock Dividend, except as otherwise set
forth herein. In accordance with the Merger Agreement, on April 6, 1998, RCN,
LME and Lancit entered into the Amendment to adjust the formula for
calculating the Merger Consideration to give effect to the RCN Stock Dividend.
Reasons for the Merger--Lancit
The Lancit Board has determined that the terms of the Merger
are fair and in the best interest of the Lancit Shareholders. The Lancit
Board has unanimously recommended that the Lancit Shareholders approve and
adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger.
The Lancit Board of Directors, in its consideration of the
Merger Agreement, received presentations from and/or reviewed the terms and
conditions of the Merger Agreement with members of Lancit's management,
Lancit's counsel and Lancit's financial advisor, Schroders. After such
review, the Board of Directors of Lancit concluded that the Merger will afford
the Lancit Shareholders the most value for their shares of Lancit Common
Stock, as compared with other potential business combinations available to
Lancit or with a potential liquidation or bankruptcy if Lancit failed to enter
into a transaction such as that proposed by RCN.
In deciding that the consideration to be received in the Merger
is fair to the Lancit Shareholders, the Lancit Board considered the following
factors:
(i) the terms of the Merger Agreement and the transactions
contemplated thereby, including the consideration to be paid by RCN;
(ii) a comparison of the proposed Merger with the
alternatives available to Lancit, both with respect to the amount and
liquidity of the consideration contemplated thereby and the timeliness of
its execution, delivery and proposed consummation;
(iii) Lancit's need for additional financing in order to
sustain its operations and the likelihood of adverse financial
consequences, such as the possibility of bankruptcy or liquidation, in the
event that a transaction such as that proposed by RCN was not promptly
entered into;
(iv) the length and comprehensiveness of the process
followed by management and Schroders in soliciting alternative
transactions;
(v) information concerning the financial performance,
condition, business operations and prospects of Lancit and RCN;
(vi) the fact that the terms of the Merger Agreement were
the result of arm's length negotiations between representatives of Lancit
and RCN; and
(vii) the fairness opinion of Lancit's financial advisor,
Schroders.
The Lancit Board also considered the following additional
benefits of the transactions contemplated by the Merger Agreement in deciding
that the Merger is in the best interests of the Lancit Shareholders:
(i) the opportunity to participate in the potential growth
of RCN being offered to Lancit Shareholders through ownership of RCN
Common Stock;
(ii) the structure of the Merger, which would permit the
Lancit Shareholders to exchange all of their Lancit Common Stock for RCN
Common Stock on a tax-free basis; and
(iii) that the Lancit Shareholders would have increased
investment liquidity as the RCN Common Stock is listed on the NASDAQ and
trades at substantially higher volumes than the Lancit Common Stock.
The Lancit Board also considered certain risks and
uncertainties relating to consummation of the Merger, principally relating to
Lancit's ability to maintain its operations through consummation of the
Merger. However, as noted above, the Lancit Board believed that entering into
the Merger Agreement would enhance its ability to maintain such operations.
In view of the wide variety of factors considered in connection
with its evaluation of the Merger and the Merger Agreement, the Lancit Board
did not find it practical to assign relative weights to the factors considered
in reaching its decision, and, therefore, the Lancit Board did not quantify or
otherwise attach relative weights to the specific factors considered by it.
On the basis of the foregoing factors and for reasons discussed
in greater detail under "--Background of the Merger," above, the Lancit Board
of Directors concluded that the proposed Merger with RCN would afford the
Lancit Shareholders greater value for their shares of Lancit Common Stock than
was likely to be realized by them through the other available alternatives
and, accordingly, was fair to and in the best interests of the Lancit
Shareholders. THE LANCIT BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
LANCIT SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
Consequence of Failure to Approve the Merger
As of the expected date of the Special Meeting of Lancit
Shareholders to consider the Merger Agreement and the transactions
contemplated thereby, including the Merger, it is anticipated that Lancit will
have minimal, if any, further cash resources or access to substantial such
resources. Accordingly, if the Merger Agreement and the transactions
contemplated thereby, including the Merger, are not approved by the Lancit
Shareholders, it is unlikely that Lancit would be able to sustain its
operations, whether in order to pursue an alternative transaction or
otherwise, for any significant period beyond the date of such meeting, absent
a source of additional funding which does not currently exist. In such event,
Lancit would have to consider seeking protection from its creditors under the
Federal bankruptcy laws and/or liquidating. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Lancit--Liquidity
and Capital Resources."
Recommendation of the Lancit Board
THE LANCIT BOARD UNANIMOUSLY RECOMMENDS THAT THE LANCIT
SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
Reasons for the Merger--RCN
RCN believes that Lancit will provide it with high quality,
proprietary programming at a relatively low cost. RCN also anticipates that
as a result of the Merger, RCN will be able to meet its local production
obligations more efficiently.
Opinion of Financial Advisor
Schroders was retained by Lancit to act as a financial advisor to
Lancit in connection with the proposed Merger. In connection with such
engagement, Lancit requested that Schroders advise the Lancit Board with respect
to the fairness, from a financial point of view, to the holders of Lancit Common
Stock of the Merger Consideration. On February 27, 1998, at a meeting of the
Lancit Board held to evaluate the proposed Merger, Schroders reviewed with the
Lancit Board the financial analyses performed by Schroders in connection with
such advice and delivered to the Board an oral opinion (which opinion was
subsequently confirmed by delivery of a written opinion, dated February 27,
1998) to the effect that, as of the date of such opinion, based upon and subject
to certain matters stated therein and given the strategic alternatives available
to Lancit, the Merger Consideration was fair, from a financial point of view, to
the holders of Lancit Common Stock. Schroders has delivered to Lancit the May 7
Opinion, reiterating the February 27 Opinion.
In arriving at its opinion, Schroders, among other things: (i)
reviewed Lancit's (a) Annual Reports on Form 10-K filed with the Securities
and Exchange Commission for the fiscal years ended June 30, 1995, 1996 and
1997, (b) Quarterly Reports on Form 10-Q for the quarters ended September 30,
1997 and December 31, 1997 and (c) Proxy Statement dated November 14, 1996;
(ii) reviewed the Report of Independent Auditors of Lancit dated October 13,
1997, contained in Form 10-K for the fiscal year ended June 30, 1997, in which
Lancit anticipated that additional funding will be necessary to sustain
Lancit's operations through the fiscal year ending June 30, 1998 (which report
stated that these conditions raise substantial doubt about Lancit's ability to
continue as a going concern); (iii) reviewed a certain near-term cash flow
forecast dated February 16, 1998 prepared by management of Lancit which
relates to the six months ended June 30, 1998; (iv) visited the principal
office of Lancit and conducted discussions with the senior management of
Lancit concerning its historical financial results and near-term cash flow
forecast as presented and described in (i), (ii) and (iii) above; (v)
performed various financial analyses, as Schroders deemed appropriate, of
Lancit using generally accepted analytical methodologies, including (a) the
application to the financial results of Lancit of the public trading multiples
of companies which Schroders deemed comparable, (b) the application to the
financial results of Lancit of the multiples reflected in recent mergers and
acquisitions for businesses which Schroders deemed comparable and (c) a review
of Lancit's near term cash flow forecast as described in (iii) above; (vi)
reviewed the historical trading prices and volumes of Lancit Common Stock on
the NASDAQ from January 1, 1996 to February 25, 1998; (vii) reviewed the draft
Merger Agreement dated February 27, 1998; (viii) discussed the transaction
with RCN; (ix) reviewed RCN's (a) Amendment No. 2 to Form 10/A filed with the
Securities and Exchange Commission on September 5, 1997, (b) Form 10-Q for the
quarter ended September 30, 1997, (c) 144A offering memorandum, dated January
30, 1998, for its 9.80% Senior Discount Notes due 2008 and (d) Form 8-K dated
February 5, 1998; (x) reviewed the historical trading prices and volumes of
RCN Common Stock on the NASDAQ from September 19, 1997 to February 25, 1998;
(xi) reviewed projections for RCN contained in research reports by Merrill
Lynch & Co. dated February 9, 1998 and by Prudential Securities Incorporated
dated February 9, 1998; (xii) took into account the results of the extended
solicitations of interest by Lancit and Schroders, from persons thought likely
to have a possible interest in acquiring Lancit; and (xiii) performed such
other financial studies, analyses, inquiries and investigations as Schroders
deemed appropriate.
In its review and analysis and in formulating its opinion,
Schroders assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to it by Lancit or obtained
by Schroders from other sources, and upon the assurance of Lancit's management
that they were not aware of any information or facts that would make the
information provided to Schroders incomplete or misleading. Schroders did not
attempt to independently verify any of such information. Schroders did not
undertake an independent appraisal of the assets or liabilities (contingent or
otherwise) of Lancit, nor was it furnished with any such appraisals. In
addition, Schroders did not review any information with respect to RCN other
than that referred to in items (viii), (ix), (x) and (xi) in the preceding
paragraph. No projections prepared by management of RCN were made available
to Schroders, and Lancit advised Schroders that RCN had not made available to
Lancit any projections prepared by management of RCN. With respect to the
near-term cash flow forecast for Lancit (as described in (iii) above),
Schroders was advised by Lancit, and Schroders assumed, without independent
investigation, that it had been reasonably prepared and reflected Lancit
management's reasonable estimate of the aggregate amounts of the sources and
uses of its funds for the six-month period covered thereby.
Schroders noted that its opinion was necessarily based upon
financial, economic, market and other conditions as they existed and could be
evaluated by Schroders on each of the date of the February 27 Opinion and the
date of the May 7 Opinion.
Schroders noted that its opinion does not constitute a
recommendation as to any action the Lancit Board or any shareholder of Lancit
should take in connection with the Merger Agreement or any aspect thereof or
alternative thereto, and does not constitute a recommendation to any
shareholder with respect to whether to vote in favor of the Merger, and should
not be relied upon by any shareholder as such. In rendering its opinion,
Schroders was not engaged as an agent or fiduciary of Lancit's shareholders or
of any other third party. Schroders' Opinion relates solely to the fairness,
from a financial point of view, to the shareholders of Lancit of the Merger
Consideration to be received by the holders of Lancit Common Stock. Schroders
expressed no opinion as to the structure, terms or effect of any other aspect
of the Merger or the Merger Agreement.
The full text of the Schroders' Opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached hereto as Annex III and is incorporated herein by reference.
Holders of Lancit Common Stock are urged to read the Schroders' Opinion
carefully in its entirety. The opinions of Schroders are directed to the
Lancit Board and relates only to the fairness of the Merger Consideration from
a financial point of view, do not address any other aspect of the Merger or
the Merger Agreement and do not constitute a recommendation to any shareholder
as to how such shareholder should vote at the Special Meeting. The summary of
the opinions of Schroders set forth in this Proxy Statement--Prospectus is
qualified in its entirety by reference to the full text of such opinions.
In preparing its opinion, Schroders performed a variety of
financial and comparative analyses, including those described below. The
summary of such analyses does not purport to be a complete description of the
analyses underlying the Schroders' Opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances, and, therefore,
such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Schroders did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Schroders believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and opinion. In its
analyses, Schroders made numerous assumptions with respect to Lancit, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Lancit. The estimate
contained in such analyses and the valuation ranges resulting from any
particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. The February 27 Opinion and analyses were only
one of many factors considered by the Lancit Board in its evaluation of the
Merger and should not be viewed as determinative of the views of the Lancit
Board or management of Lancit with respect to the Merger Consideration or the
proposed Merger.
The following is a summary of certain analyses performed by
Schroders in connection with its opinion.
Financial Viability. Lancit had previously publicly disclosed
that it believed that additional funding would be necessary to sustain its
operations through the fourth fiscal quarter of fiscal 1998 and that it was
actively seeking such funding, including through a sale of an interest in
Lancit, an acquisition of Lancit and/or strategic alliances with industry
partners (and the near term cash flow forecast prepared by management of
Lancit reflected those expectations). In the course of the solicitations of
interest by Lancit and Schroders, no additional source of such funding had
been identified other than such a corporate transaction. Schroders did not
perform a traditional discounted cash flow analysis in connection with its
opinion because, without the additional funding to be provided by such a
transaction, Lancit's management did not believe that Lancit would be able to
sustain its operations for any substantial period following June 30, 1998.
Analysis of Comparable Publicly Traded Companies. Using
publicly available information, Schroders compared selected historical
operating data and selected stock market data of Lancit to the corresponding
data of the following publicly traded companies which Schroders considered
reasonably comparable to Lancit (collectively, the "Comparable Companies"):
Cinar Films, Inc; Dick Clark Productions, Inc.; Film Roman, Inc.; The
Kushner-Locke Company; Nelvana Limited; and The Producers Entertainment Group
Ltd.
Since Lancit had negative earnings per share ("EPS"), revenue,
earnings before interest and taxes ("EBIT") and cash flow for the last twelve
months ("LTM") ending December 31, 1997, a comparison of historical EPS, EBIT
and cash flow of Lancit with those of the Comparable Companies was not
meaningful. In addition, since projected financial data for Lancit for
periods after June 30, 1998 were not prepared by management of Lancit for the
reasons set forth above under "--Financial Viability," Schroders did not
perform an analysis comparing projected EPS, revenue, EBIT or cash flow of
Lancit with those of the Comparable Companies. The analyses that Schroders
believed to be meaningful were (i) the market value of each of the Comparable
Companies and Lancit as multiples of book value and (ii) the market value plus
total debt minus total cash ("Enterprise Value") of each of the Comparable
Companies and Lancit as multiples of LTM revenue. Schroders performed these
analyses using closing market prices as of February 25, 1998. Based on these
analyses, Schroders calculated an implied equity value for the Lancit Common
Stock of between $0.14 and $1.93 per share.
Analysis of Merger and Acquisition Transactions in the Film and
Television Production Industry. Schroders analyzed certain publicly available
information relating to numerous selected merger and acquisition transactions in
the film and television production industries since 1994. Although these
transactions were reviewed for comparison purposes, none of such transactions
was considered directly comparable to the proposed Merger. Among the
transactions analyzed by Schroders were (target/acquiror): Windlight
Studios/Nelvana Limited; All American Communications, Inc./Pearson plc;
Grosso-Jacobson Entertainment Companies, Inc./Producers Entertainment Group
Ltd.; Metromedia International Group, Inc./Metro-Goldwyn-Mayer, Inc.; Rabbit
Ears Productions, Inc./Microleague Multimedia, Inc.; Mark Goodson Productions,
L.P./All American Communications, Inc.; Samuel Goldwyn Company/Metromedia
International Group, Inc.; Positive Response Television, Inc./National Media
Corporation; Allied Communications, Inc./Pearson plc; MCA, Inc./Seagram Company
Limited; Stephen J. Cannell Productions, Inc./New World Productions Group, Inc.;
ITC Entertainment Group/PolyGram N.V.; Beacon Communications Corporation/COMSAT
Corporation; Fremantle International, Inc./All American Communications, Ltd.;
and Diamond Entertainment II, Inc./Eagle Automotive Enterprises, Inc.
In each of the selected transactions analyzed, Schroders
computed the adjusted price (the Equity Cost (as defined below) plus latest
reported total debt, capitalized leases, preferred stock and minority interest
minus total cash and cash equivalents (the "Adjusted Purchase Price")) and
divided such amount by the acquired company's LTM revenues immediately prior
to the acquisition, which resulted in a range of purchase price multiples.
Schroders also computed the equity cost (where applicable, the offer per share
multiplied by total common shares outstanding (the "Equity Cost")) paid in
each of the selected transactions analyzed and divided such amount by the
acquired company's book value immediately prior to the acquisition, which
resulted in another range of purchase price multiples. Such analyses
illustrated a range of acquisition multiples of LTM revenues of 0.5x to 4.7x
and a range of acquisition multiples of book value of 2.2x to 9.3x. Excluding
two transactions which Schroders believed yielded multiples of LTM revenues
which were either extremely high or extremely low, the analyses illustrated a
range of acquisition multiples of LTM revenues of 1.0x to 2.0x. Excluding two
transactions which Schroders believed yielded multiples of book value which
were either extremely high or extremely low, the analyses illustrated a range
of multiples of 2.6x to 8.5x. Excluding the extreme outliers, Schroders
calculated an implied equity value of the Lancit Common Stock of between $0.62
and $2.04 per share.
Analysis of Merger and Acquisition Transactions of Companies in
Financial Distress. Schroders analyzed certain publicly available information
relating to numerous selected merger and acquisition transactions since 1994 of
companies in financial distress. Although these transactions were reviewed
for comparison purposes, none of such transactions was considered directly
comparable to the proposed Merger. Among the transactions analyzed by
Schroders were (target/acquiror): Health Management Inc./Counsel Corporation;
Sure Shot International, Inc./Investor Group; WRT Energy Corporation/DLB Oil &
Gas Inc. and Wexford Management LLC; biosys, inc./Thermo Trilogy Corporation;
Physicians Clinical Laboratory, Inc./Nu-Tech Bio-Med, Inc.; Comptronix
Corporation/Sanmina Corporation; and Codenoll Technology Corporation/ADC
Telecommunications, Inc.
In each of the selected transactions analyzed, Schroders
computed the Adjusted Purchase Price and divided such amount by the acquired
company's LTM revenues immediately prior to the acquisition, which resulted in
a range of purchase price multiples. Schroders also computed the Equity Cost
paid in each of the selected transactions analyzed and divided such amount by
the acquired company's book value immediately prior to the acquisition, which
resulted in another range of purchase price multiples. Such analyses
illustrated a range of acquisition multiples of LTM revenues of 0.4x to 6.4x
and a range of acquisition multiples of book value of 0.6x to 3.1x. Excluding
two transactions which Schroders believed yielded multiples of LTM revenue
which were either extremely high or extremely low, the analyses illustrated a
range of acquiring multiples of LTM revenue of 0.5x to 1.3x. Excluding the
extreme outliers, Schroders calculated an implied equity value of the Lancit
Common Stock of between $0.14 and $0.99 per share.
Premium Analysis. Schroders analyzed the premium paid over the
stock price of acquired companies in selected merger transactions since
January 1, 1997, based on stock prices one day, one week and four weeks prior
to the announcement of the transaction. Because RCN's definitive offer was
submitted to Lancit on February 9, 1998, and in light of the significant price
increase in the stock after February 6, 1998 (which coincided with atypically
high trading volume on several days between February 6 and February 26)
Schroders performed the premium analysis using two benchmark dates for the
Lancit Common Stock: February 26, 1998 (the last trading before the February
27, 1998 Lancit Board Meeting to approve the Merger) and February 6, 1998 (the
last trading day before a definitive offer was received from RCN). This
analysis demonstrated that, on average, the acquired company received a
premium over its stock price of 25.0%, 29.9% and 36.9% over its stock price
one day, one week and four weeks, respectively, prior to announcement of a
transaction. For transactions with an Enterprise Value of $20-$50 million,
such premiums, on average, were 16.9%, 23.5% and 15.6%, respectively. For
transactions with an Enterprise Value of less than $20 million, such premiums,
on average, were 6.1%, 11.1% and 10.7%, respectively. Schroders compared
these results with the results implied by Merger Consideration (based on RCN's
share price of $56.875 ($28.4375 after adjustment for the RCN Stock Dividend)
on February 26, 1998 and an exchange ratio of 0.021 (0.042 after adjustment
for the RCN Stock Dividend) RCN shares per share of Lancit Common Stock),
which comparison indicated that the Merger Consideration implied discounts of
23.2%, 4.0% and 4.0% from Lancit's share price on February 26, 1998 and one
week and four weeks, respectively, prior to February 26, 1998. Schroders
compared the selected transaction premiums with the results implied by the
Merger Consideration (based on RCN's share price of $56.875 ($28.4375 after
adjustment for the RCN Stock Dividend) of the February 26, 1998 and an
exchange ratio of 0.021 (0.042 after adjustment for the RCN Stock Dividend)
RCN shares per share of Lancit Common Stock) using February 6, 1998 as the
benchmark date for the Lancit Common Stock, which comparison indicated that
the Merger Consideration implied premiums of 20.0%, 6.7% and 12.9% over
Lancit's share price on February 6, 1998, one week prior to February 6, 1998
and four weeks prior to February 6, 1998, respectively.
Pursuant to the terms of Schroders' engagement by Lancit,
Lancit has agreed to pay Schroders for its services in connection with the
Merger an aggregate financial advisory fee equal to the greater of $250,000 or
2.5% of the total consideration payable in connection with the Merger, which
is contingent on consummation of the Merger. Lancit has also agreed to
reimburse Schroders for reasonable out-of-pocket expenses incurred by
Schroders in performing its services, including the reasonable fees and
expenses of its outside legal counsel, and to indemnify Schroders and related
persons against certain liabilities relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
Schroders, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Lancit selected Schroders
as its financial advisors because it is a nationally recognized investment
banking firm that has substantial experience in transactions similar to the
Merger.
Fractional Shares
No fractional shares of RCN Common Stock will be issued in
connection with the Merger. In lieu thereof, each Lancit Shareholder
otherwise entitled to receive a fraction of a share of RCN Common Stock
pursuant to the terms of the Merger Agreement (after aggregating all
fractional shares of RCN Common Stock to be issued in respect of all shares of
Lancit Common Stock held by such holder immediately prior to the Effective
Time) will be paid as soon as practicable following the Effective Time, in
cash, an amount equal to such fraction multiplied by the Average Closing
Price. No fractional share interest shall entitle the owner thereof to vote
or to any rights of a shareholder of RCN.
Lancit Stock Options and Warrants
Each stock option (each, a "Lancit Stock Option") owned by
current and former employees, directors and consultants of Lancit outstanding
and unexercised as of the Effective Time, whether or not vested, will be
canceled. As of February 27, 1998, there were outstanding Lancit Stock
Options to purchase 1,235,250 shares of Lancit Common Stock under Lancit's
various stock option plans.
The warrants (each, a "Lancit Warrant") to purchase an
aggregate of (i) 438,116 shares of Lancit Common Stock currently held by DCI,
with an exercise price of $13.00 per share, (ii) 122,093 shares of Lancit
Common Stock currently held by Robinson Lerer Montgomery, LLC, with an
exercise price of $3.625 per share, and (iii) 100,000 shares of Lancit Common
Stock currently held by Allen & Company Incorporated, with an exercise price
of $3.00 per share, will, as of the Effective Time, be converted into warrants
to purchase shares of RCN Common Stock in accordance with the respective terms
of each individual warrant. Pursuant to such conversion, the aggregate
exercise price of each Lancit Warrant (i.e., the product of the exercise price
per share times the number of shares covered thereby) will remain unchanged.
Effective Time of the Merger
The Merger will become effective upon the time of the filing of
a Certificate of Merger with the Secretary of State of New York (i.e., the
Effective Time). Such filing will occur when all conditions to the Merger
contained in the Merger Agreement, including the requisite approval of the
Lancit Shareholders, have been satisfied or waived. RCN and Lancit currently
anticipate that such filing will be made and that the Effective Time will
occur as soon as practicable after the Special Meeting. See "--Other
Conditions to Consummation of the Merger."
Resale of RCN Common Stock Issued in the Merger; Affiliates
The RCN Common Stock to be issued to the Lancit Shareholders in
connection with the Merger will be freely transferable under the Securities
Act, except for shares of RCN Common Stock issued to any person deemed to be an
affiliate of Lancit for purposes of Rule 145 under the Securities Act at the
time of the Special Meeting ("Affiliates"). Affiliates may not sell their
shares of RCN Common Stock acquired in connection with the Merger except
pursuant to an effective registration statement under the Securities Act
covering such shares, or in compliance with Rule 145 promulgated under the
Securities Act or another applicable exemption from the registration
requirements of the Securities Act.
Rule 145 Restrictions
The shares of RCN Common Stock that will be issued pursuant to
the Merger are registered securities. Following the Merger, persons who are not
affiliates of Lancit will be able to sell RCN Common Stock in the public market.
Under Rule 145 of the Securities and Exchange Commission's (the "Commission")
rules and regulations, for one year after the Effective Time, persons that were
affiliates of Lancit prior to the Merger (and are not affiliates of RCN after
the Merger) may sell RCN Common Stock subject to certain volume limitations,
manner of sale provisions, notification requirements and requirements as to
current public information concerning RCN set forth in Rule 144 of the
Commission's rules and regulations. During the period between the first and
second years after the Effective Time, such persons are subject only to the Rule
144 requirement as to current public information regarding RCN. After two
years, such persons may sell their shares of RCN Common Stock without compliance
with Rules 145 and 144. Assuming that the Average Closing Price is $29,
affiliates of Lancit will receive approximately 274,546 shares of RCN Common
Stock pursuant to the Merger. If instead, the minimum Average Closing Price of
$24 was used to calculate the amount of RCN Common Stock issuable pursuant to
the Merger, affiliates of Lancit would receive approximately 331,738 shares of
RCN Common Stock pursuant to the Merger. Persons who are currently affiliates
of Lancit and become affiliates of RCN after the Merger may sell RCN Common
Stock only pursuant to an effective registration statement, Rule 144 or another
exemption from registration.
Certain Federal Income Tax Consequences
Lancit has received from its counsel, Christy & Viener, an
opinion to the effect that the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code, that RCN, LME and Lancit
each will be a party to the reorganization within the meaning of Section
368(b) of the Code and that RCN, LME and Lancit will not recognize any gain or
loss as a result of the Merger. Such opinion is subject to certain
assumptions and is based on certain representations of RCN, LME and Lancit.
Lancit Shareholders should be aware that such opinion is not binding on the
Internal Revenue Service (the "IRS"), and no assurance can be given that the
IRS will not adopt a contrary position or that a contrary IRS position would
not be sustained by the courts. None of RCN, LME or Lancit has requested an
advance ruling from the IRS as to the tax consequences of the Merger.
Assuming the Merger qualifies as a reorganization under Section
368(a) of the Code, the U.S. federal income tax consequences of the Merger
will be as follows:
The Lancit Shareholders will not recognize gain or loss as a result of
the Merger with respect to shares of Lancit Common Stock converted
solely into RCN Common Stock;
The tax basis of the RCN Common Stock received by the Lancit
Shareholders in the Merger (including any fractional share deemed
received) will be the same as the tax basis of the Lancit Common Stock
surrendered in exchange therefor;
The payment of cash to the Lancit Shareholders in lieu of fractional
shares of RCN Common Stock will be treated as if the fractional shares
were distributed as part of the Merger exchange and then redeemed by
RCN; the Lancit Shareholders will recognize gain or loss for federal
income tax purposes as a result thereof, measured by the difference
between the amount of cash received and the portion of the basis of the
share of Lancit Common Stock allocable to such fractional share
interest. Such gain or loss will be capital gain or loss, provided that
such share of Lancit Common Stock was held as a capital asset at the
Effective Time, and will be long-term capital gain or loss if such share
of Lancit Common Stock has been held for more than one year at the
Effective Time; if the holding period for such fractional share is more
than 18 months at the Effective Time, a maximum tax rate of 20% will
apply to any such capital gain if recognized by a Lancit Shareholder who
is an individual.
The holding period of the shares of RCN Common Stock received in the
Merger by the Lancit Shareholders (including any fractional share deemed
received) will include the period during which the shares of Lancit
Common Stock surrendered in exchange therefor were held, provided that
such shares of Lancit Common Stock were held as capital assets at the
Effective Time; and
No gain or loss will be recognized by RCN, LME or Lancit as a result of
the Merger.
The foregoing discussion is intended only as a summary of
certain U.S. federal income tax consequences of the Merger, and does not
purport to be a complete analysis or listing of all potential tax effects
relevant to a decision as to whether to vote in favor of the approval and
adoption of the Merger Agreement and the transactions contemplated thereby,
including the Merger. The discussion does not address the tax consequences
that may be relevant to a particular Lancit Shareholder subject to special
treatment under certain U.S. federal income tax laws, such as dealers in
securities, mutual funds, banks, insurance companies, tax-exempt
organizations, non-United States persons and Lancit Shareholders who acquired
their shares of Lancit Common Stock pursuant to the exercise of Lancit Stock
Options or otherwise as compensation, nor any consequences arising under the
laws of any state, local or foreign jurisdiction. Tax consequences to holders
of Lancit Stock Options and Lancit Warrants are not discussed. The discussion
is based upon the Code, treasury regulations thereunder and administrative
rulings and court decisions as of the date hereof. All of the foregoing are
subject to change and any such change could affect the continuing validity of
this discussion. Lancit Shareholders are urged to consult with their own tax
advisors concerning the federal, state, local and foreign tax consequences of
the Merger to them.
Accounting Treatment
The Merger will be accounted for under the "purchase" method.
Management After the Merger
The Board of Directors and executive officers of LME prior to
the Effective Time will be the Board of Directors and executive officers of
the Surviving Corporation. The Board of Directors of LME consists of David C.
McCourt. The Chief Executive Officer is David C. McCourt, the President and
Chief Operating Officer is Michael J. Mahoney and the Chief Financial Officer
and Secretary is Bruce C. Godfrey. For information about such persons, see
"Management of RCN" and "Additional Information." After the Merger, RCN will
own all of the Lancit Common Stock and will be able to elect or appoint all
the directors or officers of Lancit.
Interests of Certain Persons in the Merger
Laurence A. Lancit and Cecily Truett, co-presidents, directors
and co-founders of Lancit, are the beneficial owners of an aggregate of
1,106,226 shares (approximately 16.7% of the shares of Lancit Common Stock
expected to be outstanding at the time of the Special Meeting) consisting of
553,113 shares held by each of them individually. The Children's Trust, a
trust established for the benefit of the minor children of Mr. Lancit and Ms.
Truett, beneficially owns 40,080 shares of Lancit Common Stock (approximately
0.6% of the shares of Lancit Common Stock expected to be outstanding at the
time of the Special Meeting). Each of Mr. Lancit, Ms. Truett and the
Children's Trust has entered into the Voting Agreement whereby each of them
agreed to vote the shares owned by them "for" the approval and adoption of the
Merger Agreement and the transactions contemplated thereby, including the
Merger, and to vote against certain competing transactions. See "The Voting
Agreement."
The remaining directors and executive officers of Lancit and
persons related to any of them, as a group, beneficially own approximately
0.3% of the shares of Lancit Common Stock expected to be outstanding at the
time of the Special Meeting entitled to vote at the Special Meeting. Each
such Lancit Shareholder has advised Lancit that they intend to vote "for" the
approval and adoption of the Merger Agreement and the consummation of the
transactions contemplated thereby. All shares held by these parties will be
converted in the Merger on the same terms and conditions as apply to all
shares of Lancit Common Stock. See "Introduction--Vote Required."
Pursuant to the terms of the employment agreement between Susan
L. Solomon and Lancit, upon consummation of the Merger, Ms. Solomon's
employment with Lancit will terminate and she would be entitled to receive a
payment equal to twice her annual salary ($350,000, subject to New York
consumer price index adjustments), plus accrued and unpaid bonus compensation
of $50,000, together with certain additional amounts. Effective upon
consummation of the Merger, Ms. Solomon has agreed to waive her right to
receive such cash amount and certain other benefits and to accept, in full
satisfaction thereof, registered RCN Common Stock having a value at the time
of the Merger of $750,000. At RCN's request, Ms. Solomon entered into a
consulting agreement with RCN, terminable at will by either party upon 45
days' prior notice, pursuant to which she will act as a consultant to RCN
following the Effective Time of the Merger for compensation at a monthly rate
approximately equal to her current Lancit salary.
Upon consummation of the Merger, pursuant to the terms of their
respective employment agreements, each of Mr. Lancit and Ms. Truett would be
entitled to terminate his or her employment with Lancit prior to its scheduled
termination in October 1998 and to be released from his or her respective
noncompete covenant under his or her employment agreement. Each of them has
agreed with RCN to waive the rights to terminate his or her employment and to
be released from the noncompete covenant by reason of the Merger.
All outstanding stock options to purchase Lancit Common Stock
that are held by the foregoing persons and the other directors and officers of
Lancit will be canceled in accordance with the terms of the Merger Agreement.
See "The Merger--Lancit Stock Options and Warrants."
Pursuant to the terms of the Merger Agreement, RCN has agreed
to cause the Surviving Corporation to maintain, for a period of six years
after the Effective Time, directors' and officers' liability insurance in
respect of acts or omissions occurring prior to the Effective Time covering
each director or officer of Lancit who was previously covered by Lancit's
directors' and officers' liability insurance policy on terms with respect to
coverage and amount no less advantageous to such officers and directors than
those of such policy in effect on February 27, 1998; provided that, in
satisfying this obligation, RCN shall not be obligated to cause the Surviving
Corporation to pay an aggregate premium in excess of 300% of the amount per
annum Lancit paid for its current year of coverage.
Possible Transaction Expenses Adjustment in the Merger Consideration
Pursuant to the Merger Agreement, the amount of the Merger
Consideration is subject to adjustment in the event that Lancit's transaction
expenses (the "Transaction Expenses") exceed $602,000, in which case, for
purposes of calculating the Merger Consideration, the $1.20 per share
transaction value will be reduced by an amount equal to the excess of the
Transaction Expenses over $602,000 divided by the number of outstanding shares
of Lancit Common Stock immediately prior to the Effective Time (i.e. the
Transaction Expenses Adjustment). If the Transaction Expenses exceed $602,000
(such excess, the "Excess Transaction Expenses"), the fraction of a share of
RCN Common Stock into which each share of Lancit Common Stock will be
converted pursuant to the Merger will be calculated using the following
formula:
Excess Transaction Expenses
$1.20- -----------------------------------------
Number of Shares of Lancit Common Stock
- ------------------------------------------------
Average Closing Price
(not greater than $29 or less than $24)
If, for example, the Transaction Expenses were $650,000, the
Average Closing Price used for this purpose were $24.00 and the number of
outstanding shares of Lancit Common Stock were 6,634,750, each share of Lancit
Common Stock would be converted into the right to receive 0.049698 shares of
RCN Common Stock in the Merger instead of the 0.05 shares of RCN Common Stock
into which each share of Lancit Common Stock would have been converted if
there had been no Transaction Expenses Adjustment. Lancit anticipates that if
the Transaction Expenses Adjustment is required it will not be material.
Other Conditions to Consummation of the Merger
In addition to the requisite approval of the Merger Agreement
and the transactions contemplated thereby, including the Merger, by the Lancit
Shareholders, the consummation of the Merger is subject to the satisfaction or
waiver of the following conditions set forth in the Merger Agreement: (i) the
respective representations and warranties of Lancit and RCN contained in the
Merger Agreement must be true and correct, except to the extent that any such
incorrect representations or warranties relate to matters which, singly or in
the aggregate, did not have and could not reasonably be expected to have a
material adverse effect; (ii) the respective obligations of Lancit, LME and
RCN required by the Merger Agreement to have been performed at or prior to the
Effective Time must have been performed in all material respects; (iii) each
of RCN and Lancit must have received various legal opinions, certificates,
consents, resolutions and reports from the other and from third parties, as
applicable; (iv) the Registration Statement must have become effective under
the Securities Act and must not be the subject of any stop order or of
proceedings seeking a stop order; (v) the shares of RCN Common Stock issuable
pursuant to the Merger Agreement must have been approved for listing on the
NASDAQ, subject to official notice of issuance; (vi) no provision of any
applicable law, regulation, judgment, order, decree or injunction shall
prohibit or restrain the consummation of the Merger; (vii) all actions by or
in respect of or filings with and all consents, approvals and licenses of any
governmental or other regulatory body and all consents from third parties
required for the consummation of the Merger and for the Surviving Corporation
to conduct Lancit's business shall have been obtained in form and substance
reasonably satisfactory to RCN and no such consent, authorization or approval
shall have been revoked; (viii) there shall not be instituted or pending any
action or proceeding by any government or governmental authority or agency or
any other person before any court or governmental authority or agency which,
if successful, would make illegal, materially delay or otherwise directly or
indirectly restrain or prohibit the consummation of the Merger or RCN's
ownership and operation of all or any material portion of Lancit's business or
assets, or seeking to impose or confirm material limitations on the ability of
RCN to control the business or operations of Lancit, or seeking to require
divestiture by RCN of any shares of stock of the Surviving Corporation; and
(ix) RCN shall have received a written undertaking from each person who might
reasonably be considered an "affiliate" within the meaning of Rule 145(c)
under the Securities Act providing that such affiliate will agree to
procedures to place a legend on the shares of RCN Common Stock to be received
by such affiliate in the Merger, will notify RCN in writing before offering
for sale or selling its RCN Common Stock, and will not make such a sale
without supplying RCN with an opinion of counsel for the affiliate to the
effect that such transfer is not in violation of the Securities Act.
No assurance can be given as to when all of the conditions to
the Merger can or will be satisfied. Except as limited by applicable law, any
party to the Merger Agreement may waive any of the conditions to such party's
obligations thereunder.
Representations and Warranties
The Merger Agreement contains various customary representations
and warranties relating to, among other things, (i) each of RCN's, LME's,
Lancit's and Lancit's subsidiaries' organization and similar corporate matters;
(ii) Lancit's and its subsidiaries' capital structures; (iii) delivery of
certain corporate documents; (iv) authorization, execution, delivery,
performance and enforceability of the Merger Agreement and any agreements
delivered pursuant thereto and related matters; (v) receipt of an opinion from
the financial advisor of Lancit as to the fairness from a financial point of
view of the consideration to be received pursuant to the Merger; (vi) absence of
conflicts under charters or bylaws and of violations of any instruments or law;
(vii) required governmental and third-party consents, approvals and
authorizations; (viii) financial statements; (ix) liens on assets and principal
properties; (x) documents filed by RCN and Lancit with the Commission and the
accuracy of information contained therein; (xi) absence of certain changes;
(xii) validity of permits, certificates, approvals and other authorizations of
governmental authorities necessary to operate Lancit's business, and compliance
with laws generally; (xiii) tax matters relating to Lancit; (xiv) Lancit's
employee benefit plans; (xv) litigation; (xvi) Lancit's material agreements and
commitments; (xvii) Lancit's intellectual property; (xviii) brokers used in
connection with the Merger and Lancit's Transaction Expenses; (xix) the accuracy
of information supplied by RCN and Lancit, respectively, in connection with the
Registration Statement on Form S-4 ("Registration Statement") (of which this
Proxy Statement--Prospectus is a part) and this Proxy Statement--Prospectus;
(xx) the absence of certain changes in Lancit's business from the date of the
Merger Agreement until the Effective Time; (xxi) environmental matters relating
to Lancit; (xxii) Lancit's insurance coverage; (xxiii) Lancit's employees and
various labor matters; (xxiv) Lancit's books and records; (xxv) interested party
transactions entered into by Lancit; (xxvi) no material adverse change in RCN's
business from September 30, 1997 until the date of the Merger Agreement, and
(xxvii) due authorization, issuance and listing of the Merger Shares.
Amendment, Waiver and Termination
The Merger Agreement (including any schedules and exhibits
thereto) may be amended at any time before or after its approval by the Lancit
Shareholders, to the extent permitted under the NYBCL.
The Merger Agreement provides that either RCN or Lancit may (i)
extend the time for the performance of any of the obligations or acts of the
other party, (ii) waive any inaccuracies in the representations and warranties
of the other party contained in the Merger Agreement, or (iii) waive
compliance by the other party with any of the agreements or conditions
contained in the Merger Agreement.
The Merger Agreement may be terminated at any time prior to the
Effective Time (a) by mutual written consent of Lancit and RCN, (b) by either
Lancit or RCN, if the transactions contemplated by the Merger Agreement shall
not have been consummated by June 30, 1998, provided that the party seeking to
exercise such termination right is not then in breach in any material respect
of any of its obligations under the Merger Agreement, and provided, further,
that if the Merger has not been consummated by June 30, 1998 because of a
delay caused by RCN (even if such delay does not constitute a material breach
by RCN of its obligations under the Merger Agreement), RCN shall not be
permitted to terminate the Merger Agreement prior to August 1, 1998, (c) by
either Lancit or RCN, if the other party shall have breached in any material
respect any of its obligations under the Merger Agreement or any
representation and warranty of the other party shall have been incorrect in
any material respect when made or, except as to representations made as of a
specific date, at any time prior to the Effective Time, provided that prior to
seeking any termination the party seeking to terminate shall give written
notice of its intention to terminate to the other party and the other party
shall have 15 business days to cure the breach or failure of compliance giving
rise to such right to terminate, (d) by either Lancit or RCN, if there shall
be any law or regulation that makes consummation of the Merger illegal or
otherwise prohibited or if any judgment, injunction, order or decree enjoining
Lancit or RCN from consummating the Merger is entered and such judgment,
injunction, order or decree shall become final and nonappealable, (e) by RCN
if the Lancit Board shall have withdrawn or modified or amended, in a manner
adverse to RCN, its approval or recommendation of the Merger Agreement and the
Merger or its recommendation that the Lancit Shareholders adopt and approve the
Merger Agreement and the Merger, or approved or recommended or endorsed any
Acquisition Proposal for a transaction other than the Merger, or if Lancit has
failed to promptly call the Special Meeting or failed as promptly as
practicable to mail the Proxy Statement--Prospectus to the Lancit Shareholders
or failed to include in such statement the recommendation referred to above,
(f) prior to approval of the Merger by the Lancit Shareholders, by Lancit on 48
hours' prior notice if, prior to the Effective Time, and based on a good faith
determination (following consultation with outside counsel) that failure to
take such action would result in a breach of the Lancit Board's fiduciary
duties, the Lancit Board shall have withdrawn or modified or amended, in a
manner adverse to RCN, its approval or recommendation of the Merger Agreement
and the Merger or its recommendation that the Lancit Shareholders adopt and
approve the Merger Agreement and the Merger in order to permit Lancit to
execute a definitive agreement providing for the acquisition of Lancit or in
order to approve a tender or exchange offer for any or all of the Lancit
Common Stock, in either case, that is determined by the Lancit Board to be on
financial terms more favorable to the Lancit Shareholders than the Merger, or
(g) by either Lancit or RCN if the requisite shareholder adoption and approval
shall not have been obtained.
Expenses; Termination Fees
If (w) the Merger Agreement is terminated pursuant to clause (e)
of the preceding paragraph; (x) pursuant to clause (f) of the preceding
paragraph in contemplation of a merger agreement or tender or exchange offer or
any transaction of the type listed in clause (z) below; (y) the Merger Agreement
is terminated by RCN pursuant to clause (c) of the preceding paragraph if the
breach referred to in such clause is willful; or (z) any of the following events
occurs within 12 months of the termination of the Merger Agreement pursuant to
clause (g) of the preceding paragraph: Lancit is acquired by merger or
otherwise by a Third Party; a Third Party acquires more than 50% of the total
assets of Lancit and its subsidiaries, taken as a whole; a Third Party acquires
more than 50% of the outstanding Lancit Common Stock or Lancit adopts and
implements a plan of liquidation, recapitalization or share repurchase relating
to more than 50% of the outstanding Lancit Common Stock or an extraordinary
dividend relating to more than 50% of the outstanding Lancit Common Stock or 50%
of the assets of Lancit and its subsidiaries, taken as a whole, and, in each
case, Lancit Shareholders receive, pursuant to such event, cash, securities or
other consideration having an aggregate value, when taken together with the
value of any securities of Lancit or its subsidiaries otherwise held by the
Lancit Shareholders after such event, in excess of $1.20 per share of Lancit
Common Stock, then in each case Lancit has agreed to pay to LME, within two
business days thereafter, a fee of $500,000 in cash.
The Merger Agreement provides that if the Merger is
consummated, all costs, expenses and fees incurred by Lancit in connection
with the transactions contemplated in the Merger Agreement will be paid by RCN.
Consideration of Other Proposals
The Merger Agreement provides that neither Lancit nor any of
its subsidiaries may (whether directly or indirectly through advisors, agents
or other intermediaries), nor may Lancit or any of its subsidiaries authorize
or permit any of its or their officers, directors, agents, representatives,
advisors or subsidiaries to, solicit, initiate or take any action knowingly to
facilitate the submission of inquiries, proposals or offers from any Third
Party (other than RCN or LME) relating to any acquisition or purchase of 20%
or more of the consolidated assets of Lancit and its subsidiaries or of over
20% of any class of equity securities of Lancit or any of its subsidiaries,
any tender offer (including a self tender offer) or exchange offer that if
consummated would result in any Third Party beneficially owning 20% or more of
any class of equity securities of Lancit or any of its subsidiaries, any
merger, consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving
Lancit or any of its subsidiaries whose assets, individually or in the
aggregate, constitute more than 20% of the consolidated assets of Lancit other
than the transactions contemplated by the Merger Agreement, or any other
transaction the consummation of which would or could reasonably be expected to
impede, interfere with, prevent or materially delay the Merger or which would
or could reasonably be expected to materially dilute the benefits to RCN of
the transactions contemplated by the Merger Agreement (collectively,
"Acquisition Proposals"), or agree to or endorse any Acquisition Proposal,
enter into or participate in any discussions or negotiations regarding any of
the foregoing, or furnish to any Third Party any information with respect to
its business, properties or assets or any of the foregoing, or otherwise
cooperate in any way with, or knowingly assist or participate in, facilitate
or encourage, any effort or attempt by any Third Party (other than RCN) to do
or seek any of the foregoing, or grant any waiver or release under any
standstill or similar agreement with respect to any class of equity securities
of Lancit or any of its subsidiaries; provided, however, that the foregoing
does not prohibit Lancit (either directly or indirectly through advisors,
agents or other intermediaries) from (i) furnishing information pursuant to an
appropriate confidentiality letter (which letter shall not be less favorable
to Lancit in any material respect than the Confidentiality Agreement dated as
of December 10, 1997 between RCN and Lancit, and a copy of which must be
provided for informational purposes only to RCN) concerning Lancit and its
businesses, properties or assets to a Third Party who has made a bona fide
Acquisition Proposal, (ii) engaging in discussions or negotiations with such a
Third Party who has made a bona fide Acquisition Proposal, (iii) following
receipt of a bona fide Acquisition Proposal, taking and disclosing to its
shareholders a position contemplated by Rule 14e-2(a) under the Exchange Act
or otherwise making disclosure to its shareholders, (iv) following receipt of
a bona fide Acquisition Proposal, failing to make or withdrawing or modifying
its recommendation that the Lancit Shareholders approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger,
and/or (v) taking any non-appealable, final action ordered to be taken by
Lancit by any court of competent jurisdiction, but in each case referred to in
the foregoing clauses (i) through (iv) only to the extent that the Lancit
Board shall have concluded, following consultation with outside counsel, that
failure to take the relevant action would result in a breach of the Lancit
Board's fiduciary duties to the Lancit Shareholders; provided, further, that
the Lancit Board must promptly notify RCN of the taking of any of the
foregoing actions referred to in clauses (i) through (iv) and, in addition, if
the Lancit Board receives an Acquisition Proposal, then Lancit must promptly
notify and inform LME of the material terms and conditions of such proposal
and the identity of the person making it and thereafter promptly advise RCN of
any material change in the status or terms and conditions thereof.
Lancit may terminate the Merger Agreement on 48 hours' prior
notice if, prior to approval of the Merger by the Lancit Shareholders and the
Effective Time, and based on a good faith determination (following consultation
with outside counsel) that failure to take such action would result in a breach
of the Lancit Board's fiduciary duties, the Lancit Board shall have withdrawn or
modified or amended, in a manner adverse to RCN, its approval or recommendation
of the Merger Agreement and the Merger or its recommendation that the Lancit
Shareholders approve and adopt the Merger Agreement and the Merger in order to
permit Lancit to execute a definitive agreement providing for the acquisition of
Lancit or in order to approve a tender or exchange offer for any or all of the
Lancit Common Stock, in either case, that is determined by the Lancit Board to
be on financial terms more favorable to the Lancit Shareholders than the Merger.
Notwithstanding the foregoing, Lancit is still subject to the Termination Fee
described in "--Expenses; Termination Fees." Since the announcement of the
Merger Agreement, no such inquiry, offer or proposal has been received by
Lancit, nor is Lancit engaged in any such discussions or negotiations.
Conduct of Business Pending the Merger
The Merger Agreement provides that until the Effective Time,
Lancit and its subsidiaries shall, except in actions to be taken pursuant to
the express provisions of the Merger Agreement, use their reasonable best
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
employees and conduct Lancit's business only in the ordinary course consistent
with past practice.
In addition, except actions to be taken pursuant to the express
provisions of the Merger Agreement, Lancit may not, and may not permit any of
its subsidiaries to, without the prior written consent of RCN in each instance,
(i) except pursuant to Lancit Stock Options or Lancit Warrants in effect on
February 27, 1998, issue, sell, purchase, repurchase, redeem or otherwise
acquire any shares of its capital stock or any of its subsidiaries' capital
stock, (ii) declare, set aside, or pay any dividend or make any distribution
with respect to any shares of Lancit Common Stock or other capital stock of
Lancit or any of its subsidiaries, except from any such subsidiary to Lancit,
(iii) directly or indirectly redeem, purchase or otherwise acquire or commit to
acquire any shares of Lancit Common Stock or other capital stock or other
ownership interest of any party, (iv) effect a split or reclassification of its
capital stock, or a recapitalization, (v) amend the Lancit Certificate of
Incorporation or the Lancit Bylaws, (vi) except as required by law, (A) grant or
make any change in control, severance or termination payments to any officer or
employee except pursuant to plans or agreements in existence on February 27,
1998, (B) enter into any option, employment, deferred compensation or other
similar agreement (or enter into any amendment to any such existing agreement)
with any officer, director, employee or consultant, (C) increase benefits
payable under any existing severance or termination pay policies or agreements,
or (D) except as otherwise permitted by the Merger Agreement, grant or provide
for any increase in (or commit, orally or in writing, to increase) the rate or
terms (including, without limitation, any acceleration of the right to receive
payment) of compensation payable to or to become payable to, or any bonus,
insurance, pension or other employee benefit plan benefitting any director,
officer, employee or consultant, (vii) merge or consolidate with any other
person or acquire a material amount of assets of any person, (viii) enter into
any material transaction, contract or commitment, (ix) assume or guarantee any
debt for borrowed money, (x) sell, lease, license, encumber or otherwise dispose
of any material properties or assets, (xi) make any reevaluation of the assets
of Lancit or any of its subsidiaries, (xii) except as required by GAAP, change
any of its accounting methods, principles or practices, (xiii) make any tax
election that would have an adverse effect on Lancit or any of its subsidiaries,
(xiv) agree or commit to any of the foregoing, or (xv) (A) intentionally take or
agree or commit to take any action that would make any representation and
warranty of Lancit under the Merger Agreement inaccurate in any material respect
at, or as of any time prior to, the Effective Time, or (B) intentionally omit or
agree or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any material respect at any
such time. In addition, Lancit is required to (x) use its best efforts to
maintain in full force and effect insurance policies providing coverage and
amounts of coverage comparable to the coverage and amounts of coverage provided
under the policies of insurance now in effect for Lancit, (y) timely file all
tax returns due on or before the Effective Time and pay (or reserve for) all
taxes due and payable with respect to periods ending on or before or including
the Effective Time, and (z) notify RCN promptly of the occurrence of any matter,
event or change in circumstances known to it after February 27, 1998 that would
have been required to be disclosed by it under the Merger Agreement if it had
occurred on or prior to February 27, 1998 or which constitutes a breach of any
of the representations, warranties or covenants or agreements under the Merger
Agreement by Lancit.
Lancit is required to use it reasonable best efforts to obtain
for RCN the right to show re-runs of episodes of The Puzzle Place and Reading
Rainbow on terms satisfactory to RCN. RCN has agreed that it will cooperate
with Lancit in connection with Lancit obtaining financing between February 27,
1998 and the Effective Time and Lancit has agreed that it will take such
reasonable actions as RCN may request in order to obtain such financing and
that any such financing will be on terms reasonably satisfactory to RCN.
After entering into the Merger Agreement, Lancit negotiated arrangements with
certain creditors to defer certain of its obligations until after the
estimated date of the Special Meeting. See "Description of Business Conducted
by Lancit--Restructuring; Corporate Transaction." Lancit is further required
to provide to RCN such access to its premises, employees and information as
RCN reasonably requests.
THE VOTING AGREEMENT
This section of the Proxy Statement--Prospectus describes
certain aspects of the Voting Agreement. The following description does not
purport to be complete and is qualified in its entirety by reference to the
Voting Agreement, which is attached as Annex II to this Proxy
Statement--Prospectus and is incorporated herein by reference.
Each of Laurence A. Lancit, Cecily Truett and the Children's
Trust has entered into the Voting Agreement with RCN, Lancit and LME, whereby
each of them agreed to vote the shares owned by them "for" the approval and
adoption of the Merger Agreement and the transactions contemplated thereby,
including the Merger.
Pursuant to the terms of the Voting Agreement, each of Mr.
Lancit, Ms. Truett and the Children's Trust has agreed that, during the period
beginning on February 27, 1998 and ending on the earlier of (i) the Effective
Time, (ii) the date that is one year after the termination of the Merger
Agreement (A) by RCN for a willful breach by Lancit of its obligations under
the Merger Agreement, (B) by RCN if the Lancit Board shall have withdrawn or
modified or amended, in a manner adverse to RCN, its approval or
recommendation of the Merger Agreement and the Merger, or its recommendation
that the Lancit Shareholders approve and adopt the Merger Agreement and
Merger, or approved, recommended or endorsed any Acquisition Proposal other
than the Merger or if Lancit has failed to call the Special Meeting or failed
as promptly as practicable to mail the Proxy Statement--Prospectus to its
shareholders or failed to include in such Proxy Statement--Prospectus the
recommendation referred to above, (C) by Lancit if prior to the Effective
Time, and based on a good faith determination (following consultation with
outside counsel) that failure to take such action would result in a breach of
the Lancit Board's fiduciary duties, the Lancit Board shall have withdrawn or
modified or amended, in a manner adverse to RCN, its approval or
recommendation of the Merger Agreement and the Merger or its recommendation
that the Lancit Shareholders approve and adopt the Merger Agreement and Merger
in order to permit Lancit to execute a definitive agreement providing for the
acquisition of Lancit or in order to approve a tender or exchange offer for
any or all of the Lancit Common Stock, in either case, that is determined by
the Lancit Board to be on financial terms more favorable to the Lancit
Shareholders than the Merger or (D) by either Lancit or RCN, if the Merger
Agreement shall have been voted upon by the Lancit Shareholders at the Special
Meeting (which includes any adjournment or postponement thereof) without the
requisite shareholder approval being obtained, and, in the case of termination
in accordance with (B) or (C) above, payment in full of all amounts payable to
LME (see "The Merger--Expenses; Termination Fees"), (iii) the date of
termination of the Merger Agreement for any other reason, and (iv) February
27, 2000 (the "Agreement Period"), he, she or it will vote all of his, her or
its shares of Lancit Common Stock, whether now owned or subsequently acquired,
to approve and adopt the Merger Agreement and the Merger and any actions
directly and reasonably related thereto at any meeting or meetings of the
Lancit Shareholders and at any adjournment thereof or pursuant to action by
written consent at or by which the Merger Agreement or such other actions are
submitted for the consideration and vote of the Lancit Shareholders so long as
such meeting is held or written consent adopted prior to the termination of
the Agreement Period. Additionally, during the Agreement Period, each of Mr.
Lancit, Ms. Truett and the Children's Trust has agreed that he, she or it will
vote all of his, her or its shares of Lancit Common Stock subject to the
Voting Agreement against the approval of any other merger, consolidation, sale
of assets, reorganization, recapitalization, liquidation or winding up of
Lancit or any other extraordinary transaction involving Lancit or any matters
related to or in connection therewith and that, except in Mr. Lancit's or Ms.
Truett's capacity as an officer or director of Lancit, he or she will not
directly or indirectly solicit, initiate or encourage any Acquisition Proposal
or engage in negotiations or discussions with, or disclose non-public
information relating to Lancit or afford access to the properties, books or
records of Lancit to, or otherwise assist, facilitate or encourage any party
that may be considering making a proposal for an Acquisition Proposal. If any
of Mr. Lancit, Ms. Truett or the Children's Trust sells, transfers or
otherwise disposes of any of the shares of Lancit Common Stock subject to the
Voting Agreement during the Agreement Period, he, she or it shall require the
transferee of such shares to execute and deliver to RCN and Lancit a voting
agreement identical in form to the Voting Agreement except for the identity of
the shareholder.
Under the Voting Agreement, neither Mr. Lancit nor Ms. Truett
has made an agreement or understanding in his or her capacity as director or
officer of Lancit. The Voting Agreement binds each of Mr. Lancit, Ms. Truett
and the Children's Trust only in his, her or its capacity as a shareholder of
Lancit and only with respect to the specific matters set forth therein. The
Voting Agreement does not prohibit Mr. Lancit or Ms. Truett from acting in
accordance with his or her fiduciary duties as an officer or director of
Lancit.
Entering into the Voting Agreement was a condition to RCN
entering into the Merger Agreement, and no compensation was paid to any person
in consideration for entering into the Voting Agreement.
TRADING MARKET
The RCN Common Stock currently trades on the NASDAQ. It is a
condition to the obligation of Lancit to consummate the Merger that the Merger
Shares shall have been approved for listing on the NASDAQ. See "The
Merger--Other Conditions to Consummation of the Merger." The prices at which
the RCN Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including, among others, quarter-to-quarter
variations in the actual or anticipated financial results of RCN or other
companies in the markets served by RCN. In addition, the stock market has
experienced extreme price and volume fluctuations that have affected the
market price of many telecommunications stocks and that have often been
unrelated or disproportionate to the operating performance of individual
companies. These and other factors may adversely affect the market price of
the RCN Common Stock. See "Risk Factors--RCN Risk Factors."
RCN anticipates that approximately 274,546 to 331,738 shares of
RCN Common Stock will be issued pursuant to the Merger, assuming no
Transaction Expenses Adjustment. RCN estimates that immediately after the
Merger approximately 58,000,000 shares of RCN Common Stock will be
outstanding. Except for (i) the registration rights agreement entered into in
connection with the acquisition of Ultranet with respect to 890,384 shares of
RCN Common Stock, (ii) the registration rights agreement entered into in
connection with the Erols Acquisition with respect to 1,730,648 shares of RCN
Common Stock and (iii) the Exchange Agreement entered into in connection with
the Joint Venture with BECO and referred to in "Description of Business
Conducted by RCN--Strategic Relationships--BECO Joint Venture," RCN has not
entered into any agreement or otherwise committed to register any shares of RCN
Common Stock under the Securities Act for sale by security holders. See also
"Description of Business Conducted by RCN--Recent Acquisition Transactions."
DIVIDENDS
RCN anticipates that future revenues will be used principally
to support operations and finance growth of the business and, thus, RCN does
not intend to pay cash dividends on the RCN Common Stock in the foreseeable
future. The payment of any cash dividends in the future will be at the
discretion of the RCN Board. The declaration of any dividends and the amount
thereof will depend on a number of factors, including RCN's financial
condition, capital requirements, funds from operations, future business
prospects and such other factors as the RCN Board may deem relevant. RCN is a
holding company and its ability to pay cash dividends is dependent on its
ability to receive cash dividends, advances and other payments from its
subsidiaries. The Credit Agreement into which certain subsidiaries of RCN
have entered contains restrictions on the payment of dividends by those
subsidiaries. RCN has entered into the Indentures which restrict RCN's and
certain of its subsidiaries' ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
RCN."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF RCN
Prior to September 30, 1997, RCN was operated as part of C-TEC.
The following Unaudited Pro Forma Consolidated Statements of Operations sets
forth the historical statements of operations of RCN for the years ended
December 31, 1997 and 1996 and as adjusted for the Distribution, the
acquisition of a 19.9% minority interest in Freedom, the 1997 Notes Offering,
the Erols Acquisition and the 1998 Notes 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 the period.
The following Unaudited Pro Forma Consolidated Balance Sheet sets forth the
historical balance sheet of RCN as of December 31, 1997, and as adjusted for
the transactions and events described in the notes thereto as if such
transactions and events had been consummated on December 31, 1997.
Management believes that the assumptions used provide a
reasonable basis on which to present such Unaudited Pro Forma Consolidated
Financial Statements of RCN. The Unaudited Pro Forma Consolidated Financial
Statements of RCN should be read in conjunction with the historical RCN
Financial Statements and notes thereto included elsewhere in this Proxy
Statement--Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of RCN." The Unaudited Pro Forma
Consolidated Financial Statements of RCN are provided for information purposes
only and should not be construed to be indicative of RCN's results of
operations or financial condition had the Distribution and the transactions
and events described above been consummated on the dates assumed, may not
reflect the results of operations or financial condition which would have
resulted had RCN been operated as a separate, independent company during such
period, and are not necessarily indicative of RCN's future results of
operations or financial condition.
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>
Liberty/ Adjustments
Adjustments Pro Forma Freedom for Issuance
RCN for for Acquisitions of the 1997
Historical Distribution Distribution Adjustments Notes
----------- -------------- ---------------- --------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $ 127,297 $ 127,297
Cost and expenses, excluding
depreciation and
amortization.............. 134,967 134,967
Nonrecurring charges.......... 10,000 10,000
Depreciation and
amortization.............. 53,205 53,205 $ 1,250 (1)
----------- -------- ----------- ------ ---------
Operating (loss).............. (70,875) (70,875) (1,250)
Interest income............... 22,824 $ (8,686)(2) 14,138
Interest expense.............. (25,602) (5,654)(3) (20,796) $ (50,221)(4)
10,460 (5)
Other (expense) income, net... 131 131
----------- -------- ----------- ------ ---------
(Loss) before income taxes.... (73,522) (3,880) (77,402) (1,250) (50,221)
(Benefit) for income taxes.... (20,849) (1,358)(6) (22,207) (437)(7) (17,577)(4)
----------- -------- ----------- ------ ---------
(Loss) before equity in
unconsolidated entities
and minority interest..... (52,673) (2,522) (55,195) (813) (32,644)
Equity in (loss) of
unconsolidated entities... (3,804) (3,804)
----------- -------- ----------- ------ ---------
Income (loss) before
extraordinary charge and
minority interest in
loss of consolidated
entities.................. $ (56,477) $ (2,522) $ (58,999) $ (813) $ (32,644)
=========== ======== =========== ====== =========
Unaudited pro forma (loss)
before extraordinary
charge and minority
interest per
common share.............. $ (1.03) $ (1.07)
Weighted average number of
common shares and
common stock equivalents
outstanding............... 54,965,716 54,965,716
<CAPTION>
Adjustments
Acquisition for Issuance
Erols Adjustments of the 1998
Historical(8) for Erols Notes Pro Forma
-------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales......................... $ 36,528 $ (22,552)(9) $ 141,273
Cost and expenses, excluding
depreciation and
amortization.............. 49,829 (30,764)(9) 154,032
Nonrecurring charges.......... 10,000
Depreciation and
amortization.............. 6,360 606 (10) 61,421
-------- ---------- --------- ----------
Operating (loss).............. (19,661) 7,606 (84,180)
Interest income............... 14,138
Interest expense.............. (162) 100 $ (34,958)(12) (106,037)
Other (expense) income, net... (49) 82
-------- ---------- --------- ----------
(Loss) before income taxes.... (19,872) 7,706 (34,958) (175,997)
(Benefit) for income taxes.... (9,338)(11) (12,235)(12) (61,794)
-------- ---------- --------- ----------
(Loss) before equity in
unconsolidated entities
and minority interest..... (19,872) 17,044 (22,723) (114,203)
Equity in (loss) of
unconsolidated entities... (13,420) (9) (17,224)
-------- ---------- --------- ----------
Income (loss) before
extraordinary charge and
minority interest in
loss of consolidated
entities.................. $(19,872) $ 3,624 $ (22,723) $ (131,427)
======== ========== ========= ==========
Unaudited pro forma (loss)
before extraordinary
charge and minority
interest per
common share.............. $ (2.32)
Weighted average number of
common shares and
common stock equivalents
outstanding............... 1,730,648 (18) 56,696,364
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments
for Adjustments
RCN Erols Acquisition for Issuance of
Historical Historical(8) of Erols the 1998 Notes Pro Forma
----------- -------------- ------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and temporary cash
investments.................. $222,910 $104 $(35,000)(13) $344,587 (17) $ 532,601
Short term investments......... 415,603 415,603
Accounts receivable from
related parties.............. 9,829 9,829
Accounts receivable, net of
reserve for doubtful
accounts..................... 17,815 544 18,359
Unbilled revenues.............. 1,695 1,695
Material and supply
inventory, at average cost... 2,745 2,745
Prepayments and other.......... 5,314 390 5,704
Investments restricted for
debt service................. 22,500 150 22,650
Deferred income taxes.......... 4,821 4,821
---------- ------- -------- -------- ----------
Total current assets............ 703,232 1,188 (35,000) 344,587 1,014,007
---------- ------- -------- -------- ----------
Property, plant and equipment... 307,759 26,232 333,991
Accumulated depreciation........ 107,419 8,391 (8,391)(14) 107,419
---------- ------- -------- -------- ----------
Net property, plant and
equipment.................... 200,340 17,841 8,391 226,572
Investments..................... 70,424 51,937 (15) 122,361
Investments restricted for debt
service........................ 39,411 743 40,154
Intangible assets, net.......... 96,547 9,169 (14) 105,716
Deferred charges and other
assets.......................... 41,038 396 6,000 (17) 47,434
---------- ------- -------- -------- ----------
Total Assets.................... $1,150,992 $20,168 $ 34,497 $350,587 $1,556,244
========== ======= ======== ======== ==========
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
($ in thousands)
<TABLE>
<CAPTION>
Adjustments
Erols for Adjustments
RCN Historical Acquisition for Issuance of
Historical (8) of Erols the 1998 Notes Pro Forma
----------- -------------- ------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable to related
parties.......................... $3,748 $3,748
Accounts payable................... 24,835 $8,651 33,486
Advance billings and customer
deposits......................... 7,318 25,583 $(15,624)(15) 17,277
Accrued interest................... 5,549 5,549
Accrued contract settlements....... 3,126 3,126
Accrued cable programming
expense.......................... 3,498 3,498
Accrued expenses and other......... 21,631 1,470 (100)(13) 23,001
Current maturities of debt......... 2,167 (700)(13) 1,467
---------- ------- ------- -------- ----------
Total current liabilities........... 69,705 37,871 (16,424) 91,152
---------- ------- ------- -------- ----------
Long-term debt...................... 686,103 6,852 (5,000)(13) $350,587 (17) 1,038,542
Deferred income taxes............... 19,612 14,626 (14) 34,238
Other deferred credits.............. 2,596 9,107 (5,439)(15) 6,264
Minority interest................... 16,392 16,392
Commitments and contingencies
Common shareholders' equity......... 356,584 (33,662) 46,734 (16) 369,656
---------- ------- ------- -------- ----------
Total liabilities and shareholders'
equity............................. $1,150,992 $20,168 $34,497 $350,587 $1,556,244
========== ======= ======= ======== ==========
See Notes to Unaudited Pro Forma Consolidated Financial Statements
</TABLE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statement of Operations and
Balance Sheet of RCN assume that the Company was an autonomous entity rather
than a wholly owned subsidiary of C-TEC for the periods shown. The Pro Forma
adjustments, as described below, are keyed to the corresponding amounts shown in
the relevant statement. All 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.
(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 Notes aggregating
$50,221 for the year ended December 31, 1997, net of income taxes of $17,577.
(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) In February 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 assumption and
repayment of $5,800 of debt (including payment of accrued interest).
Additionally, the Company is converting approximately 998,719 stock options for
Erols common stock into options to purchase 699,104 shares of RCN Common Stock
at an average exercise price of $3.424 per share. The Company accounted for
this transaction under the purchase method of accounting and accordingly, the
financial statements of Erols are not consolidated with the Company's historical
financial statements as of and for the year ended December 31, 1997. 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 Note 15) 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."
(10) 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 14.) 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 14. Also, as discussed in Note 14, a portion of the excess is
expected to be allocated to certain in-process research and development projects
which has resulted in a ratable reduction of pro forma amortization expense. The
final allocation to in-process research and development 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) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the Notes aggregating $34,958 for
the year ended December 31, 1997, net of income taxes of $12,235.
(13) Adjustment to reflect $29,200 cash portion of the
consideration for the merger, $5,800 of debt (including accrued interest) of
Erols outstanding at December 31, 1997 which the Company repaid at closing and
other capitalized transaction costs.
(14) 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 research and development. Such fair market values
may differ from the allocations assumed in the pro forma financial statements.
The impact on deferred tax balances was included in the above-referenced fair
value adjustments. Erols' historical property, plant and equipment has been
adjusted to its estimated fair value based upon its depreciated cost. The
remaining excess of consideration over the historical book value of Erols net
assets acquired has been preliminarily allocated to subscriber base, goodwill
and other intangible assets. The amounts preliminarily allocated to subscriber
base, goodwill and other intangible assets have been ratably reduced by the
portion of the purchase price expected to be allocated to in-process research
and development. Such acquired research and development would result in a
charge which would initially be recognized in the period in which the RCN/Erols
merger occurred.
(15) 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. As a result, the Company's contribution is
reflected as an increase in "Investments." Additionally, the Company expects
that Starpower will assume the liability for the unearned revenue related to the
subscribers contributed to Starpower.
(16) Adjustment to reflect the elimination of Erols' deficit, the
issuance of 1,730,648 shares of RCN stock as a portion of the consideration for
the merger and the estimated write-off of acquired in-process research and
development. (See Note 8.)
(17) Adjustment to reflect the issuance in February 1998 of
$350,587 of the 1998 Notes. The debt issuance costs of $6,000 are included in
"deferred charges and other assets" and are amortized over the term of the
Notes.
(18) Represents adjustment for shares to be issued in connection
with the acquisition of Erols. (See Note 8.)
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF RCN
Prior to September 30, 1997, RCN and the RCN Businesses were
operated as part of C-TEC. The table below sets forth selected historical
consolidated financial data for RCN. The historical consolidated financial
data presented below reflect periods during which RCN 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
RCN had operated as a separate, independent company during such periods, and
are not necessarily indicative of RCN'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 RCN's unaudited historical consolidated financial
statements not included in this Prospectus. The selected historical
consolidated financial data of RCN 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 RCN's audited historical consolidated financial
statements included elsewhere in this Prospectus. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of RCN" and the
RCN Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ----------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales............................................... $ 49,504 $59,500 $91,997 $104,910 $127,297
Costs and expenses, excluding depreciation and
amortization....................................... 30,821 49,747 75,003 79,107 134,967
Nonrecurring charges(1)............................. -- -- -- -- 10,000
Depreciation and amortization....................... 9,922 9,803 22,336 38,881 53,205
-------- -------- -------- -------- ----------
Operating (loss).................................... 8,761 (50) (5,342) (13,078) (70,875)
Interest income..................................... 17,882 21,547 29,001 25,602 22,824
Interest expense.................................... (17,127) (16,669) (16,517) (16,046) (25,602)
Other income (expense), net......................... 1,195 1,343 (304) (546) 131
(Benefit) provision for income taxes................ 167 2,340 1,119 979 (20,849)
Equity in loss of unconsolidated entities........... -- -- (3,461) (2,282) (3,804)
Minority interest in (income) loss of consolidated
entities........................................... (85) (95) (144) 1,340 7,296
Extraordinary charge--debt prepayment penalty, net
of tax of $1,728................................... -- -- -- -- (3,210)
Cumulative effect of changes in accounting
principles.......................................... 1,628 (83) -- -- --
-------- -------- -------- -------- ----------
Net (loss) income................................... $ 12,087 $ 3,653 $ 2,114 $ (5,989) $ (52,391)
======== ======== ======== ======== ==========
Balance Sheet Data (at end of period):
Total assets........................................ $291,634 $568,586 $649,610 $628,085 $1,150,992
Long-term debt...................................... 181,500 154,000 135,250 131,250 686,103
Shareholders' equity................................ 74,329 372,847 394,069 390,765 356,584
</TABLE>
- ----------
(1) Nonrecurring charges of $10,000 represent costs incurred with respect to the
termination of a marketing services agreement related to RCN's wireless
video services.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RCN
(Dollars in thousands, except per share data)
Certain statements contained in this report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. Such forward-looking statements include, in
particular, statements made as to plans to develop networks and upgrade
facilities, the market opportunity presented by markets targeted by RCN, RCN's
intention to connect certain wireless video resale telephone and Internet
service customers to its advanced fiber optic networks, the development of RCN's
businesses, the markets for RCN's services and products, RCN's anticipated
capital expenditures, RCN'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
historical Consolidated Financial Statements of RCN and the Notes thereto
included elsewhere in this Proxy Statement--Prospectus.
General
RCN is developing networks that are capable of providing a full
range of high speed, high capacity telecommunications services, including voice,
video programming and data services including Internet access. RCN 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, RCN commenced providing
service through advanced fiber optic network facilities in New York City and
Boston. RCN also has hybrid fiber/coaxial cable television operations in New
York (outside New York City), New Jersey and Pennsylvania ("Hybrid
Fiber/Coaxial"), wireless video operations in New York City ("Wireless Video"),
and certain other operations, including long distance telephone (collectively,
"Other Operations"). RCN has historically managed its business along these lines
and the discussion which follows addresses those lines accordingly.
Financial results related to advanced fiber optic networks and
from provision of Internet services are currently included in the "Advanced
Fiber, Wireless Video and Other Operating" segment data. RCN may present
separate segment information with respect to the advanced fiber optic networks
and Internet business in future periods in connection with RCN's adoption of
Statement of Financial Accounting Standards No. 131-- "Disclosure about
Segments of an Enterprise and Related Information." RCN expects that the
operating and net losses and negative cash flows from its advanced fiber optic
network business will rise in the future as it expands and develops its
network and customer base. There can be no assurance that RCN will achieve or
sustain profitability or positive cash flows from operating activities in the
future as it develops its advanced fiber optic network.
The negative operating cash flow from RCN's advanced fiber
optic network business has resulted primarily from expenditures associated
with the development of RCN's operational infrastructure and marketing
expenses. RCN 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. RCN 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. RCN expects its operating
revenues will increase in 1998 through internal growth of its current advanced
fiber optic networks; however, RCN also expects negative operating cash flow
will increase for some period of time as RCN initiates network development in
Washington, D.C. and expands its current networks. When RCN makes its initial
investment in a new market, the operating losses typically increase as the
network and sales force are expanded to facilitate growth. RCN'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 RCN's markets and
any potential adverse regulatory developments. RCN 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 RCN. See "--Liquidity and Capital Resources."
The terms of RCN's joint ventures require the mutual consent of
RCN and its joint venture partner to distribute or advance funds to RCN. RCN'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 RCN. Although the joint ventures have not had a significant
impact on RCN's cash flows in the periods presented, cash flows available to
RCN in future periods will be affected by the extent to which operations are
conducted through joint ventures. Due to the degree of control that RCN has in
the joint ventures, RCN accounts for the BECO joint venture on a consolidated
basis and Starpower under the equity method of accounting.
Prior to September 30, 1997, RCN was operated as part of C-TEC.
On September 30, 1997, C-TEC distributed 100% of the outstanding shares of
common stock of its wholly owned subsidiaries, RCN and Cable Michigan, to
holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as
of the close of business on September 19, 1997 in accordance with the terms of
a Distribution Agreement dated September 5, 1997 among C-TEC, RCN and Cable
Michigan (the "Distribution Agreement"). RCN consists primarily of C-TEC's
bundled residential voice, video and Internet access operations in the Boston
to Washington, D.C. corridor, its existing New York, New Jersey and
Pennsylvania cable television operations, a portion of its long distance
operations and its international investment in Megacable. C-TEC, RCN and
Cable Michigan have entered into certain agreements providing for the
Distribution, and governing various ongoing relationships between the three
companies, including a distribution agreement and a tax-sharing agreement. The
historical financial information presented herein reflects periods during
which RCN 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 RCN which would have resulted had RCN been an
independent, public company during the reporting periods, and are not
necessarily indicative of RCN's future operating results or financial
condition.
Certain of RCN's businesses were acquired by C-TEC and
transferred to RCN 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"). RCN
acquired the remaining minority interest in Freedom in March 1997. The
acquisition was accounted for as a purchase and is reflected in RCN'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 RCN. As of May 15, 1995, RCN also
assumed management of Twin County. As a result, RCN had control of Twin County
and accordingly has fully consolidated Twin County in RCN'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. RCN accounts
for its investment by the equity method of accounting and is amortizing the
original excess cost over the underlying equity in the net assets on a
straight-line basis over 15 years.
Results of Operations
Selected segment data was as follows for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
------------ ----------- ----------
(in thousands)
<S> <C> <C> <C>
Sales
Hybrid Fiber/Coaxial......................................... $ 92,000 $ 84,096 $66,404
Advanced Fiber, Wireless Video and Other Operating........... 35,111 20,768 25,528
Corporate.................................................... 86 46 65
--------- -------- -------
Total....................................................... $ 127,297 $104,910 $91,997
========= ======== =======
</TABLE>
Operating Income Before Depreciation and Amortization and
Nonrecurring Charge:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
------------ ----------- -----------
(in thousands)
<S> <C> <C> <C>
Sales
Hybrid Fiber/Coaxial......................................... $ 39,767 $ 40,094 $ 28,458
Advanced Fiber, Wireless Video and Other Operating........... (39,882) (11,711) (8,416)
Corporate.................................................... (7,555) (2,580) (3,048)
-------- -------- --------
Total....................................................... $ (7,670) $ 25,803 $ 16,994
======== ======== ========
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
For the year ended December 31, 1997, operating income before
depreciation and amortization and nonrecurring charge was ($7,670) as compared
to $25,803 for the year ended December 31, 1996. Sales increased 21.3% to
$127,297 for the year ended December 31, 1997 from $104,910 for the same period
in 1996.
Sales. Sales are primarily comprised of subscription fees for
basic, premium and pay per view cable television services; local telephone
service fees consisting primarily of monthly line charges, local toll and
special features; long distance telephone service fees based on minutes of
traffic and tariffed rates or contracted fees; and Internet access fees billed
at contracted rates. For the year ended December 31, 1997, sales were
$127,297, an increase of $22,387 due to higher Hybrid Fiber/Coaxial sales of
$8,004 and higher Advanced Fiber, Wireless Video and Other Operating sales of
$14,343. The increase in Hybrid Fiber/Coaxial sales principally results from
higher basic service revenue resulting from approximately 4,850 additional
average monthly subscribers over 1996, the effects of a rate increase in the
first quarter of 1997 and cash incentives related to the launch of certain new
channels. Advanced Fiber, Wireless Video and Other Operating sales increased
primarily due to the acquisition of Freedom in August 1996 (the "Freedom
Acquisition"), which resulted in higher basic and premium video revenue.
Additionally, higher voice revenue of approximately $3,200 resulted from
higher advanced fiber optic voice connections and higher resold voice
connections. The increase in Advanced Fiber, Wireless Video and Other
Operating sales also includes increases of approximately $3,300 related to the
long distance business.
Costs and Expenses Excluding Depreciation and Amortization and
Nonrecurring Charges. Costs and expenses, excluding depreciation and
amortization and nonrecurring charges, are comprised of direct costs of
providing services, primarily cable programming and franchise costs, network
access fees, video transmission licensing fees, salaries and benefits, and
customer service costs; sales and marketing costs; and general and
administrative expenses. For the year ended December 31, 1997, costs and
expenses, excluding depreciation, amortization, and nonrecurring charges, were
$134,967, an increase of $55,860 or 70.6% as compared to 1996. The increase is
primarily attributable to higher Advanced Fiber, Wireless Video and Other
Operating costs and expenses, excluding depreciation and amortization, of
approximately $42,500, resulting principally from the Freedom Acquisition in
August 1996 and expansion of the business in the Boston and New York City
markets. The most significant increases occurred in personnel and related costs,
due to increased headcount primarily in operations, marketing and customer
service to support the expansion of the business, origination and programming
cost associated with an increase in video connections, and advertising expenses
of approximately $9,000 associated with a high visibility campaign. The long
distance business contributed approximately $6,100 of the remaining increase in
Advanced Fiber, Wireless Video and Other Operating costs and expenses, excluding
depreciation and amortization. Hybrid Fiber/Coaxial costs and expenses,
excluding depreciation and amortization, increased approximately $8,300
primarily due to higher basic programming costs resulting from higher rates,
additional channels and subscriber increases. Additionally, in connection with
the Distribution (see Note 1 to the Consolidated Financial Statements of RCN),
C-TEC completed a comprehensive study of its employee benefit plans in 1996. As
a result of this study, effective December 31, 1996, in general, employees of
RCN no longer accrued benefits under the defined benefit pension plan, but
became fully vested in their benefit accrued through that date. C-TEC notified
affected participants in December 1996. In December 1996, C-TEC allocated
pension plan assets of $6,984 to a separate plan for employees who no longer
accrue benefits after December 31, 1996 (the "curtailed plan"). The underlying
liabilities were also allocated. The allocation of assets and liabilities
resulted in a curtailment/settlement gain attributable to Hybrid Fiber/Coaxial
cable operations of approximately $1,500. Such gain did not recur in 1997. The
remaining increase in costs and expenses, excluding depreciation and
amortization, of approximately $5,000 is primarily due to costs associated with
the spin-off of RCN from C-TEC.
Depreciation and Amortization. Depreciation and amortization
is comprised principally of depreciation relating to RCN's Hybrid
Fiber/Coaxial facilities, advanced fiber and wireless video network and
amortization of subscriber lists, building access rights and goodwill.
Depreciation and amortization increased $14,324, or 36.8% to $53,205 for the
year ended December 31, 1997 as compared to $38,881 for 1996. The increase is
principally due to the additional depreciation and amortization resulting from
the Freedom Acquisition and depreciation related to RCN'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 RCN's
advanced fiber optic networks in New York City and Boston and due to
depreciation and amortization with respect to RCN's acquisitions in February
1998 of Erols and Ultranet. See Note 19 to the Consolidated Financial
Statements of RCN.
Nonrecurring Charges. Nonrecurring charges of $10,000
represent costs incurred with respect to the termination of a marketing
services agreement held by Freedom.
Interest Income. For the year ended December 31, 1997,
interest income was $22,824, a decrease of $2,778, or 10.9% primarily due to
lower average cash balances and lower average notes receivable with related
parties. Average cash balances decreased principally as a result of the
Freedom Acquisition in August 1996 (as well as the acquisition in March 1997
of the remaining 19.9% ownership interest in Freedom) and capital
expenditures, partially offset by the proceeds of the 1997 Notes Offering.
See Note 10 to the Consolidated Financial Statements of RCN.
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 RCN's $225,000 of 10% Senior Notes and $601,045 aggregate
principal amount at maturity of 11 1/8% Senior Discount Notes placed in
October 1997. See Note 10 to the Consolidated Financial Statements of RCN.
This was partially offset by lower interest expense resulting from the
required principal payment of $18,750 on the Senior Secured Notes in December
1996. Additionally, RCN paid $922 to Level 3 Telecom in 1996 in connection
with RCN'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 before taxes. For an analysis
of the change in income taxes, see the reconciliation of the effective income
tax rate in Note 11 to the Consolidated Financial Statements of RCN.
Minority Interest. Minority interest in the loss of
consolidated entities increased $5,956 primarily as a result of the minority
share of the losses of the BECO joint venture (see Note 7 to the Consolidated
Financial Statements of RCN), which began operations in June 1997.
Additionally, the minority share of the losses of Freedom from January 1
through March 21, at which time RCN acquired the remaining 19.9% ownership
interest, was $966.
Equity in Loss of Unconsolidated Entities. RCN's equity in the
(loss) of unconsolidated entities was ($3,804) in 1997 and ($2,282) in 1996,
and is comprised principally of RCN's share of the operating results of
Megacable. In January 1995, RCN purchased a forty percent equity position in
Megacable, a Mexican cable television provider, for cash of $84,115. RCN 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. RCN is also exposed to foreign
currency transaction losses resulting from transactions of Megacable which are
made in currencies different from its own. RCN's proportionate share of
transaction gains (losses) are included in income as they occur. RCN does not
hedge its foreign currency exchange risk and it is not possible to determine
what effect future currency fluctuations will have on RCN'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 RCN'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, RCN's share of the income of Megacable was $2,411 and $4,090,
respectively, which includes the exchange gains (losses) as discussed above.
RCN'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 RCN's excess purchase price over the net assets of Megacable
when acquired was $6,280 in each year.
Extraordinary Charge. In September 1997, RCN prepaid the
Senior Secured Notes with the proceeds of new credit facilities. See Note 10
to the Consolidated Financial Statements of RCN. The early extinguishment of
the 9.65% Senior Secured Notes resulted in an extraordinary charge of $3,210,
net of taxes.
Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
For the year ended December 31, 1996, operating income before
depreciation and amortization was $25,803 as compared to $16,994 for the year
ended December 31, 1995. Sales increased 14.0% to $104,910 for 1996 from
$91,997 in 1995. The improvement in operating income before depreciation and
amortization of $8,809 was offset by higher depreciation and amortization of
$16,545, as discussed below, resulting in a net loss of ($5,989) for the year
ended December 31, 1996 as compared to net income of $2,114 in 1995.
Sales. For 1996, sales were $104,910, an increase of $12,913,
or 14.0% due to higher Hybrid Fiber/Coaxial sales partially offset by lower
Advanced Fiber, Wireless Video and Other Operating sales, principally long
distance. Hybrid Fiber/Coaxial sales increased $17,692, or 26.6%, primarily
due to the acquisition of the Pennsylvania cable system (formerly Twin County
Trans Video, Inc.) in May 1995, which resulted in $13,530 of the increase in
Hybrid Fiber/Coaxial sales in 1996. The Pennsylvania cable system serves
approximately 74,000 subscribers in the Greater Lehigh Valley area of
Pennsylvania. The 14.0% increase in sales in 1996 was lower than the increase
of 54.6% in 1995, principally due to the consolidation of the Pennsylvania
cable system for seven months (from acquisition in May 1995). Since the
Pennsylvania cable system was consolidated for seven months in 1995,
consolidation for a full year in 1996 reflects only an incremental five months
revenue as compared to an incremental seven months revenue in 1995.
Additionally, long distance revenues decreased approximately 30% from 1995 to
1996, principally as a result of termination of AT&T Tariff 12 production in
1996, as compared to increases of 77% from 1994 to 1995, which resulted from
the resale of AT&T Tariff 12 long distance services and increases in long
distance switched business and 800 services sales in 1995. The remaining
increase in Hybrid Fiber/Coaxial sales is due to higher basic service revenues
resulting from an increase in average subscribers of 4,995 or 5.3% and the
full year impact, in 1996, of the 9.6% rate increase in April 1995 and the
impact of 5.9% rate increase in February 1996. These increases were partially
offset by lower Advanced Fiber, Wireless Video and Other Operating sales of
$4,760 primarily resulting from the termination in the second quarter of 1995
of an agreement for the resale of AT&T Tariff 12 long distance services to
another long distance reseller. Included in Advanced Fiber, Wireless Video and
Other Operating sales for 1996 were Wireless Video sales of $3,532, compared
to zero for 1995 reflecting the Freedom Acquisition.
Cost and Expenses, Excluding Depreciation and Amortization. In
1996, costs and expenses, excluding depreciation and amortization, were
$79,107, an increase of $4,104 or 5.5% as compared to 1995. Hybrid
Fiber/Coaxial programming expense increased $3,930 due to license fee
increases, channel additions, and subscriber growth, primarily due to the
acquisition of the Pennsylvania cable system. Additionally, Hybrid
Fiber/Coaxial salaries and benefits expense increased $1,862 primarily due to
the acquisition of the Pennsylvania cable system. Corporate costs and
expenses, excluding depreciation and amortization, decreased $487. This
decrease is primarily due to the corporate allocable share of the gain on the
partial curtailment and settlement of C-TEC's defined benefit pension plan of
$992 (see Note 13 to the Consolidated Financial Statements of RCN) partially
offset by RCN's allocable portion of costs associated with the investigation
of the feasibility of various restructuring alternatives to enhance
shareholder value. Advanced Fiber, Wireless Video and Other Operating costs
and expenses, excluding depreciation and amortization, decreased $1,465
primarily due to lower expenses associated with the 97% reduction in AT&T
Tariff 12 long distance revenues partially offset by an increase of $2,320
representing costs associated with the development of RCN's advanced fiber
optic networks in New York City and Boston and Wireless Video costs and
expenses of $8,303 in 1996 compared to zero in 1995 reflecting the Freedom
Acquisition.
Depreciation and Amortization. For 1996, depreciation and
amortization expense was $38,881, an increase of $16,545 or 74.1% as compared
to 1995 primarily due to purchase accounting effects of the acquisition of
Pennsylvania cable system in May 1995 and the Freedom Acquisition on August
30, 1996. See Note 4 to the Consolidated Financial Statements of RCN. In
addition, RCN incurred $3,756 in depreciation related to RCN's advanced fiber
optic networks in New York City and Boston.
Interest Income. For the year ended December 31, 1996,
interest income was $25,602, a decrease of $3,399, or 11.7% due primarily to a
reduction in average cash balances in 1996 as compared to 1995 and a decrease
in the average yield on invested cash, partially offset by interest income of
$2,222 accrued on a $13,088 note receivable acquired from Mazon Corporativo
S.A. de C.V. in January 1996. Average cash balances decreased in 1996
primarily due to cash used in the Freedom Acquisition and the purchase of the
loan receivable from Mazon Corporativo S. A. de C.V. Additionally, lower
balances on notes receivable-affiliates contributed to the decrease.
Interest Expense. Interest expense for 1996 was $16,046, a
decrease of $471, or 2.9% in 1996 as compared to 1995. This decrease is due to
lower average rates on outstanding debt and includes approximately $922 paid
to Level 3 Telecom, RCN'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. RCN'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 of RCN.
Minority Interest. As a result of the Freedom Acquisition,
Freedom's financial results are consolidated with RCN 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, RCN'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 RCN's excess purchase price over the net assets of
Megacable when acquired was $6,280 and $5,757, respectively.
Liquidity and Capital Resources
RCN expects that it will require a substantial amount of
capital to fund the network development and operations in the Boston to
Washington, D.C. corridor, including funding the development of its advanced
fiber optic networks, upgrading its Hybrid Fiber/Coaxial plant, funding
operating losses and debt service requirements. RCN currently estimates that
its capital requirements for the period from January 1, 1998 through 1999 will
be approximately $785,000, which includes capital expenditures (including
connection costs which will only be incurred as RCN obtains revenue-generating
customer connections) of approximately $300,000 in 1998 and approximately
$485,000 in 1999. These capital expenditures will be used principally to fund
the buildout of RCN's fiber optic network in high density areas in the Boston,
New York and Washington, D.C. markets and to upgrade its Hybrid Fiber/Coaxial
cable systems. To build out these areas on an efficient basis, RCN undertakes
a subscriber-driven capital expenditure strategy whereby it (i) closely
monitors development of its subscriber base in order to tailor network
development in each target market, and (ii) seeks to establish a customer base
in advance of or concurrently with its network deployment. For example, RCN
offers resale telephone services on an interim basis to customers located near
its advanced fiber optic networks. Depending upon factors such as subscriber
density, proximity to the advanced fiber optic network and development costs
and the degree of success achieved in its initial markets, RCN will determine
whether extending its advanced fiber optic network to additional high density
target markets can be achieved on an attractive economic basis. In addition
to its own capital requirements, RCN's joint venture partners are each
expected to contribute approximately $150,000 in capital to the joint ventures
in connection with development of the Boston and Washington, D.C. markets
through 2000.
In October 1997, RCN raised $575,000 in gross proceeds from an
offering of two tranches of debt securities. The offering was comprised of
$225,000 principal amount of 10% Senior Notes and $601,000 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,045 of restricted cash to be used to fund the Escrow Account to
pay interest on the 10% Senior Notes for three years. In February 1998, RCN
raised $350,587 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 Notes
will be 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.
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 the 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 Notes at a certain premium. Upon
the occurrence of a change of control, RCN must make an offer to purchase all
of the Notes 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 expects to have sufficient liquidity to meet its capital
requirements through mid-2000. RCN 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 RCN's
network and to fund operating losses may vary materially from RCN'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 RCN encounter a
successful rollout in its initial markets, RCN may accelerate the expansion
and extend the reach of its network. Conversely, should RCN be less successful
than anticipated, the operating losses associated with the installed network
may be higher than anticipated. RCN 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 RCN anticipates
that, if it is successful, it will continue to extend its network coverage
into additional areas within the Boston-Washington, D.C. corridor, it expects
to continue to experience losses and negative cash flow on an aggregate basis
for an extended period of time.
RCN'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 RCN's access to cash flow generated by the joint ventures (which
will be paid in the form of dividends). RCN may enter into additional joint
ventures in the future as RCN begins to develop new markets.
Sources of funding for RCN's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. RCN is considering, subject to market
conditions, a possible registered public offering of RCN Common Stock during
the second or third quarter of 1998. In addition, depending on market
conditions, RCN may also consider a public offering or private placement of
additional debt securities during the second or third quarter of 1998. There
can be no assurance that any such offering or placement will be completed or
that additional financing will be available to RCN 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 RCN's development
and expansion plans and expenditures. Any of these events could impair RCN's
ability to meet its debt service requirements and could have a material
adverse effect on its business.
RCN Cable and certain of its subsidiaries have in place secured
credit 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 December 31,1997, $100,000 of the Term
Credit Facility was outstanding. The term loan must be repaid over six years
in quarterly installments, at the end of September, December, March and June
of each year from September 30, 1999 through June 30, 2005. As of December 31,
1997, $3,000 principal was outstanding under the Revolving Credit Facility.
Revolving loans may be repaid and reborrowed from time to time. Borrowings
under the Credit Agreement are available for certain financing activities. 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.
RCN has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At December 31, 1997, after giving effect
to 1998 Notes Offering, RCN had an aggregate of approximately $1,036,000 of
indebtedness outstanding, and the ability to borrow up to an additional
$22,000 under the Credit Agreement. As a result of the substantial
indebtedness of RCN, RCN's fixed charges are expected to exceed its earnings
for the foreseeable future. In addition, RCN will require substantial
additional indebtedness particularly in connection with the buildout of RCN's
networks and the introduction of its telecommunications services to new
markets. The leveraged nature of RCN could limit its ability to effect future
financing or may otherwise restrict RCN's business activities.
The extent of RCN's leverage may have the following
consequences: (i) limit the ability of RCN 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
RCN'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 RCN's flexibility in planning for, or reacting to,
changes in its business; (iv) place RCN at a competitive disadvantage as
compared with less leveraged competitors; and (v) render RCN more vulnerable
in the event of a downturn in its business.
For the year ended December 31, 1997, RCN's net cash provided
by operating activities was $1,661, comprised primarily of a net loss of
($52,391) adjusted by non-cash depreciation and amortization of $53,205, other
non-cash items totaling ($611) , working capital changes of $377 and changes
in other deferred expenses of $1,081. Net cash used in investing activities of
$475,860 consisted primarily of purchases of short-term investments of
$445,137, additions to property, plant and equipment of $79,042 and
acquisitions of $30,490 (primarily acquisition of the minority interest of
Freedom) partially offset by sales and maturities of short-term investments of
$76,923. Net cash provided by financing activities of $635,266 consisted
primarily of issuance of long-term debt of $688,000, change in affiliate notes
of $97,624 and transfers from C-TEC of $89,324 partially offset by redemption
of long-term debt of $141,250, transfers to C-TEC of $23,474, payments made
for debt financing costs of $19,743 and an increase related to cash restricted
for debt service of $61,250.
For the year ended December 31, 1996, RCN's net cash provided
by operating activities was $23,831 comprised primarily of a net loss of
$5,989 adjusted by non-cash depreciation and amortization of $38,881 and other
non-cash items totaling ($7,184). Net cash used in investing activities of
$9,377 consisted primarily of additions to property, plant and equipment of
$40,369, the purchase of a loan receivable of $13,088 and acquisitions of
$30,090 (primarily the Freedom Acquisition), partially offset by net sales and
maturities of short-term investments of $73,995. Net cash provided by
financing activities of $9,391 included the issuance of long-term debt of
$19,000 and change in affiliate notes of $32,802 partially offset by the
redemption of long-term debt of $44,750.
Impact of the Year 2000 Issue
RCN has certain financial, administrative and operational
systems which are subject to Year 2000 exposures. RCN has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion. RCN's plan is proceeding on
target. The plan includes ensuring that those systems for which RCN is
dependent on external vendors, such as certain billing systems, will be Year
2000 compliant by the end of 1999 based on the status of external vendors'
remediation efforts. For those internal systems that require corrective
action, RCN has contracted with its information systems services provider to
rewrite the relevant programming code. Finally, RCN 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 RCN 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.
RCN 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 RCN's plans will continue to
progress as intended. RCN estimates that its cost of Year 2000 remediation
will not be material.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF LANCIT
The selected historical consolidated financial data for the
fiscal years ended June 30, 1994 and 1993, and as of June 30, 1995, 1994 and
1993 are derived from Lancit's audited historical consolidated financial
statements not included in this Proxy Statement--Prospectus. The selected
historical consolidated financial data for the fiscal years ended June 30,
1997, 1996 and 1995, and as of June 30, 1997 and 1996 are derived from and
should be read in conjunction with the Lancit Audited Financial Statements
included elsewhere in this Proxy Statement--Prospectus. The summary
consolidated financial data for the six-month periods ended December 31, 1997
and 1996 are derived from and should be read in conjunction with the Lancit
Unaudited Financial Statements included elsewhere in this Proxy
Statement--Prospectus. The Lancit Unaudited Financial Statements include, in
management's opinion, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results for such periods.
Results for the six months ended December 31, 1997 are not necessarily
indicative of results to be expected for the entire year ending June 30, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of Lancit" and the Lancit Financial Statements.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues................ $ 3,152,057 $ 9,061,213 $17,882,479 $ 8,914,698 $ 3,670,990
Net income (loss)(1).... $ (10,078,908) $(3,700,713) $ 1,247,499 $ 34,874 $ (996,823)
Basic income (loss) per
common share(1)....... $ (1.54) $ (.60) $ .20 $ .01 $ (.25)
Basic weighted average
shares used in
computation........... 6,538,851 6,177,051 6,127,551 5,560,999 3,944,010
Diluted income (loss)
per common share(1)... $ (1.54) $ (.60) $ .20 $ .01 $ (.25)
Diluted weighted
average shares used
in computation........ 6,538,851 6,177,051 6,365,741 6,154,223 3,944,010
Balance Sheet
Data:
Total assets............ $ 9,199,313 $14,388,166 $22,395,858 $16,926,998 $ 5,494,714
<CAPTION>
Six Months
Ended December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Statement of (unaudited)
Operations Data:
Revenues................ $ 832,520 $ 1,389,883
Net income (loss)(1).... $(2,635,753) $(1,467,914)
Basic income (loss) per
common share(1)....... $ (.40) $ (.23)
Basic weighted average
shares used in
computation........... 6,634,750 6,443,952
Diluted income (loss)
per common share(1)... $ (.40) $ (.23)
Diluted weighted
average shares used
in computation........ 6,634,750 6,443,952
Balance Sheet
Data:
Total assets............ $ 6,692,888 $17,235,497
</TABLE>
(1) Net income (loss) for fiscal 1997 includes a charge of $5,456,180, or $0.83
per share, for a non-cash write-down related to projects and, for fiscal
1996, includes a charge of $2,650,000, or $0.43 per share, for a non-cash
write- down related to a project and a restructuring charge. See the
Lancit Financial Statements and related notes thereto.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF LANCIT
Certain statements contained in this Proxy Statement--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, plans to develop and produce programs and
plans for obtaining additional funding. 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. See "Risk Factors--Lancit Risk
Factors."
The following discussion should be read in conjunction with the
Lancit Financial Statements and the Notes thereto included elsewhere in this
Proxy Statement--Prospectus.
Results of Operations
Six months ended December 31, 1997 as compared to six months
ended December 31, 1996
Production and royalty revenues for the six month period ended
December 31, 1997 decreased to $381,732 from $746,008 in the comparable 1996
six month period. This decrease is primarily the result of reductions in
production activity on Reading Rainbow in the amount of approximately $526,000
and Backyard Safari[Trademark] in the amount of approximately $196,000, which
were partially offset by revenues from final production activity on No
Really[Trademark] of approximately $46,000 and broadcast renewal fees on The
Puzzle Place of approximately $270,000.
Licensing agent fee revenues for the six month period ended
December 31, 1997 decreased to $450,788 from $643,875 in the comparable 1996
six month period. This decrease is primarily the result of the expiration of
certain license contracts on The Puzzle Place amounting to approximately
$39,000 and reductions in royalties on the Sonic[Registered] the Hedgehog
property of approximately $140,000.
Production and royalty expenses for the six month period ended
December 31, 1997 increased to $1,120,320 (or 293.5% of related revenues) from
$978,991 (or 131.2% of related revenues) in the comparable 1996 six month
period reflecting primarily increased payments for broadcast renewal rights
license fees on The Puzzle Place in the amount of approximately $209,000,
increased development costs of approximately $279,000 and final production
activity on No Really of approximately $41,000, all of which was partially
offset by reduced production activity on Reading Rainbow of approximately
$366,000. Production and royalty expenses include costs associated with
development activities, which did not result in the generation of current
revenues for Lancit, contributing to the increase in the percentage of these
expenses to related revenues.
Direct costs of licensing agent activities for the six month
period ended December 31, 1997 decreased to $275,277 from $440,248 in the
comparable 1996 six month period primarily as a result of reduced personnel
costs of approximately $91,000, reduced travel costs of approximately $17,000
and reduced trade show and advertising expenses of approximately $34,000, all
of which were directly related to the restructuring of the licensing agent
operation of The Strategy Licensing Company, Inc. ("Strategy"), Lancit's
licensing subsidiary.
General and administrative expenses for the six month period
ended December 31, 1997 rose to $2,111,400 from $1,500,770 in the comparable
1996 six month period, primarily as a result of initiatives involving new
personnel and Lancit's restructuring, resulting in increases in personnel
costs of approximately $150,000, office related costs of approximately $97,000
and insurance costs of approximately $57,000, as well as increased legal and
other professional fees of approximately $281,000.
Interest income, net for the six month period ended December
31, 1997 decreased to $82,441 from $113,813 in the comparable 1996 six month
period. This decrease is primarily due to a reduced level of cash invested in
1997 compared to 1996.
There was no provision for income taxes recorded for the six
month period ended December 31, 1997, or for the comparable 1996 six month
period, as both periods showed a loss.
Minority interest in licensing activities for the six month
period ended December 31, 1997 was $43,717 compared to $51,601 in the
comparable 1996 six month period. This is primarily the result of increased
profitability at a subsidiary where there is a minority owner.
Net loss for the six month period ended December 31, 1997 was
$2,635,753 ($.40 per share) compared to a net loss of $1,467,914 ($.23 per
share) in the comparable 1996 six month period primarily as a result of the
combination of all factors discussed above. Weighted average shares
outstanding for the six month period ended December 31, 1997 increased to
6,634,750 from 6,443,952 in the comparable 1996 six month period primarily as
a result of the inclusion for the full six months of shares issued to DCI
related to its purchase of a 6.6% equity stake in Lancit as well as the
exercise of stock options during the twelve month period since December 31,
1996.
Fiscal 1997 as compared to Fiscal 1996
Production and royalty revenues for the fiscal year ended June
30, 1997 decreased to $1,943,807 from $6,812,975 for the fiscal year ended
June 30, 1996. This decrease is primarily the result of significant reductions
in production activity on The Puzzle Place in the amount of approximately
$3,561,000, Backyard Safari in the amount of approximately $629,000 and
Reading Rainbow in the amount of approximately $1,873,000, all of which was
partially offset by revenues from production activity beginning in the third
quarter of fiscal 1997 on No Really in the amount of approximately $573,000
and a series of promotional spots for the Discovery Kids programming block in
the amount of approximately $741,000.
Licensing agent fee revenues for the fiscal year ended June 30,
1997 decreased to $1,208,250 from $2,248,238 in the fiscal year ended June 30,
1996. This decrease is primarily the result of reduced revenue recognition
resulting from the adjustment of the licensing terms for several licensees on
The Puzzle Placeamounting to approximately $584,000 and reductions in
royalties on Sonic The Hedgehog of approximately $392,000.
Production and royalty expenses for the fiscal year ended June
30, 1997 decreased to $3,026,577 (or 155.7% of production and royalty
revenues) from $6,580,666 (or 96.6% of production and royalty revenues) in the
fiscal year ended June 30, 1996, reflecting primarily decreased production and
royalty activity on The Puzzle Place in the amount of approximately $3,339,000
and reduced production activity on Reading Rainbow in the amount of
approximately $1,640,000 and Backyard Safari in the amount of approximately
$409,000, all of which was partially offset by revenues from production
activity beginning in the third quarter of fiscal 1997 on No Really in the
amount of approximately $520,000 and a series of promotional spots for the
Discovery Kids programming block in the amount of approximately $733,000.
Also included in production and royalty expenses were costs associated with
development activities of approximately $384,000, which did not result in the
generation of current revenues and therefore contributed to the increase in
the percentage of these expenses to related revenues.
Direct costs of licensing agent activities for the fiscal year
ended June 30, 1997 decreased to $809,823 from $1,175,699 in the fiscal year
ended June 30, 1996 primarily as a result of reductions in personnel costs
(approximately $183,000), professional fees (approximately $108,000) and
marketing costs (approximately $79,000).
General and administrative expenses for the fiscal year ended
June 30, 1997 increased to $4,073,089 from $2,438,471 in the fiscal year ended
June 30, 1996. This increase is principally due to personnel costs
(approximately $451,000), a severance charge (approximately $126,000) and
professional fee costs (approximately $422,000) as well as a reduction in
project activities resulting in costs (approximately $398,000) being reflected
as overhead expenses rather than being absorbed as part of project activities.
A non-cash write-down related to film and program costs was
taken during the fiscal year ended June 30, 1997 amounting to approximately
$5.5 million. This non-cash charge, of which approximately $2.1 million
relates to The Puzzle Placeand approximately $3.3 million relates to Backyard
Safari, reflects Lancit's revision of its estimated future net royalty stream
with respect to The Puzzle Place and Lancit's revision of its anticipated
production funding sources and its estimated future net royalty stream with
respect to Backyard Safari. In both cases, Lancit accrued for estimated
remaining project costs.
With respect to The Puzzle Place, Lancit determined that the
licensing relaunch plan developed by Lancit in early 1997 did not appear to
have the revenue generating capabilities that Lancit previously anticipated,
particularly in the short-term. In addition, unexploited licensing categories
previously identified by Lancit with respect to The Puzzle Place had not met
expectations. Further, internationally, Lancit has been finding it to be a
greater challenge than anticipated to distribute the television program,
leading to delays in the building of a licensing campaign.
With respect to Backyard Safari, Lancit obtained an airing
commitment for Fall 1997 which did not include an initial license fee. Because
the program was expected to be aired on a limited basis, at least initially,
Lancit reduced its expected production revenues. Furthermore, negotiations
with certain venues that were expected to help drive merchandise sales were
not successfully completed which further reduced previously estimated
licensing revenues. Because the program had only recently been cleared
domestically, international exploitation of this property, at least initially,
was no longer expected to be significant.
A write-down related to a project and a restructuring charge
during the fiscal year ended June 30, 1996 amounted to $2,650,000. A
project-related charge in the amount of $2,500,000 primarily reflected
revisions in Lancit's future anticipated net royalty stream on The Puzzle
Place project and an effort to adjust the amortization of film and program
costs to those anticipated revenue streams. Additionally, a downsizing of
staff involved with certain projects resulted in a restructuring charge of
$150,000 including severance and other benefits paid to terminated employees.
Interest income, net for the fiscal year ended June 30, 1997
decreased to $255,508 from $276,570 in the fiscal year ended June 30, 1996.
This decrease is primarily due to a reduced level of cash invested during the
current fiscal year, resulting from Lancit's utilization of cash for
production, development and general corporate needs.
Provision for income tax was $19,500 for state and local taxes
for the fiscal year ended June 30, 1997 compared to $87,900 for state and
local taxes in the fiscal year ended June 30, 1996.
Minority interest in Lancit's licensing activities for the
fiscal year ended June 30, 1997 was $101,304 compared to $105,760 in the
fiscal year ended June 30, 1996.
Net loss for the fiscal year ended June 30, 1997 was
$10,078,908 ($1.54 per share) compared to net loss of $3,700,713 ($.60 per
share) in the fiscal year ended June 30, 1996 primarily as a result of the
combination of all factors discussed above. Weighted average shares
outstanding for the fiscal year ended June 30, 1997 increased to 6,538,851
from 6,177,051 in the fiscal year ended June 30, 1996 primarily as a result of
the issuance of shares related to DCI's purchase of its 6.6% equity stake in
Lancit. Net loss for the fiscal year ended June 30, 1997 included a charge of
$5,456,180, or $0.83 per share, for a non-cash write-down related to projects
and, for the fiscal year ended June 30, 1996, included a charge of $2,650,000,
or $0.43 per share, for a non-cash write-down related to a project and a
restructuring charge.
Fiscal 1996 as compared to Fiscal 1995
Production and royalty related revenues for the fiscal year
ended June 30, 1996 decreased to $6,812,975 from $15,532,607 in the fiscal
year ended June 30, 1995 primarily as a result of reduced royalty revenues and
lower levels of production activity related to The Puzzle Place project during
fiscal 1996. In fiscal 1995, revenues included approximately $7,367,000 of
initial copyright holder royalties from licensees of this project. As of June
30, 1996, substantially all of these licensees were still in the process of
recouping initial royalty commitments from product sales. Lancit is not able
to record additional revenues, as copyright holder, until individual licensees
have recouped the royalties previously recognized by Lancit. In addition,
production revenues decreased on Puzzle Place by approximately $2,725,000.
Both of these decreases were offset by increases in production revenues on
Backyard Safari of approximately $631,000, Reading Rainbow of approximately
$277,000 and revenues related to other projects of approximately $465,000.
Licensing agent fees for the fiscal year ended June 30, 1996
remained relatively constant at $2,248,238 compared to $2,349,872 in the
fiscal year ended June 30, 1995.
Production and royalty related expenses for the fiscal year
ended June 30, 1996 decreased to $6,580,666 (or 96.6% of related revenues)
from $13,550,150 (or 87.2% of related revenues) in the fiscal year ended June
30, 1995 primarily related to the decreased level of royalty and production
activity for The Puzzle Place series (approximately $7,439,000). However,
such expenses represented an unusually high percentage of related revenues in
fiscal 1996 primarily due to copyright holder expenses on The Puzzle Place
project remaining relatively high during the fiscal 1996 period of licensee
recoupment on the project. This decrease was partially offset by increases
related to Backyard Safari of approximately $275,000 and increased production
overhead of approximately $182,000.
Direct costs of licensing activities for the fiscal year ended
June 30, 1996 remained relatively constant at $1,175,699 compared to
$1,184,345 in the fiscal year ended June 30, 1995. During fiscal 1996,
increased personnel costs (approximately $105,000) were offset by reduced
travel costs (approximately $106,000).
General and administrative expenses for the fiscal year ended
June 30, 1996 increased to $2,438,471 from $2,168,827 in the fiscal year ended
June 30, 1995. This increase is primarily the result of the hiring of more
personnel (approximately $149,000), as well as higher facilities and insurance
costs (approximately $32,000), increased depreciation and amortization expense
(approximately $59,000) and increased travel and entertainment costs of
approximately $24,000.
A write-down related to a project and a restructuring charge
during the fiscal year ended June 30, 1996 amounted to $2,650,000. Lancit's
decision to record a non-cash project-related charge in the amount of
$2,500,000 primarily reflected revisions in Lancit's future anticipated net
royalty stream on The Puzzle Place project and an effort to adjust the
amortization of film and program costs to those anticipated revenue streams.
Additionally, an overall decrease in production activity during the fiscal
year ended June 30, 1996 resulted in a downsizing of staff involved with
certain projects and a resulting restructuring charge of $150,000 including
severance and other benefits paid to terminated employees.
Interest income for the fiscal year ended June 30, 1996
decreased to $276,570 from $506,316 in the fiscal year ended June 30, 1995.
This decrease was primarily the result of cash being used during the year
which reduced the cash available for investment during the year.
Provision for income taxes - current for the fiscal year ended
June 30, 1996 increased to $87,900 from $38,000 in the fiscal year ended June
30, 1995. This increase was primarily due to state and local income tax
liabilities associated with Strategy, Lancit's licensing subsidiary, and its
interest in the Puzzle Place marketing joint venture.
Minority interest in Lancit's licensing activities decreased to
$105,760 for the fiscal year ended June 30, 1996 from $199,974 for the fiscal
year ended June 30, 1995. This change is the direct result of the change in
the profitability of the licensing activities from year to year.
Net loss for the fiscal year ended June 30, 1996 was $3,700,713,
or $0.60 per share (which includes the above-mentioned write-down related to a
project and restructuring charge amounting to $2,650,000, or $.43 per share)
compared to net income of $1,247,499, or $0.20 per share, in the fiscal year
ended June 30, 1995 as a result of the combination of the factors described
above. Weighted average shares outstanding for the fiscal year ended June 30,
1996 decreased to 6,177,051 from 6,365,741 in the fiscal year ended June 30,
1995 primarily reflecting the exclusion of outstanding anti-dilutive stock
options during the fiscal 1996 loss period.
Liquidity and Capital Resources
Lancit had cash and cash equivalents as of December 31, 1997 of
approximately $3.2 million, and no long-term debt. Notwithstanding Lancit's
cash position at December 31, 1997, Lancit's management believes that
additional funding will be required to enable Lancit to continue to meet its
obligations and to sustain Lancit's operations through the fourth quarter of
the current fiscal year. Lancit had previously announced that it was actively
seeking additional funding and had retained an investment banking firm to
assist it in this effort. Among the alternatives considered by Lancit were a
sale of an interest in Lancit, an acquisition of Lancit, and/or strategic
alliances with industry partners.
On February 27, 1998 Lancit entered into the Merger Agreement
with RCN. Pending the Special Meeting, Lancit has negotiated arrangements
with certain creditors to defer certain of its obligations until after the
estimated date of the Special Meeting.
As of the expected date of the Special Meeting, it is
anticipated that Lancit will have minimal, if any, further cash resources or
access to substantial cash resources. Accordingly, if the Merger Agreement
and the transactions contemplated thereby, including the Merger, are not
approved by the Lancit Shareholders, it is unlikely that Lancit would be able
to sustain its operations, whether in order to pursue an alternative
transaction or otherwise, for any significant period beyond the date of such
meeting, absent a source of additional funding which does not currently exist.
In such event, Lancit would have to consider seeking protection from its
creditors under the Federal bankruptcy laws and/or liquidating.
There has been a trend over the past two to three years of
decreased profitability manifested by the decreases in revenues and the
increases in production and royalty expense and general and administrative
expenses. This trend is expected to continue, at least in the short term.
Lancit's response to this trend, as noted above, has been to seek additional
funding through a sale of an interest in Lancit, an acquisition of Lancit,
and/or strategic alliances with industry partners.
Lancit has also taken steps to reduce, where appropriate, its
operating expenses. These steps include relocating Strategy, its
merchandising and licensing subsidiary, from Westport, Connecticut to Lancit's
New York City offices, and certain staff reductions. These measures are
expected to result in certain reductions to licensing agent direct costs and
general and administrative expenses in the third and fourth quarters of fiscal
1998, when the effect of one-time costs related to staff reductions and the
relocation of Strategy has been reduced and Lancit will have the benefit of a
full quarter of reduced costs related to these items; however, the effect of
these savings will be reduced in some cases by the effect of the minority
interest. In addition, Lancit does not intend to renew the lease for its
Beverly Hills, California office, which expires in April 1998 and has an
annual rental of $24,636.
For the six month period ended December 31, 1997, cash used in
operating activities was approximately $1.3 million, compared to the use of
approximately the same amount for the same period of the prior year. A net
loss of approximately $2.6 million and additions to film and program costs of
approximately $0.6 million were partially offset by a decrease in accounts
receivable of approximately $1.2 million and an increase in deferred revenue -
current of $0.6 million, comprising the major components of cash used in
operating activities for such period.
For the fiscal year ended June 30, 1997, cash used in operating
activities was approximately $3.6 million, compared to approximately $3.9
million for the fiscal year ended June 30, 1996. A net loss of approximately
$10.1 million for the fiscal year ended June 30, 1997, including a non-cash
write down on projects of approximately $5.5 million and depreciation and
other amortization of approximately $0.4 million, net additions to film and
program costs of approximately $1.6 million, a decrease in deferred revenues
of approximately $1.2 million and a decrease in participations payable of
approximately $0.4 million, which were partially offset by a decrease in
accounts receivable of approximately $2.2 million, an increase in accounts
payable and accrued expenses of approximately $1.4 million, comprises the
majority of the cash used in operating activities for fiscal 1997.
For the six month period ended December 31, 1997, cash provided
from financing activities was $0.1 million, compared to $4.7 million for the
comparable 1996 period. Warrants to purchase 100,000 shares of stock were
issued in partial payment and satisfaction of fees owed for services performed
in connection with the September 1996 purchase of a 6.6% stake in Lancit by
DCI.
For the fiscal year ended June 30, 1997, cash used in investing
activities was approximately $55,000 compared to approximately $163,000 for
the fiscal year ended June 30, 1996. Lancit made improvements to its office
space and purchased computer equipment in the fourth quarter of fiscal 1997.
Cash provided from financing activities was approximately $4.7 million for the
fiscal year ended June 30, 1997 compared to approximately $13,000 for the
fiscal year ended June 30, 1996. In September 1996, DCI invested $5 million,
which was partially offset by costs relating to the transaction, in return for
a 6.6% equity stake in Lancit, and the right to purchase what currently
represents an additional 6.2% equity stake in Lancit through the exercise of
warrants at $13 per share.
As of December 31, 1997, Lancit was completing the remaining
elements associated with the outreach for the first 65 episodes of The Puzzle
Place. All the remaining costs for the first 65 episodes of The Puzzle Place
were accrued in fiscal 1997. Lancit estimates that, after it receives the
balance of monies due from the Corporation for Public Broadcasting and KCET,
it will have no remaining funding obligation on the first 65 episodes of this
project.
Lancit's 13 episodes of Backyard Safari, which was partially
funded through a major grant from the National Science Foundation, began
airing on PBS stations in November of 1997. Lancit estimates that its
remaining funding requirement for this project is less than $0.4 million. All
of these remaining costs were accrued in fiscal 1997.
Management does not expect inflation to have a significant
impact on Lancit's business.
Impact of the Year 2000 Issue
Lancit uses primarily "off the shelf" computer software and has
been advised by the manufacturers that most of this software, including
Lancit's accounting and financing software, is Year 2000 compliant.
Additionally, Lancit's hardware has been tested and is believed to be Year
2000 compliant. Accordingly, the cost of addressing the Year 2000 issue is
not expected to be material to Lancit and any potential cost to Lancit for
incomplete or untimely resolution of Year 2000 issues is not expected to be
material.
DESCRIPTION OF BUSINESS CONDUCTED BY RCN
Overview
As used in this Description of Business Conducted by RCN
section, "RCN" and the "Company" mean RCN Corporation and its subsidiaries and
those joint ventures in which RCN exercises control.
RCN is developing advanced fiber optic networks to provide a
wide range of telecommunications services including local and long distance
telephone, video programming and data services (including high speed Internet
access), primarily to residential customers in selected markets in the Boston
to Washington, D.C. corridor. RCN believes that its capability to deliver
multiple services (telephone, video programming and Internet access) to any
given customer on its networks will provide it with competitive advantages
over other competitors. RCN's strategy is to become the leading single-source
provider of voice, video and data services to residential customers in each of
its markets by offering individual or bundled service options, superior
customer service and competitive prices.
RCN's initial advanced fiber optic networks have been
established in New York City and, through a joint venture with BECO, in Boston
and surrounding communities. RCN has also entered into a joint venture named
Starpower with Pepco Communications, an indirect wholly owned subsidiary of
PEPCO, to develop an advanced fiber network in the Washington, D.C. area. RCN
also benefits from a strategic relationship with MFS/WorldCom in New York City
and Boston and from its interconnection and resale agreements with incumbent
telephone service providers including Bell Atlantic. RCN believes that these
joint ventures and relationships provide it with a number of important
advantages including access to rights of way and use of existing fiber optic
facilities, the ability to enter its target markets quickly and efficiently
and a reduction in the up-front capital investment required to develop its
networks. In addition, the Company's joint venture partners provide access to
additional assets, equity capital and established customer bases. The Company
also benefits from its relationship with its largest shareholder, LCI, and
from the experience gained by certain of the Company's key employees who
participated in the development of MFS Communications Company, Inc.
As of December 31, 1997, the Company had approximately 267,600
connections which were delivered through a variety of owned and leased
facilities including hybrid fiber/coaxial cable systems, a wireless video
system and advanced fiber optic networks. In addition, the Company gained
approximately 325,000 Internet service customers as a result of the recent
completion of the acquisitions of Ultranet and Erols. 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 "--Properties." At
December 31, 1997, RCN had approximately 82,700 total connections attributable
to customers in the New York City and Boston markets (of which approximately
42,600 were wireless video service and other connections and approximately
24,900 were resold telephone connections) and had approximately 184,900 were
connections attributable to its hybrid fiber/coaxial cable systems in the
states of New York (outside New York City), New Jersey and Pennsylvania, all
within 75 miles of New York City. Because it delivers multiple services, RCN
reports the total number of its various service connections (for local
telephone, video programming and Internet access) rather than the number of
customers. See "--RCN Services--Connections."
RCN's extensive operating experience in both the telephone and
video industries and in the design and development of telecommunications
facilities provides it with expertise in systems operation and development, an
established infrastructure for customer service and billing for both voice and
video services and established relationships with providers of equipment and
video programming. In addition, the Company's management team and board of
directors benefit from experience gained in connection with the management of
C-TEC, which prior to September 30, 1997 owned and operated RCN. See
"--Relationship Among RCN, Commonwealth Telephone 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 which have
resulted from widespread changes in the U.S. telecommunications industry. RCN
believes that density is a critical factor in the effective economic deployment
of its networks, and that the Boston to Washington, D.C. corridor is a
particularly attractive market for developing advanced fiber optic facilities
due to population density, favorable demographics and the aging infrastructure
of the incumbent service providers' network facilities in this region. The
Company applies a subscriber-driven investment strategy focusing on subscriber
density, proximity to the Company's advanced fiber optic networks and network
development costs, in order to determine if the number of potential connections
in a target area will permit network development on an attractive economic
basis.
Business Strategy
The Company believes that the opportunity to effectively deploy
advanced fiber optic networks and to compete with incumbent telephone and
cable television service providers results from several key factors, including
the broad deregulation of the telecommunications industry pursuant to the
Telecommunications Act of 1996, the need for more advanced, higher capacity
networks to meet growing consumer demands for new communications products and
services and the superior technology of the Company's networks. In order to
achieve its goal of becoming the leading provider of telecommunications, video
and data services to residential customers in its target markets, RCN is
pursuing the following key strategies:
Developing Advanced Fiber Optic Networks. RCN's advanced fiber
optic networks are specifically designed to provide a single source for high
speed, high capacity voice, video programming and data services. RCN believes
that its high capacity advanced fiber optic networks provide RCN with certain
competitive advantages such as increased capacity (including the ability to
offer bundled voice, video and data services) and generally superior signal
quality and network reliability relative to the typical networks of the
incumbent service providers. By using advanced fiber optic networks capable of
delivering multiple services, RCN is able to address a larger number of
potential subscriber connections in its target markets than incumbent service
providers which typically provide only single or limited services.
Focusing on Residential Customers in High-Density Markets.
RCN seeks to be the first operator of an advanced fiber optic network
providing voice, video and data services to residential customers in each of
its target markets. RCN believes that it is unique in its markets in offering
a wide range of bundled voice, video and data services to customers in
residential areas and in striving to connect residential customers directly to
its advanced fiber optic networks. RCN also believes that residential
customers will be attracted to lower prices, broader service offerings,
enhanced levels of customer care and consumer choice. Although the Company's
primary focus is on residential customers, RCN also serves certain commercial
accounts which are located on or in close proximity to its networks.
Implementing Subscriber-Driven Investment Strategy. RCN
attempts to efficiently deploy its capital by tying facility development to
the procurement of customer connections. In order to promote its presence in
its markets and to develop a subscriber base for its advanced fiber optic
networks, the Company may provide telephone services to customers located near
its advanced fiber networks by first reselling services, and then by
establishing leased facilities (such as unbundled local loops), in advance of
constructing or extending its networks. RCN also provides wireless video
services to approximately 38,000 customers in New York City with a view to
extending the advanced fiber optic network to service many of these existing
customers. In addition, RCN intends to extend its network to cover the primary
areas currently served by Erols and Ultranet.
Utilizing Strategic Alliances and Existing Facilities to Speed
and Reduce Cost of Entry. By utilizing strategic alliances, RCN is able to
enter the market quickly and efficiently and to reduce the up-front capital
investment required to develop its networks. Through alliances with companies
such as BECO, Pepco Communications and MFS/WorldCom, which provide or are
expected to provide RCN with extensive fiber optic networks or other assets,
by utilizing certain components of its own existing cable television
infrastructure, and through the strategic acquisitions of Ultranet and Erols,
RCN has been able to expedite and reduce the cost of market entry and business
development and has created the opportunity to leverage existing customer
relationships.
Offering Bundled Voice, Video and Data Services. RCN believes
that, as a full service voice, video and data programming provider, it will be
able to offer a single-source package of voice, video and data services,
individually or on a bundled basis, which is not yet generally available from
any incumbent telephone, cable or other service provider. In addition,
services provided over RCN's advanced fiber optic networks are generally
priced at competitive rates as compared to the incumbent service providers.
Providing Superior Customer Service. RCN seeks to provide
superior customer service as compared to incumbent service providers, with
service features such as a 24-hour-a-day call center and quality control
system, on-time service guarantees and bundled service offerings, providing
the consumer with added choice and convenience.
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
---------------------------------------------------------------
12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Connections(1)
Advanced Fiber Optic Networks
Voice..................................... -- -- 370 1,909 3,214
Video..................................... -- -- 1,060 4,870 11,784
Internet.................................. -- -- 81 326 150
---------- --------- --------- --------- ----------
Subtotal.................................. -- -- 1,511 7,105 15,148
Resold Voice.............................. 1,875 2,315 4,672 10,953 24,900
Wireless Video & Other(2)................. 40,162 43,616 46,668 46,053 42,681
---------- --------- --------- --------- ----------
Total RCN Telecom......................... 42,037 45,931 52,851 64,111 82,729
---------- --------- --------- --------- ----------
Hybrid Fiber/Coaxial Cable Operations(3)....... 179,932 180,169 181,790 183,145 184,938
---------- --------- --------- --------- ----------
Total connections......................... 221,969 226,100 234,641 247,256 267,667
========== ========= ========= ========= ==========
</TABLE>
- ----------
(1) Because RCN delivers multiple services, RCN accounts for its customer
activity by the number of individual local telephone, video programming or
Internet access services, or "connections," purchased. Consequently, a
single customer purchasing local telephone, video programming and Internet
access constitutes three connections.
(2) Includes approximately 38,000 wireless connections. RCN classifies
connections provided over advanced fiber optic networks within the "Other"
category until the relevant network is capable of providing voice, video and
data services, including local telephone service through an RCN switch.
"Other" also includes, among other things, wireline video connections
serving the University of Delaware (4,474 connections at December 31, 1997).
(3) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its Hybrid
Fiber/Coaxial Cable Systems in the Lehigh Valley area.
Set forth below is a brief description of RCN's services:
Voice. RCN offers full-featured local exchange telephone
service, including standard dial tone access, enhanced 911 access, operator
services and directory assistance in competition with the incumbent local
exchange providers and CLECs. In addition, RCN offers a wide range of
value-added services, including call forwarding, call waiting, conference
calling, speed dial, calling card, 800-numbers and voice mail. RCN also
provides Centrex service and associated features. RCN's local telephone rates
are generally competitive with the rates charged by the incumbent providers.
At December 31, 1997, RCN had approximately 3,200 telephone service
connections on its advanced fiber optic networks and approximately 24,900
customers for resold telephone service.
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
December 31, 1997, RCN Long Distance Company had approximately 13,595
customers. In the future RCN intends to offer long distance telephone service
predominantly to customers whom it expects will eventually be connected to its
own facilities.
Video Services. RCN offers a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system,
RCN offers from 61 to 110 channels. RCN's basic video programming package
provides extensive channel selection featuring all major cable and broadcast
networks. RCN's premium services include HBO, Cinemax, Showtime and The Movie
Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2.
RCN's StarCinema, available on the Company's advanced fiber optic networks,
utilizes the latest "impulse" technology allowing convenient impulse
pay-per-view ordering of the latest hit movies and special events instantly
from the customer's remote. RCN's "Music Choice" offers 30 different
commercial-free music channels delivered to the customer's stereo in digital
CD quality sound.
As of December 31, 1997, RCN had approximately 11,800
subscribers for its video programming services provided over advanced fiber
optic networks in New York City and Boston. As of such date, RCN also had
approximately 38,000 connections attributable to the wireless video system and
approximately 184,900 connections attributable to the hybrid fiber/coaxial
cable systems.
RCN also acts as a provider of DirecTV direct broadcast
satellite service to multiple dwelling units ("MDUs") in New York City.
DirecTV allows RCN to deliver an additional 175 channels of programming
including exclusive sports programming.
Internet Access and Data Transmission. RCN's StarPass
Internet service provides access for personal computers to RCN's advanced
fiber optic network for a reliable high speed connection to provide access to
electronic mail, World Wide Web, Internet chat lines and newsgroups and remote
access and file transfer services. RCN provides data transmission services
over its advanced fiber optic network either via two-way dial-up modem over
traditional telephone lines or via cable modem utilizing RCN's high capacity
network. RCN also offers private line point-to-point data transmission
services such as DS-1 and DS-3 with the capability to provide higher speed
connections as well. Following the recent Erols and Ultranet acquisitions, RCN
believes it is the largest regional provider of Internet services in the
Northeast.
Migration of Customers to Advanced Fiber Networks
RCN provides wireless video services to customers located near
its advanced fiber optic network in New York City and provides resale
telephone service with a view to extending the advanced fiber optic network
and fully activating RCN's own telephone switches to service many of those
customers. As RCN's advanced fiber optic network is extended into these areas
or buildings, customers receiving wireless video service in New York City will
be switched to the advanced fiber optic network from the wireless video
network, and the wireless video equipment will be used to provide service to
other customers in off-network premises. Similarly, as the advanced fiber
optic network is developed and switches are deployed, voice customers will be
switched to the advanced fiber optic network from resale accounts, thereby
allowing RCN to gain additional revenue (and larger margins) from originating
and terminating access fees and to control the related services and service
quality.
Strategic Relationships
RCN has developed a number of strategic alliances and
relationships in order to provide it with early entry and to reduce the cost
of entry into the market for telecommunications services. RCN expects to
continue to pursue opportunities that may be afforded by entering into
strategic alliances to facilitate network expansion and entry into new
markets.
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 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 RCN 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 RCN Common Stock, to customary registration rights
with respect to such shares.
RCN expects to benefit from the ability to utilize BECO's large
fiber optic network, its focus on innovative technology, its sales and
marketing expertise and its reach into the market. In the future, the venture
may expand into energy management and property monitoring services. Starting
in Boston, the joint venture partners will consider further expansion into
surrounding markets. RCN anticipates that as a result of its access to the
extensive BECO network, RCN's reliance on and utilization of MFS/WorldCom
facilities in Boston will be reduced significantly.
Starpower Joint Venture
On August 1, 1997, RCN Telecom Services, Inc., a subsidiary of
RCN, and Potomac Capital Investment Corporation ("PCI"), a wholly owned
subsidiary of PEPCO, entered into a letter of intent (the "Letter of Intent")
to form a joint venture which will own and operate a communications network to
provide voice, video, data and other communications services to residential
and commercial customers in the greater Washington, D.C., Virginia and
Maryland area (the "Washington, D.C. Market"). Starpower, an unregulated
limited liability company with a perpetual term, was formed on October 28,
1997 by RCN 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 18, 1997 by and
between RCN Washington and Starpower ("Contribution Agreement"). RCN
Washington and Pepco Communications also each paid $12.5 million in cash in
January 1998 as their initial capital contributions.
Pursuant to the Starpower Operating Agreement, RCN Washington
and Pepco Communications are each required to make additional capital
contributions in accordance with a schedule set forth in such agreement on a
50%/50% basis. Failure of either RCN Washington or Pepco Communications to
make a scheduled capital contribution or to vote in favor of certain
additional capital contributions may result in the recalculation of equity
interests. The business and affairs of Starpower is to be managed by RCN
Washington and Pepco Communications. So long as RCN Washington and Pepco
Communications maintain a 50%/50% equity interest in the joint venture, each
of RCN Washington and Pepco Communications will appoint three members to the
operating committee, the approval of which is required for any business
action. Certain fundamental business actions, such as mergers, acquisitions,
sales of substantially all of the assets, liquidation and amendments to the
certificate of organization or any agreement signed at the Starpower Closing,
require the unanimous approval of the operating committee regardless of
whether the parties continue to maintain a 50%/50% ownership interest. Failure
to reach agreement may trigger a deadlock event. In the event a deadlock
arises within the first three years of the joint venture, the proposed action
shall be deemed rejected. If the deadlock arises thereafter, the disputing
party may give a notice to the other party offering to sell its membership or
to purchase all membership interests from the other party; the offeree has the
obligation to elect to buy or sell its interest. Subject to certain
exceptions, neither RCN Washington nor Pepco Communications may sell any
interest in Starpower for four years. Thereafter, RCN Washington or Pepco
Communications may sell any of its membership interests with the written
consent of the other subject to a right of first offer by the other party. RCN
Washington shall be restricted from transferring its interest if Pepco
Communications can demonstrate that such assignment would have a material
adverse impact on Starpower's business. Upon a change of control of RCN
Washington or Pepco Communications, which the other party has reason to
believe will have a material adverse effect on Starpower, the other party may
offer to sell its membership interests 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.
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 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.
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 Trader[SM], Erols' turn-key e-commerce product for small businesses,
(ii) Internet security services, including security consulting and virtual
private networks, and (iii) Web hosting, design and development services.
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 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, RCN is converting
approximately 999,000 Erols 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.
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. 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, UNET Holding, Inc. and Ultranet
entered into an Agreement and Plan of Merger (the "Ultranet Merger
Agreement"). The transaction was completed in February 1998. The total
consideration for the acquisition consisted of approximately $7.9 million in
cash, 890,384 shares of RCN Common Stock and $3 million in deferred
compensation. Additionally, RCN is converting approximately 63,500 Ultranet
stock options to stock options to purchase 117,052 shares of RCN Common Stock
with an average exercise price of $1.825 per share.
RCN also agreed to indemnify Ultranet and its directors,
officers and shareholders 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, a registration rights agreement (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 shareholders 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 shareholders agree to indemnify RCN, severally and on a pro rata
basis, and RCN agrees to indemnify the shareholders 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 shareholders 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 shareholders
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).
Hybrid Fiber/Coaxial Cable Systems
RCN's hybrid fiber/coaxial cable systems were operated by C-TEC
prior to the Distribution. The following table summarizes the development of
the hybrid fiber/coaxial cable systems over the last five years:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed............................ 118,216 119,761 282,836 283,940 290,612
Basic Subscribers....................... 87,660 92,140 176,131 179,932 184,938
Basic Penetration....................... 74.2% 76.9% 62.3%(1) 63.4% 63.6%
Average Monthly Revenue per Subscriber
For Last Month of the Period........... $ 40.98 $ 37.67 $ 36.73 (1) $ 39.99 $ 43.08
</TABLE>
- ----------
(1) Decline in basic penetration levels and average monthly revenue per
subscriber in 1995 reflects the acquisition of the Pennsylvania cable
systems, which are in a market in which a competing franchisee also offers
service.
The service areas for these cable television networks enjoy
favorable customer demographics. The New York and New Jersey systems primarily
serve affluent bedroom communities in suburban New York City, with 28,411 and
76,127 connections at December 31, 1997, respectively. The system in New York
State serves ten municipalities in Duchess, Putnam and Westchester Counties,
approximately 45 miles north of New York City. The New Jersey system serves 31
contiguous municipalities in Hunterdon, Mercer, Morris and Somerset Counties,
approximately 50 miles west of Manhattan. The Pennsylvania system, which is the
largest competitive cable television system in the United States, serves
Pennsylvania's Lehigh Valley area including the cities of Allentown, Bethlehem
and Easton, and virtually all of Lehigh and Northampton Counties, and is located
less than 10 miles west of the Company's New Jersey system.
Interconnection
Because access to the public switched telephone network is an
essential component of any regional or national telecommunications network,
interconnection is critical to RCN's ability to provide voice and data
services. Bell Atlantic and the other incumbent LECs and independent telephone
companies are required to provide interconnection to CLECs such as RCN
pursuant to the facilities-based interconnection requirements of Section 251
of the 1996 Act. Under the 1996 Act, the RBOC's ability to offer 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 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; (iii) receipt by RCN of
access charges for long distance calls made to and from its customers,
including full "pass through" to RCN of such compensation on number
portability; (iv) interim number portability arrangements to allow customers
to keep their telephone numbers when they switch carriers; (v) unbundled
network elements, including local loop transmission from the incumbent LEC's
central offices to the customer's premises distinct from local switching or
other services; (vi) nondiscriminatory access to 911 and emergency 911
services; directory assistance services to allow RCN's customers to obtain
telephone numbers; operator call completion services and white pages directory
listings for RCN's customers; and (vii) access to the poles, ducts, conduits
and rights-of-way owned or controlled by the incumbent LEC at
nondiscriminatory rates. The interconnection agreements generally have an
initial term of three years and are cancellable thereafter at 90 days' notice.
Resale Arrangements
Resale of Bell Atlantic Local Telephone Services
RCN provides local telephone service on a resale basis to
customers not connected to the advanced fiber optic facilities. As of December
31, 1997, RCN had 24,900 customers for local telephone services provided
through agreements to act as a reseller of Bell Atlantic local telephone
services. RCN offers its resale customers competitive telephone rates and
RCN's superior customer service. Resale customers are billed by RCN and RCN
personnel provision customer service requests by coordinating with the
incumbent LECs on the customers' behalf.
RCN has entered into agreements to act as a reseller of Bell
Atlantic local telephone services, which enable RCN to grow its subscriber
base by offering telephone services in advance of connecting the customers to
an advanced fiber optic network. RCN's agreements with Bell Atlantic allow RCN
to purchase at a "wholesale" discount (the amount of which is determined by
regulatory commissions in each state) any telephone services that those
companies offer to their end users, such as local exchange services, vertical
features including Caller ID, Call Waiting, etc., and regional toll calls. The
agreements provide that RCN will be entitled to the most favorable terms and
conditions, including wholesale discounts, available to any telecommunications
carrier reselling similar services.
Long Distance Resale
RCN 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 on network
origination and termination of long distance telephone services throughout the
Mid-Atlantic and New England states. For call origination and completion
throughout the rest of the country, RCN has various resale agreements.
Specifically, RCN has contracted with LCI for 800/888 origination, Frontier
for off network origination of outbound calling and various carriers for
terminating calls.
DirecTV
In October 1996, RCN signed an agreement with DirecTV to
deliver DirecTV's high-power direct broadcast satellite service to MDUs in New
York City. DirecTV allows RCN to offer an additional 175 channels of
programming including exclusive sports programming.
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.
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. RCN Long Distance Company also
provides local telephone service to commercial customers. As of December 31,
1997, RCN Long Distance Company had approximately 13,595 long distance
customers.
International
The Company owns a 40% interest in Megacable, the second
largest cable television provider in Mexico. Megacable owns 22 wireline cable
systems, and one 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 December 31, 1997 their wireline systems passed approximately
635,350 homes and served approximately 209,300 subscribers. Megacable had
revenues of $30.4 million and $23.2 million for the years ended December 31,
1997 and 1996, respectively.
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 RCN, Commonwealth Telephone 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
RCN, Commonwealth Telephone 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 RCN, Commonwealth Telephone 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 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.
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.
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--RCN 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.
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 video industry or on the operations of the Company.
RCN believes that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs provide the most direct
competition to RCN in the delivery of "last mile" connections for voice and
video services.
Incumbent LECs
In each of its target markets for advanced fiber optic
networks, RCN faces, and expects to continue to face, significant competition
from the incumbent LECs (including Bell Atlantic in New York City and Boston),
which currently dominate their local telephone markets. RCN competes with the
incumbent LECs in its markets for local exchange services on the basis of
product offerings (including the ability to offer bundled voice and video
services), reliability, state-of-the-art technology and superior customer
service, as well as price. RCN believes that its advanced fiber optic networks
provide superior technology for delivering high-speed, high-capacity voice,
video and data services as compared to the primarily copper wire based
networks of the incumbent LECs. However, the incumbent LECs have begun to
expand the amount of fiber facilities in their networks and to prepare to
re-enter the long distance telephone service market and, in addition, have
long-standing relationships with their customers.
In addition, under the 1996 Act, and ensuing federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The introduction of such competition, however, also establishes the
predicate for the incumbent RBOCs, such as Bell Atlantic, to provide in-region
interexchange long distance services. The incumbent RBOCs are currently
allowed to offer "incidental" long distance service in-region and to offer
out-of-region long distance service. Once the incumbent RBOCs are allowed to
offer in-region long distance services, they will also be in a position to
offer single source local and long distance service similar to that offered by
RCN and proposed by the three largest IXCs (AT&T, MCI and Sprint). The Company
expects that the increased competition made possible by regulatory reform will
result in certain pricing and margin pressures in the telecommunications
services business.
RCN has sought, and will continue to seek, to provide a full
range of local voice services in competition with incumbent LECs in its
service areas. The Company expects that competition for local telephone
services will be based primarily on quality, capacity and reliability of
network facilities, customer service, response to customer needs, service
features and price, and will not be based on any proprietary technology. As a
result of the comparatively recent installation of RCN's advanced fiber optic
networks, its dual path architecture and the state-of-the-art technology used
in its networks, RCN may have capital cost and service quality advantages over
some currently available local networks relied upon by the incumbent LECs, as
well as the competitive advantage provided by the ability to deliver a bundled
voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a
wide variety of video services directly to subscribers in competition with
RCN. Various LECs currently are providing video services within and outside
their telephone service areas through a variety of distribution methods,
including both the deployment of broadband wire facilities and the use of
wireless transmission facilities. The Company cannot predict the likelihood of
success of video service ventures by LECs or the impact on the Company of such
competitive ventures.
Incumbent Cable Television Service Providers
Certain of RCN's video service businesses compete with
incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in New York City and Boston, primarily
Time-Warner Cable in New York City and Cablevision in Boston. RCN's wireless
video service in New York City competes primarily with Time-Warner Cable. RCN
believes that the expanded capacity and fiber-to-node architecture of its
advanced fiber optic networks in New York City and Boston make it better
equipped to provide high-capacity communications services than coaxial cable
based networks utilizing "tree and branch" architecture. RCN's Pennsylvania
hybrid fiber/coaxial cable television system competes with an alternate
service provider, Service Electric, which also holds a franchise for the
relevant service area.
Since cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis, and the 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems,
well-financed businesses from outside the cable industry (such as the public
utilities that own certain of the poles on which cable is attached) may become
competitors for franchises or providers of competing services.
CLECs and Other Competitors
RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the markets in which RCN offers
its services. Other CLECs, such as Teleport Communications Group, compete for
local telephone services, although they have to date focused primarily on the
market for commercial customers rather than residential customers. In
addition, potential competitors capable of offering private line and special
access services also include other smaller long distance carriers, cable
television companies, electric utilities, microwave carriers, wireless
telephone system operators and private networks built by large end-users,
including Winstar, Dualstar and New Vision. However, RCN believes that, at
least initially, it is relatively unique in its markets in offering bundled
voice, video and data services to customers in residential areas, and in
striving to connect residential customers directly to its advanced fiber optic
network.
Internet Services
The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
accordingly competition in this market is expected to intensify. The Company
competes (or in the future may compete) directly or indirectly with (i)
national and regional ISPs; (ii) established online services; (iii) computer
software and technology companies; (iv) national telecommunications companies;
(v) LECs; (vi) cable operators; and (vii) nonprofit or educational ISPs, and
some of these present or potential future competitors have or can be expected
to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's
online competitors, including America Online, the Microsoft Network and
Prodigy, have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also
introduced competitive flat-rate pricing for unlimited access (without a
set-up fee for at least some period of time). Bell Atlantic has recently filed
with the 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 "Description of the
Business Conducted by RCN--Competition."
Other new technologies may become competitive with services
that RCN can offer. Cellularvision, a provider of LMDS, recently began
offering wireless Internet and video programming services in New York City and
has announced plans to offer telephone service in the future. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. In addition,
a continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors to
RCN. The Company cannot predict whether competition from such developing and
future technologies or from such future competitors will have a material
impact on its operations.
Regulation
The telephone and video programming transmission services
offered by the Company are subject to federal, state and local government
regulation. The 1996 Act, which became effective in February 1996, introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments in which the Company operates. The 1996 Act was
intended to promote competition and decrease regulation of these segments of
the industry. The law delegates to both the FCC and the states broad
regulatory and administrative authority to implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses, preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations,
and sets basic standards for relationships between telecommunications
providers.
Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow incumbent RBOCs
to enter the long distance market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations, and the appeals were consolidated in the United States Court of
Appeals for the Eighth Circuit. On July 18, 1997, the Eighth Circuit found
constitutional challenges to certain practices implementing cost provisions of
the Telecommunications Act that were ordered by certain state PUCs to be
premature; vacated significant portions of the FCC's nationwide pricing rules;
and confined the use of combined unbundled network elements to instances where
the requesting carrier itself would do the combining. On October 14, 1997, the
Eighth Circuit issued a decision vacating additional FCC rules that will
likely have the effect of increasing the cost of obtaining the use of
combinations of an 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.
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, New York, Pennsylvania,
Maryland, the District of Columbia, and Virginia (as well as in some
neighboring jurisdictions where the Company does not currently operate but may
expand in the future). Starpower has filed separately applications for similar
authority in Maryland, the District of Columbia, and Virginia, all of which
have been granted. RCN's resale agreements with Bell Atlantic have been
approved, pursuant to Section 252 of the Communications Act, by state
regulatory commissions in Delaware, the District of Columbia, Maine, Maryland,
Massachusetts, New York, New Jersey, New Hampshire, Pennsylvania, Rhode Island,
Vermont, and Virginia.
RCN Long Distance Company is authorized to offer intrastate
long distance services in Pennsylvania, New York and Massachusetts and, in
addition, has received state regulatory authority to offer such services in 45
other states nationwide. Pursuant to such authorizations, RCN Long Distance
Company is permitted to resell intrastate long distance services both to other
carriers, including RCN's local operating subsidiaries and Starpower for
resale to their end user subscribers, and to its own end user customers.
FCC Regulation of Interstate and International Telephone
Services. RCN, through several of its subsidiaries, including RCN Long
Distance Company, may also provide domestic interstate telephone services
nationwide pursuant to tariffs on file at the FCC, and has been authorized by
the FCC under Section 214 of the 1996 Act to offer worldwide international
services as well. RCN is authorized to resell in-state long-distance services
in 48 states (all except Alaska and Hawaii), and, where required, has
registered with or obtained licenses or certificates from state regulatory
agencies for the provision of this service.
Local Regulation of Telephone Services. Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
RCN will be required to obtain a telephone franchise in order to provide voice
services using its advanced fiber optic network facilities located in the
streets of New York City (although services may be provided over certain
leased or resold facilities pending receipt of a franchise).
Regulation of Video Services
Open Video Systems. In February 1997, RCN subsidiaries were
certified to operate OVS networks in the five boroughs of New York City and,
as part of the BECO joint venture, in Boston and 47 surrounding communities.
Initiation of OVS services is subject to completion of an open enrollment
period for non-affiliated video programmers to seek capacity on the systems
and upon negotiation of certain agreements with local governments. The initial
open enrollment period for both the New York City and Boston area systems has
expired. RCN executed an agreement with the City of Boston on June 2, 1997,
and initiated OVS service in the City on that day. Pursuant to its agreement
with the City of Boston, RCN will be required to pay a fee to the City equal
to 5% of video revenues. RCN has entered into similar OVS agreements or is in
the process of negotiating agreements with certain other Boston-area
municipalities, either to offer OVS services or franchised cable television
services. RCN executed an agreement with the City of New York on December 29,
1997 and has initiated OVS service in the Borough of Manhattan pursuant to
that agreement.
In areas where it offers video programming services as an OVS
operator, RCN is required to hold a 90-day open enrollment period every three
years, during which times RCN will be required to offer capacity on its
network to other VPPs. Under the OVS regulations, RCN must offer at least
two-thirds of its capacity to unaffiliated parties, if demand for such
capacity exists during the open enrollment period. In certain areas, RCN is in
discussions with local municipal authorities to explore the feasibility of
obtaining a cable franchise in lieu of an OVS agreement, and will consider
providing RCN video service pursuant to franchise agreements rather than OVS
certification, if franchise agreements can be obtained on terms and conditions
acceptable to RCN. However, RCN will consider the relative benefits of OVS
certification versus local franchise agreements, including the possible
imposition of universal service requirements, before making any such
decisions. In addition, the current FCC rules concerning OVS are subject to
appeal in the United States Court of Appeals and, to the extent that certain
favorable aspects of the FCC's rules are overturned on appeal, the
determination of whether to operate as an OVS provider versus as a franchised
cable television operator may be affected. Moreover, the incumbent cable
television provider in Boston, Cablevision Systems, has requested that the FCC
permit it to obtain capacity on RCN's Boston area OVS network, and Time
Warner, the incumbent cable television provider in certain communities in the
Boston area, has made a similar filing at the FCC with respect to its request
for capacity on the Boston OVS network. RCN will continue to oppose these
requests, but to the extent that the FCC were to grant any such request(s),
such a result would likely affect the Company's determination as to whether to
operate as an OVS provider versus as a franchised cable television operator.
Prior to its certification as an OVS provider, RCN offered
limited video programming services using the VDT services offered by
MFS/WorldCom in Manhattan and the City of Boston. In February 1997, the FCC
held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly adopted
OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease
video programming distribution operations over the MFS/WorldCom platform. One
of the incumbent cable television companies in New York City has filed a
complaint with the New York Public Service Commission challenging the former
(pre-OVS) operations of RCN and WorldCom under the VDT framework, which
remains pending before that commission.
Wireless Video Services. RCN's 18 GHz wireless video services
in New York City are distributed using microwave facilities provided by
Bartholdi Cable pursuant to temporary authorizations issued to Bartholdi Cable
by the FCC. Bartholdi Cable has agreed to provide transmission services to RCN
until RCN has either converted the wireless video subscribers to its advanced
fiber optic network facilities or has obtained FCC authority to provide such
services pursuant to its own wireless radio licenses. In addition, Bartholdi
Cable has agreed to transfer to RCN the transmission equipment on demand.
Bartholdi Cable's obligation to provide transmission services is subject to
Bartholdi Cable having licenses from the FCC to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are at issue in an FCC proceeding in
which an Initial Decision was released on March 6, 1998. In the Initial
Decision, the Administrative Law Judge found Bartholdi Cable unqualified with
respect to 15 such licenses. The 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 such
jurisdictions. The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits the payment of franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances.
RCN's ability to provide franchised cable television services
is dependent to a large extent on its ability to obtain and renew its
franchise agreements from local government authorities on generally acceptable
terms. RCN currently has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems in New York (outside New York City), New Jersey
and Pennsylvania. These franchises typically contain many conditions, such as
time limitations on commencement and completion of construction, conditions of
service, including the number of channels, the provision of free service to
schools and certain other public institutions, and the maintenance of
insurance and indemnity bonds. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
Approximately 39 of RCN's hybrid fiber/coaxial cable systems' franchises are
due for renewal within the next three years. No assurance can be given that
RCN will be able to renew its franchises on acceptable terms. No one franchise
accounts for more than 7% of RCN's total revenue. RCN's five largest
franchises account for approximately 27% of RCN's total revenue.
The hybrid fiber/coaxial cable systems are also subject to
certain service quality standards and other obligations imposed by the FCC
and, where effective competition has not been demonstrated to exist, to rate
regulation by the FCC as well. RCN's cable television system in Pennsylvania
has been operating in a competitive cable environment for almost 30 years,
with approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, the Company's Pennsylvania
cable system is exempt from many FCC cable television regulations, including
rate regulation. Its other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. With the passage of
the 1996 Act, however, all cable systems rates will be deregulated as
effective competition is shown to exist in the franchise area, or by March 31,
1999, whichever date is sooner. RCN anticipates that the remaining provisions
of the 1992 Act that do not relate to rate regulation, such as the provisions
relating to retransmission consent and customer service standards, will remain
in place and may serve to reduce the future operating margins of RCN's hybrid
fiber/coaxial cable television businesses as video programming competition
develops in its cable television service markets.
The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The 1996 Act and
the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain
providers of telecommunications services to rely upon the protections of the
current law and by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. The FCC has recently adopted new
regulations to govern the charges for pole attachments used by companies
provided telecommunications services, including cable operators. These new
pole attachment rate regulations will become effective five years after
enactment of the 1996 Act, and any increase in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
period of five years beginning on the effective date of the new FCC
regulations. The ultimate outcome of these rulemakings and the ultimate impact
of any revised FCC rate formula or of any new pole attachment rate regulations
on the Company or its businesses cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors and require such programmers to sell
their programming to other multichannel video distributors. These provisions
limit the ability of program suppliers affiliated with cable companies or with
common carriers providing satellite delivered video programming directly to
their subscribers to offer exclusive programming arrangements to their
affiliates. The Communications Act also includes provisions, among others,
concerning horizontal and vertical ownership of cable systems, customer
service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
In addition to the FCC regulations noted above, there are other
FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration
of cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of home
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable
television have previously been introduced in Congress or considered by other
governmental bodies over the past several years. It is probable that there
will be legislative proposals in the future by Congress and other governmental
bodies relating to the regulation of communications services.
Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals.
The data services business, including Internet access, is
largely unregulated at this time (apart from Federal, state, and local laws
and regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers
of data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue
to be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data
services to the extent they use local exchange telephone network facilities for
access to their customers, similar proposals may well be considered by the FCC
or Congress in the future.
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone and video programming industries. Other existing federal
regulations, copyright licensing, and, in many jurisdictions, state and local
franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the manner in which communications companies operate. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted pursuant to the new law on RCN or its
businesses cannot be determined at this time.
Employees
As of December 31, 1997, RCN had 1,150 full-time employees
including general office and administrative personnel. RCN considers relations
with its employees to be good.
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.
Voice Services
Advanced Fiber Optic Networks. The Company's advanced fiber
optic networks in New York City and Boston utilize a voice network that
supports both switched and non-switched (private line) services. Individual
buildings are connected to the network backbone via fiber extensions that are
generally terminated on SONET equipment, which provide redundant and fail-safe
interconnection between the building and the RCN central office or switch
location. In situations where fiber extensions are not yet available, interim
facility connections can be provided by leasing special access facilities
through a leasing arrangement with MFS/WorldCom or the incumbent LEC. In this
regard, RCN has in place arrangements which allow it to lease certain
facilities owned by the incumbent LECs (unbundled local loops and T-1
facilities) to provide voice services. This enables RCN to provide voice and
data services to off-net subscribers who are not physically connected to RCN's
advanced fiber optic network. As RCN's network expands to reach more areas
within a target market, subscribers served by these temporary connections will
be migrated to RCN's advanced fiber optic network. Within a building (or small
grouping of buildings) a voice service hub is established by installing an
Integrated Digital Loop Carrier ("IDLC") device, which acts as the point of
interface between the SONET backbone facility and the intra-building wiring.
Each IDLC is installed with a standby power system and is capable of serving
up to 672 lines. The IDLC is capable of supporting a wide range of both
non-switched services (DS-1, digital data) and switched voice services and
features including ISDN, Custom Calling and CLASS features. Within each
building, internal wiring (twisted pair copper cable) connects the IDLC to the
customer premises and the customer-owned telephone equipment. In certain
instances, voice service is extended to other buildings in the building group
or cluster via either fiber optic cable or twisted pair copper cable. At the
time of initial wiring, RCN generally installs wiring in excess of its initial
requirements, in order to meet future subscriber demand.
Video Programming
Advanced Fiber Optic Networks. There are presently two video
headend locations within RCN's advanced fiber optic networks in New York City
and Boston. The video headends consist of optical transmitters, optical
receivers, satellite receivers, signal processors, modulators, encoding
equipment and network status monitoring and automated tape distribution
equipment. From the headend, the video signal is distributed to individual
fiber nodes or receivers via the same fiber cable backbone used to deliver the
voice and data service. The fiber cable terminates in a fiber optic receiver
within an individual building or service area. From the fiber node, coaxial
cable and related distribution equipment is used to distribute the video
signals to the customer premises. The bandwidth of the video distribution is
a minimum of 750 MHZ, which is capable of supporting a minimum of 110 video
channels. This distribution plant is specifically designed to be predominantly
fiber-based, which increases the reliability and improves the quality of the
services delivered compared to traditional cable television distribution
architectures.
Wireless Video. RCN also owns and operates a "wireless video"
television system (which was formerly operated as Liberty Cable Television of
New York, the operations of which were acquired by RCN in 1996) using
point-to-point 18GHz microwave technology. RCN is utilizing this system in New
York City as an alternate platform for delivering television programming to
buildings that are not yet connected to the advanced fiber optic network. RCN
expects that the majority of the buildings currently served by the wireless
service will ultimately be connected to the network, to the extent that
connection is feasible. As buildings are connected to the RCN network, RCN
will reuse the microwave equipment to provide service to other customers in
off-network premises. The transmission equipment and microwave services used
to provide RCN's wireless service are provided by Bartholdi Cable, which
formerly operated Liberty Cable Television of New York. Bartholdi Cable has
agreed to provide transmission services to RCN until RCN has either converted
the subscribers to its advanced fiber optic network or has obtained FCC
authority to provide such services pursuant to its own licenses. In addition,
Bartholdi Cable has agreed to transfer to RCN the transmission equipment on
demand. Bartholdi Cable's obligation to provide transmission services is
subject to Bartholdi Cable having authority to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are at issue in an FCC proceeding in
which an Initial Decision was released on March 6, 1998. In the Initial
Decision, the Administrative Law Judge found Bartholdi Cable unqualified with
respect to 15 such licenses. The 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[Registered]
Internet Explorer) and SurfWatch(TM) software for parental control over
Internet content access. This software package permits simplified access to
the Internet through a "point and click" graphical user interface. After
installation, the subscriber has a direct connection to the Internet using
Point-to-Point Protocol and access to all of the Internet's resources,
including e-mail, the World Wide Web, Usenet News service and Internet Relay
Chat. Access software automatically displays the Erols World Wide Web site
each time a subscriber logs on, providing Erols with the opportunity to
communicate with its subscribers at the start of each session. Erols maintains
"24 x 7" subscriber and technical support 365 days a year.
Ultranet utilizes K56Flex protocol to support its POPs, a
result of a major mid-1997 upgrade in Ultranet transmission equipment. This
advancement allows users to gain access 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 RCN, 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. RCN 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 RCN.
DESCRIPTION OF BUSINESS CONDUCTED BY LANCIT
Introduction
As used in this Description of Business Conducted by Lancit
section, "Lancit" means Lancit Media Entertainment, Ltd. and its subsidiaries
and those joint ventures in which Lancit exercises control, unless the context
otherwise indicates.
Lancit creates, acquires, develops and produces high-quality
children's "edutainment" and family programming, including the 11-time Emmy
Award-winning Reading Rainbow (including 1997 and 1996 Emmys for "Outstanding
Children's Series"), which is now in its fifteenth year on PBS, and The Puzzle
Place, the award-winning children's program, produced in cooperation with
KCET, now in its fourth year on PBS. Reading Rainbow recently received seven
1998 Emmy nominations. The Puzzle Place has received over 20 broadcast
awards, plus four Emmy Award nominations, including one for 1997's
"Outstanding Children's Preschool Series." Lancit seeks to reach consumers
for its productions via traditional commercial and public broadcast
television, cable television, motion pictures, home video and interactive
media products.
Lancit was formed in New York on June 11, 1979 and became
publicly traded in June 1991 (NASDAQ: LNCT). Lancit includes Lancit Media
Entertainment, Ltd., which is an entity engaged in the acquisition and
development and/or production of properties for television series, motion
pictures, home videos and interactive media products for children and
family-oriented audiences. It has the following wholly owned subsidiaries: Frame
Accurate, Inc. ("Frame"), which provides post-production services that include
personnel, facilities, graphics and dubbing, as well as other editing and
finishing services; Lancit Copyright Corp. ("LCC"), which holds copyrights and
other intellectual property rights; and Strategy, which is a merchandise
licensing and promotions company that performs licensing agent functions and is
a 50.1% participant in The Puzzle Place Marketing Company joint venture
("PPMC").
Lancit has its principal executive offices at 601 West 50th
Street, New York, New York 10019 (212-977-9100).
Overview of Business
Lancit either creates or seeks out and identifies properties
that it believes to be suited to become television series or motion pictures,
either for television or theatrical release. Properties targeted by Lancit for
acquisition are sometimes books or characters developed in another medium.
Upon identification of such properties, Lancit negotiates with the current
holder of the property's rights to obtain an option to develop the property as
a series or motion picture.
Once the concept has been created or rights to the property
have been secured, the property enters a development period. Development
activities include determining the best medium for exploitation of the
property and an appropriate distribution venue, determining a budget for the
project, creating the stories and characters, and, where appropriate,
scripting. Once the property has been developed, Lancit seeks to negotiate
with various distribution venues which would be appropriate for the property
(i.e., broadcast television, cable, theatrical release).
Based on the outcome of these negotiations, Lancit determines
whether it will, in fact, go into production of the property and, if so, the
type of funding required to complete the production. Lancit seeks production
funding from several sources, including underwriting grants and corporate
funding or sponsorship, broadcast license fees, producer fees, royalties and
licensing and distribution advances. In certain cases, Lancit's costs of
production exceed the production funding available, requiring Lancit to
deficit-finance a portion of these production costs, if it elects to go
forward with production.
After production funding has been obtained and primary production
has been completed, the project goes into post-production, which may include
editing of the project, the addition of graphics and effects, opening and
closing credits and other improvements to the original production materials.
Additional revenue opportunities may come from international
sales, publishing tie-ins and, in the case of successful series, licensing
fees and royalties related to sales of merchandise and other consumer items.
Rights in and revenues from these various revenue streams are typically
shared, in a significant fashion, with talent, distributors and others. There
can be no assurance, once Lancit has developed, produced and sold a property,
that it will be a success or, if it is a success, that it will generate income
for Lancit.
Lancit has a number of properties in development that it
believes to be well-suited for the growing children's programming market. See
"--Development." However, even if Lancit successfully develops, produces and
sells these properties, it will be some time, if at all, before they can
become income-producing properties. Lancit requires additional funding in
order to continue its operations and to place these and or other properties
into production. Lancit has been actively exploring a number of alternatives
to obtain such funding. Lancit is also actively seeking guaranteed
distribution arrangements which would reduce the risk of funding such new
programming.
Restructuring; Corporate Transaction
During the fiscal year ended June 30, 1997, Lancit determined
to implement a strategic restructuring plan, the initial phase of which
included an extensive and systematic review of Lancit's operations, cost
structure and balance sheet. As part of this process and Lancit's continuing
analysis, Lancit reviewed the anticipated future revenue streams related to
its projects and recorded a charge of approximately $5.5 million. This
non-cash charge related to film and program costs, of which approximately $2.1
million related to The Puzzle Place and approximately $3.3 million related to
Backyard Safari. The charge reflected Lancit's revision of each of its
estimated future royalty streams with respect to The Puzzle Place and its
anticipated production funding sources and its estimated future net royalty
stream with respect to Backyard Safari. In both cases, Lancit accrued for
estimated remaining project costs.
As part of this restructuring program, management focused more
of Lancit's time and resources on properties that are currently in development
which may have more revenue-producing potential to Lancit, including a new
series currently called Putt Putt 'n Pals, based upon characters developed by
Humongous Entertainment, programming for DCI to fill a minimum of one-sixth of
the programming on Discovery Kids (see "Strategic Programming Alliance with
Discovery Communications, Inc" and "--Development"), and other commercial
broadcasters. See also "--Licensing Agent Activities."
Notwithstanding Lancit's significant cash position at June 30,
1997, Lancit's management believed that additional funding would be necessary
to sustain Lancit's operations through the fourth quarter of fiscal year 1998.
Accordingly, Lancit announced that it was actively seeking additional funding
and had retained an investment banking firm to assist it in this effort. Among
the alternatives considered by Lancit were a sale of an interest in Lancit, an
acquisition of Lancit, and/or strategic alliances with industry partners.
On February 27, 1998, Lancit entered into the Merger Agreement
with RCN. Pending the Special Meeting, Lancit has negotiated arrangements
with certain creditors to defer certain of its obligations until after the
estimated date of the Special Meeting.
As of the expected date of the Special Meeting, it is
anticipated that Lancit will have minimal, if any, further cash resources or
access to substantial cash resources. Accordingly, if the Merger Agreement
and the transactions contemplated thereby, including the Merger, are not
approved by the Lancit Shareholders, it is unlikely that Lancit would be able
to sustain its operations, whether in order to pursue an alternative
transaction or otherwise, for any significant period beyond the date of such
meeting, absent a source of additional funding which does not currently exist.
In such event, Lancit would have to consider seeking protection from its
creditors under the Federal bankruptcy laws and/or liquidating.
Lancit also continued to pursue marketing efforts to generate
cash from production and licensing activities and took steps to reduce, where
appropriate, its operating expenses. These steps included relocating Strategy,
its merchandising and licensing agent subsidiary, from Westport, Connecticut
to Lancit's New York City offices, and certain staff reductions.
Strategic Programming Alliance With Discovery Communications, Inc.
In September 1996, DCI entered into a non-exclusive strategic
programming alliance with Lancit and invested $5 million for an initial 6.6%
equity stake in Lancit. DCI is a large privately-held, diversified media
company which owns cable television's The Discovery Channel and The Learning
Channel, as well as the national retailing chain, The Nature Company.
In May 1997, Lancit entered into a strategic alliance with DCI,
which included a two-year production output agreement with DCI, under which
Lancit will provide one-sixth of The Discovery Channel's Discovery Kids block
of programming, which will expand as the programming block expands. Discovery
Kids is currently a three-hour weekly block. Pursuant to the May 1997
agreement, DCI also agreed to fund 13 half-hours of programming for each of the
1997-98 and 1998-99 seasons. No Really is a show which was already produced
and aired under the original September 1996 arrangement, as were the Discovery
Kids promotional spots. In the fiscal year ended June 30, 1997, DCI accounted
for 64% of Lancit's production and royalty revenues.
Lancit and DCI have agreed that Outward Bound, scheduled to
debut in Fall 1998 with 13 half-hour episodes, will be the first program
produced under the new May 1997 arrangement.
Productions
In addition to Reading Rainbow and The Puzzle Place, Lancit's
television productions include Outward Bound, an original series that follows
a group of young teenagers on Outward Bound wilderness adventure trips, which
is currently in production and scheduled to air on Discovery Kids in Fall
1998, and Backyard Safari, a natural science series for 4-to-8 year olds,
featuring Crinkleroot[Registered], a 3-D animated character featured in Jim
Arnosky's popular series of nature books, which began airing on public
television stations in November 1997 and is now airing on 38 stations
nationwide, in 27 markets including six of the top ten markets.
Reading Rainbow
Lancit is the co-creator of and has produced 130 episodes of
Reading Rainbow, the award-winning daily children's series, hosted by LeVar
Burton, now in its fifteenth broadcast season on approximately 300 PBS
stations nationwide. The series was the winner of the 1996 and 1997 Daytime
Emmy Award for "Outstanding Children's Series." Each episode centers on a
television adaptation of a picture book appropriate for beginning readers.
The episodes were produced pursuant to contracts with GPN/NETV
Network ("GPN") on behalf of itself and WNED-TV, Buffalo ("WNED"). Reading
Rainbow is owned by GPN and WNED, which control all rights to the series,
including merchandising and distribution. Lancit and Frame are paid fees for
producing, directing and providing post-production services to this series.
Revenues related to the series accounted for approximately 30%, 35% and 14% of
Lancit's production and royalty revenues during the fiscal years ended June 30,
1997, 1996 and 1995, respectively. Funding for Reading Rainbow has been provided
by PBS, The Corporation for Public Broadcasting ("CPB"), the National Science
Foundation ("NSF") and others. Funding commitments for future episodes have been
received from NSF and Kellogg's Rice Krispies, and Lancit began pre-production
on five new episodes in January of 1998.
In August 1997, Lancit became the exclusive worldwide licensing
and distribution agent for Reading Rainbow for a term of up to ten years,
subject to meeting certain sales goals. Lancit will receive a customary
license fee based on the percentage of sales of products and merchandise
bearing the Reading Rainbow brand (excluding sales of existing products sold
to the school and library markets) and a customary distribution fee based upon
a percentage of license fees received for continued and expanded distribution
of the program (excluding PBS). Lancit, as licensing and distribution agent
for Reading Rainbow (see "--Licensing Agent Activities"), will seek to expand
the merchandising activities relating to the Reading Rainbow brand, and is
developing plans for brand expansion both domestically and internationally
focusing on publishing, merchandising, foreign television, promotions,
multi-media, home video and learning systems marketed to parents.
The Puzzle Place
In November 1991, CPB awarded Lancit and KCET a $4.5 million
grant to develop and produce The Puzzle Place, designed to be the first new
major daily preschool series created for public television since the premiere
of "Sesame Street" in 1969. The series premiered on January 16, 1995 with an
initial 40 episodes delivered to PBS. Episodes 41 through 65, produced between
March 1995 and December 1995, began airing in February 1996.
In June 1997, Lancit and KCET entered into an agreement with
PBS, pursuant to which PBS would reimburse Lancit and KCET up to $1.0 million
in actual costs of securing additional releases of episodes one through 65 of
the series in return for domestic broadcast rights to the series through
December 1998. In addition, if Lancit and KCET deliver ten new episodes on or
before November 1, 1998 for airing on or before January 1, 1999, PBS will
reimburse up to $688,000, plus any unused portion of the previous $1.0 million
in funding, toward securing additional releases of the first 65 episodes in
exchange for domestic broadcast rights to the series through June 30, 2000.
Lancit and KCET share equal ownership in all ancillary rights
to the series. CPB is entitled to receive a 19% profit participation in
ancillary sales of the project but has committed to invest proceeds which
would otherwise be received under this participation, from contracts in effect
as of November 1, 1997, towards the production funding shortfall on the first
65 episodes.
As of June 30, 1997, Lancit had received all but approximately
$100,000 of the full amount of the project grants and had recognized
substantially all of the revenues related to them over a four-year period
ending June 30, 1997. As of June 30, 1997, the remaining promotion and
outreach efforts required under the CPB grant for the series are still
continuing. Production and royalty revenues related to The Puzzle Place
accounted for less than 1% of Lancit's production and royalty revenues during
the fiscal year ended June 30, 1997 and approximately 48% and 83% of Lancit's
production and royalty revenues during the fiscal years ended June 30, 1996
and 1995, respectively.
Lancit and KCET have actively sought funding from various
sources to support the production of ten new episodes. International Home
Foods, Inc./Chef Jr. has agreed to provide funding in the amount of $1.25
million over the next three years. CPB has agreed to provide an additional
$1.0 million in funding. Lancit and KCET began production of the ten new
episodes, required to be delivered to PBS by November 1, 1998, in January
1998. The budget of $3.1 million for the ten new episodes includes
approximately $650,000 for outreach and promotion activities of which
approximately $400,000 is already in place from Carnegie Corporation of New
York, the Surdna Foundation and The Ford Foundation. After taking into
account Lancit's partner's contribution to the new episodes, Lancit's
remaining shortfall in the project is estimated at $100,000.
During the fiscal year ended June 30, 1994, Lancit, through
Strategy, established PPMC, a joint venture with KCET to manage the
exploitation of the various ancillary rights associated with The Puzzle Place.
Lancit has recognized revenues of $741,420, $1,325,868 and $1,351,007 during
the fiscal years ended June 30, 1997, 1996 and 1995, respectively, resulting
from its role in the joint venture. PPMC continues to service The Puzzle Place
licensee accounts and generates fees from such activities. However, Lancit
believes that early licensee and retailer expectations for sales of licensed
products related to the property were excessively high and that the product
introduction, shortly after the show began airing, into an unusually weak
overall retail climate led to disappointing retail sales in a number of
product categories. Lancit, with KCET, has agreed to restructure royalty
payment schedules and license terms with certain licensees in order to reflect
more closely the anticipated future royalty stream expected to be generated by
those particular categories. There can be no assurance that Lancit will not
effect such a restructuring again in the future.
During the fiscal year ended June 30, 1997, Lancit determined
that the licensing relaunch plan for The Puzzle Place developed by Lancit in
early 1997 did not appear to have the revenue generating capabilities that
Lancit previously anticipated, particularly in the short-term. In addition,
unexploited licensing categories previously identified by Lancit have not met
expectations. Further, internationally, Lancit has been finding it to be a
greater challenge than anticipated to distribute the television program,
leading to delays in the building of an international licensing campaign. As a
result of all of these factors, Lancit recorded a non-cash charge in the
amount of approximately $2.1 million for the fiscal year ended June 30, 1997,
which included an accrual for the estimated remaining program cost. For the
fiscal year ended June 30, 1996, Lancit recorded a non-cash charge of
approximately $2.5 million to reflect its reduced royalty expectations.
Based on the history of certain other well established PBS
children's series, consumer awareness levels appear to reach their peak
several years after a show's debut. Although there can be no assurance that
the same will hold true with The Puzzle Place, Lancit will seek to work
closely with licensees and potential retail partners to heighten the retail
popularity of the property.
Backyard Safari
Lancit has completed production and post-production on the
initial season of 13 half-hour episodes of Backyard Safari, a natural science
television series for young children. In September 1997, Lancit entered into
an agreement to launch Backyard Safari on public televisions stations, the
show debuted in November 1997 and as of February 1998 the program airs on 38
stations nationwide in 27 markets, including six of the top ten markets. In
addition, Lancit has entered into an agreement with GPN for distribution of
Backyard Safari to the national school and library market. The show combines
live action field trips with "3-D" performance animation to explore the
wonders of nature. In 1993, Backyard Safari was the recipient of a $1.69
million underwriting grant from the NSF, the primary grantor of the project,
and the project has been developed in cooperation with the American Museum of
Natural History.
In June 1994, Lancit and Manhattan/Transfer Edit entered into
an agreement under which Lancit utilized the technology of Manhattan/Transfer
Edit's digital animation stage to create the motion capture effects for
Backyard Safari's animated co-host, Crinkleroot. As part of the agreement,
Manhattan/Transfer Edit received a profit participation in the series.
Lancit continues to work toward securing additional production
funding from potential sources of underwriting. In the event that Lancit were
to receive no amounts from sources of outside production funding, Lancit
estimates that its remaining cash outlay required for this project beyond June
30, 1997 would be less than $400,000.
Because the program is expected to be aired on a limited basis,
at least initially, Lancit has reduced its projected production revenues.
Furthermore, negotiations with certain venues that were expected to help drive
merchandise sales were not successful, which further reduced previously
estimated licensing revenues. Also, as the program has only recently been
cleared domestically, international exploitation of this property, at least
initially, is no longer expected to be significant. As a result of all of
these factors, Lancit recorded a non-cash charge of approximately $3.3 million
during the fiscal year ended June 30, 1997, which included an accrual for
estimated remaining project costs.
Lancit currently owns all rights to the Backyard Safari series
and related products as well as the exclusive right to license the Crinkleroot
character as part of the series licensing effort. Lancit will act as exclusive
licensing agent for the series in a wide range of product categories.
Outward Bound
Outward Bound is the first series under Lancit's new output
arrangement with DCI. See "--Strategic Programming Alliance with Discovery
Communications, Inc." Lancit has signed a co-production deal with the
wilderness adventure company Outward Bound, Inc. for a series that follows the
experiences of a group of young teenagers on Outward Bound adventure trips. A
distribution arrangement with DCI is in place, pursuant to which an initial 13
episodes are on order for airing in Fall 1998 (with DCI having options to
order additional episodes). With respect to the series, Lancit, together with
Outward Bound, Inc., will retain copyright and control of all foreign
broadcast rights (except those for Latin America) and all other rights,
including home video and all other ancillary rights. Lancit and Outward Bound,
Inc. also retain the copyright and control of the domestic television rights
subject to the five-year (three years for Latin America) DCI license. Should
Outward Bound decide to begin a licensing and merchandising effort, Lancit
will be the exclusive licensing agent of these rights.
Preproduction on this series commenced in January 1998, and
principal photography began in February 1998.
No Really
Under the September 1996 agreement with DCI, Lancit produced No
Really for the Discovery Kids programming block. DCI funded the cost of the
production of the series, which represented 26% of Lancit's total production
and royalty revenues for the fiscal year ended June 30, 1997. The series
debuted in April 1997, and the six half-hour episodes produced have already
aired. Under the terms of the agreement with DCI, Lancit is not entitled to
any further revenues from the series.
"Discovery Kids" Promotional Spots
Under the September 1996 agreement with DCI, Lancit produced a
series of promotional identity spots for the Discovery Kids programming block.
DCI funded the project, and Lancit received a producer fee. The project
accounted for 38% of Lancit's total production and royalty revenues for the
fiscal year ended June 30, 1997. Under the terms of the agreement with DCI,
Lancit is not entitled to any further revenues from the series.
Development
Lancit has numerous projects in development. However, as is
typical in the television and film industry, only a relatively small number of
such projects are ultimately produced. There can be no assurance that Lancit's
efforts in developing or acquiring potential new programs, including any of
the projects in development described below, will lead to production
commitments or that any programs that are ultimately produced will be
successful. Pursuant to the Merger Agreement, Lancit is precluded from
entering into any material transaction, contract or commitment, including in
relation to projects in development, without the consent of RCN. See also
"Management's Discussion and Analysis of Financial Condition and Result of
Operations of Lancit--Liquidity and Capital Resources."
Series in Development
Lancit has a number of television projects in development,
including: Humongous's Putt-Putt[Registered] & Pals (Freddi Fish & Pajama Sam),
an original treatment for an animated series based on Humongous Entertainment's
award-winning, best-selling CD-ROMs; The Zack Files based on the Grosset &
Dunlap book series by Dan Greenburg; Seekers, a half-hour series being developed
in conjunction with the Smithsonian Institution; Danger Guys, an
action-adventure series based on the popular children's books; and The Saddle
Club, based on the popular sixty-five book series of the same title. Lancit also
has television and merchandising rights to many other projects, including
Lemmings and Broderbund Software's KID PIX.
Feature Films in Development
Lancit is currently developing a number of feature film
projects, including: Fenwick's Suit, based on the Farrar, Straus & Giroux
picture book of the same name by David Small, a comedy currently in
development with Fox 2000; The Giver, a best-selling children's fiction book,
as a feature with Jeff Bridges' AsIs Productions; The Watsons Go to Birmingham
- - 1963, with Whoopi Goldberg and her company, One Ho Productions; and The
Adventures of Taxi Dog, based on the popular Dial Press book series by Sal and
Debra Baracca. Other film properties in early development stages include
Sleepless Beauty, Christmas Crime and Coming of Age with Elephants. Should any
of these films go into production, Lancit would seek to recoup its development
costs, receive producer fees and a participation in the film's revenue and
would not be required to incur any other future costs in association with
these projects. There can be no assurance that any of these films will go into
production or that, if any of them do, that they will ultimately be successful.
Licensing Agent Activities
In September 1997, Lancit became the exclusive worldwide
licensing and distribution agent for Reading Rainbow for all product and
distribution categories other than PBS and existing products sold to the
school and library markets for a term of up to ten years, subject to meeting
certain sales goals. Lancit, as licensing agent for Reading Rainbow, seeks to
expand the merchandising activities relating to the Reading Rainbow brand.
Reading Rainbow has established brand recognition with children, parents,
teachers, educators, publishers and librarians. Lancit has developed and has
begun implementing extensive plans for brand expansion both domestically and
internationally, focusing on publishing, merchandising, foreign television,
promotions, multi-media, home video and learning systems marketed to parents.
There can be no assurance that any or all of these expansion plans will come
to fruition.
Lancit, through Strategy, a merchandising, licensing, and
promotions company, performs licensing agent functions for properties and
characters owned by Lancit, as well as for outside clients, including
Humongous Entertainment and Broderbund Software. Revenues typically are
derived from fees based upon the royalties and advances earned by its clients
from the sale of licensed consumer products and promotions through the use of
a client's copyrights, trademarks and trade names.
Strategy acts as merchandising agent for some well known
interactive properties, including Putt-Putt, Freddi Fish, and Pajama Sam for
Humongous Entertainment; Lemmings for Sony Interactive; and KID PIX for
Broderbund Software. Strategy continues to handle licensing and promotion
activities for The Puzzle Place and Backyard Safari.
In October 1997, Lancit entered into an agreement with Arlene
J. Scanlan, pursuant to which Lancit acquired the remaining 15% of the
outstanding shares of the capital stock of Strategy held by her. Thereafter,
Lancit moved the Strategy business from Westport, Connecticut to its principal
offices in New York City and as part of its strategic restructuring reduced
the Strategy work force by more than 50%.
Post Production Services
Frame provides post-production services that include personnel,
facilities, graphics and dubbing, as well as other editing and finishing
services.
Frame occupies approximately 20% of Lancit's 17,000 square feet
of production/office space in New York City and provides various post-production
services for Lancit's own productions. Post-production activities include
off-line analog and random access editing, creation of special effects,
computer-generated 3-D and digitized graphics, and on-line mastering and
duplication subsequent to the completion of production of a project. Random
access Avid[Trademark] editing systems, as well as other computer hardware and
software, have been purchased over the last few years to enhance Frame's range
of services. Frame makes facilities available for post-production services to
outside producers, when the facilities are not being used on Lancit projects.
Trademarks, Service Marks and Copyrights
LCC was formed to own and administer various copyrights created
by Lancit and currently administers all of the music publishing interests
which Lancit retains with respect to the music sound tracks for both The
Puzzle Place and Backyard Safari, as well as for other productions created by
Lancit.
Lancit owns various United States trademarks, service marks and
copyrights, including The Puzzle Place and Backyard Safari. Lancit endeavors
to take commercially reasonable actions to protect the marks and copyrights
created and acquired in its business. Certain of Lancit's trademarks, service
marks and copyrights may be considered material to Lancit's business.
Lancit's ability to obtain the rights to subject matter
appropriate for children's and family programming is a factor that contributes
to Lancit's ability to develop and market such programming and to efficiently
produce and distribute its products. Lancit endeavors to obtain rights for
merchandising and licensing and home video in order to enhance the value of
the properties.
Competition
Competition in the television production, distribution and
syndication industries is intense, with many companies competing for available
literary properties, creative personnel, talent, production personnel,
distribution channels and financing, which are essential to create, acquire,
develop, produce and distribute product. Lancit's competitors include motion
picture studios, television networks and independent television production
companies, which have become increasingly active in children's programming,
and many of which have substantially greater financial and other resources
than Lancit. Lancit competes for broadcast commitments and production funding
for public television projects with Children's Television Workshop, other
independent production companies and projects produced by local public
television stations. Should Lancit continue to attempt to expand into other
areas, including commercial television, it would face more intense competition
from other, larger entities, which have substantially greater financial and
other resources than Lancit, such as The Walt Disney Company, Fox,
Nickelodeon, Jim Henson Productions, Scholastic Productions, Cinar, and
certain television syndicators, production companies, and networks which also
seek to attract the children's/family audience segments with their
programming. In addition, there is a strong trend toward vertical integration
in the business, with more networks owning productions, making it more
difficult for smaller, independent companies such as Lancit to obtain
favorable production financing and distribution terms.
In the licensing industry, there is strong competition from other
independent licensing agencies and from the in-house licensing divisions of
other production companies and motion picture and television studios.
With respect to its post-production activities for third
parties, if any, Frame faces significant competition from many other
independent and other in-house, post-production facilities.
Employees
As of March 23, 1998, Lancit had 28 full-time employees, 20 of
whom are engaged in production and related activities, and 8 of whom are in
administration. Lancit has an in-house staff of experienced, core production
personnel as well as researchers and designers. As is customary in the
industry, in order to meet the staffing requirements of a production, from
time to time Lancit augments its full-time creative staff by contracting with
writers, directors, technical and other production personnel known to Lancit,
generally through paymaster service or loanout companies.
Lancit is party to collective bargaining agreements with the
American Federation of Television and Radio Artists (with respect to The
Puzzle Place and Backyard Safari) and the Writer's Guild of America. Some of
Lancit's current and proposed business activities may be affected by the
existence of certain collective bargaining agreements with the Directors Guild
of America and the Screen Actors Guild, as many of the performing artists,
writers, technical and other production personnel that Lancit may call upon
are members of such unions and/or guilds.
Properties
Lancit's principal production offices and its post-production
service facility, as well as its executive offices, are located at 601 West
50th Street, New York, New York 10019 pursuant to two leases with the same
unrelated party. The combined leases cover approximately 17,500 square feet
and both expire in September 1998. The aggregate annual base rent is
approximately $223,000 through September 1998.
Lancit has maintained development offices at 9454 Wilshire
Boulevard, Beverly Hills, California 90212, pursuant to a lease expiring in
April 1998 and which Lancit does not intend to renew, with an unrelated party,
for approximately 930 square feet at an aggregate annual rental of
approximately $24,000.
Strategy's licensing activities, previously based in Westport,
Connecticut, have been moved into Lancit's New York City offices and,
effective November 10, 1997, Lancit terminated its remaining lease obligation
for a one time payment in the amount of $40,635 against a remaining base rent
commitment of $90,160 between November 1997 and February 1999.
Lancit believes that its New York City facilities mentioned
above will be adequate for its needs for the foreseeable future.
MANAGEMENT OF RCN
Structure of RCN's Board of Directors
The RCN 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 1998 annual meeting, the term of office of Class II
Directors will expire at the 1999 annual meeting and the term of office of
Class III Directors will expire at the 2000 annual meeting. At each annual
meeting of shareholders 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 RCN Board has established an executive committee which
will, among other things, have all the powers of the RCN Board in the
management of the business and affairs of RCN at all times when the RCN Board
is not in session. Members are Messrs. McCourt (Chairman), Scott, Mahoney and
Crowe.
The RCN Board has established a compensation pension committee
which will make recommendations to the RCN 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 RCN Board has also established an audit committee which
will, among other things, consider the overall scope and approach of the
annual audit and recommendations from the audit performed by the independent
accountants; recommend the appointment of the independent accountants;
consider significant accounting methods adopted or proposed to be adopted; and
consider procedures for internal controls. Members are Messrs. Fasola
(Chairman), O'Neill, May and Graham.
Executive Officers and Directors
The following table sets forth certain information as of April
1, 1998 concerning the directors and executive officers of RCN:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David C. McCourt................. 41 Director (Class III), Chairman and Chief Executive Officer
Michael J. Mahoney............... 47 Director (Class I), President and Chief Operating Officer
Bruce C. Godfrey................. 42 Director (Class II),
Executive Vice President and Chief Financial Officer
Mark Haverkate................... 43 Executive Vice President, Business Development
Michael A. Adams................. 40 President, Technology and Network Development Group, and
Executive Vice President
Dennis J. Spina.................. 53 Director (Class I), Vice Chairman and President, Internet Services
James Q. Crowe................... 48 Director (Class III)
Alfred Fasola.................... 48 Director (Class II)
Stuart E. Graham................. 52 Director (Class I)
Richard R. Jaros................. 46 Director (Class II)
Thomas J. May.................... 50 Director (Class I)
Thomas P. O'Neill, III........... 53 Director (Class I)
Eugene Roth...................... 62 Director (Class III)
Walter Scott, Jr................. 66 Director (Class III)
Michael B. Yanney................ 64 Director (Class II)
Ralph S. Hromisin................ 37 Vice President and Chief Accounting Officer
Kenneth R. Knudsen............... 51 Senior Vice President, Sales and Marketing
Salvatore M. Quadrino............ 51 Chief Administrative Officer
Paul E. Sigmund.................. 33 Executive Vice President
Timothy J. Stoklosa.............. 37 Senior Vice President and Treasurer
</TABLE>
David C. McCourt, 41, has been the Chairman and Chief Executive
Officer of RCN 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 LCI
since January 1998.
Michael J. Mahoney, 47, has been the President and Chief
Operating Officer, as well as a Director, of RCN 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 RCN since
September 1997. Mr. Godfrey has also been a Director of Cable Michigan as well
as its Corporate 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 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 RCN since September, 1997. Mr. Haverkate has also been
President and Chief Operating Officer and a director of Cable Michigan since
such date. He was the President of RCN Development from June 1997 to September
1997 and Executive Vice President of Business Development at Commonwealth
Telephone from May 1997 to September 1997. Previously, he was President for
Business Operations at RCN Telecom Services, Inc. from November 1996 to June
1997, Executive Vice President of RCN Telecom Services, Inc. from August 1996
to November 1996, Executive Vice President of Commonwealth Telephone's Cable
Television Group from July 1995 to August 1996, Executive Vice President of
Development for Commonwealth Telephone from February 1995 to July 1995,
Executive Vice President for Development at Mercom from November 1995 to
February 1996, Vice President of Development for Commonwealth Telephone from
December 1993 to February 1995, Vice President of Development at Mercom from
December 1993 to February 1995, Vice President of Commonwealth Telephone's
Cable Television Group from October 1989 to December 1993.
Michael A. Adams, 40, has been the President, Technology and
Network Development Group of RCN and Executive Vice President of RCN since
September, 1997. Mr. Adams held the corresponding position at Commonwealth
Telephone from November 1996 to September 1997. Prior to that date, Mr. Adams
held the following positions: Executive Vice President of Technology and
Strategic Development of Commonwealth Telephone from August 1996 to November
1996, Executive Vice President of the Communications Services Group from
September 1994 to June 1996, Vice President of Technology from November 1993
to September 1994 and Vice President of Engineering for RCN Telecom Services
from September 1992 to October 1993.
Dennis J. Spina, 53, has served as Director, Vice-Chairman and
President of Internet Services of RCN since February 1998. Previously, he
served as Chief Executive Officer of Erols from August 1996 to February 1998.
From January 1996 until July 1996, he worked as an independent consultant in
the service and distribution industry. From November 1994 to December 1995,
he served as President and Chief Executive Officer of International Service
Systems, a company engaged in the business of janitorial and energy
management. From August 1990 to October 1994, he served as President and
Chief Executive Officer of Suburban Propane, Inc., a division of Hanson PLC.
James Q. Crowe, 48, has been a Director of RCN since September
1997. Mr. Crowe has been the President and Chief Executive Officer of LCI
since August 1997 and a Director of LCI 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, 48, has been a Director of RCN 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 Purolator
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 RCN 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 has been Chief Executive Officer of several
Skanska USA subsidiaries including Sordoni Skanska, Slattery Skanska and
Skanska E & C.
Richard R. Jaros, 46, has been a Director of RCN since
September 1997. Mr. Jaros is a member of the Board of Directors of WorldCom,
LCI, 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 and Executive Vice President and Chief Financial Officer of
Old PKS (as defined below). He served as Chairman of CECI from 1993 to 1994
and as President from 1992 to 1993.
Thomas J. May, 50, has been a Director of RCN 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 RCN 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 RCN 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 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 RCN 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 President of Old PKS for over nineteen years, Chairman of LCI
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. Mr. Scott was Chairman of the Board of WorldCom from
December 1996 to July 1997.
Michael B. Yanney, 64, has been a Director of RCN 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, Mid-America Apartment Communities, PKS Information
Commonwealth Telephone Services, Inc. and LCI. 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 RCN since September 1997. He has also been Vice
President and Chief Accounting Officer of Cable Michigan since September 1997
and of Commonwealth Telephone since August 1994. Mr. Hromisin has been Vice
President and Corporate Controller for Mercom since October 1996, Director of
Corporate Accounting for Commonwealth Telephone from March 1992 to August
1994. He also held various positions, most recently Audit Manager for Parente,
Randolph, Orlando, Carey & Associates, CPA's from November 1982 to March 1992.
Kenneth R. Knudsen, 51, has been Senior Vice President of Sales
& Marketing of RCN 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 RCN 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 RCN
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 RCN since September 1997. He has also served as Executive Vice
President and Chief Financial Officer and a Director of Cable Michigan since
such date. Mr. Stoklosa has been Senior Vice President of Finance of
Commonwealth Telephone since February 1997, Treasurer of Commonwealth
Telephone since August 1994 and Executive Vice President and Chief Financial
Officer of Mercom since October 1997. Previously, Mr. Stoklosa was Vice
President of Finance of Commonwealth Telephone from May 1995 to February 1997,
Manager of Mergers and Acquisitions at PKS from October 1991 to August 1994
and Senior Financial Analyst of Corporate Development at Citizens Utilities
Co. from February 1990 to October 1991.
Executive Compensation
The following table sets forth certain information regarding
the compensation paid for the periods indicated to the Chief Executive Officer
of RCN and the four other most highly compensated executive officers of RCN
(collectively, the "Named Executive Officers"). As previously stated, all
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 RCN Stock Dividend.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- --------------------------------------
Awards Payouts
------------- ----------
Other
Annual Restricted Securities
Compensation Stock Underlying LTIP
Name and Principal Position Year Salary($)(1) Bonus($) ($)(1) Awards($)(2) Options(#) Payouts($)
- --------------------------- -------- ------------ ---------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
David C. McCourt.............. 1997 $500,000 $1,400,000 -- $380,000 1,000,000 --
Chairman and Chief Executive
Officer
1996 491,154 700,000 -- 238,333 -- --
1995 397,885 700,000 -- 220,000 500,000 --
Michael J. Mahoney............ 1997 $248,654 $500,000 -- $149,731 400,000 --
President and Chief Operating
Officer
1996 235,027 175,000 -- 67,017 -- --
1995 222,462 100,000 -- 65,000 -- --
Bruce C. Godfrey.............. 1997 $243,077 $500,000 -- $148,615 400,000 --
Executive Vice President and
Chief Financial Officer
1996 221,462 165,000 -- 74,333 -- --
1995 183,731 150,000 -- 67,000 -- --
Mark Haverkate................ 1997 $205,192 $100,000 -- $61,038 80,000 --
Executive Vice President,
Business Development
1996 158,231 135,000 -- 51,667 -- --
1995 137,952 100,000 -- 48,000 70,000 --
Michael A. Adams.............. 1997 $203,269 $150,000 -- $70,654 230,000 --
President, Technology and
Network Development
1996 138,673 155,000 -- 36,950 -- --
1995 122,885 46,000 -- 34,200 40,000 --
<CAPTION>
All Other
Compensation
($)(3) Total
------------- -----------
<S> <C> <C>
David C. McCourt.............. $2,703 $1,902,703
Chairman and Chief Executive
Officer
5,478 1,196,632
5,612 1,103,497
Michael J. Mahoney............ $5,871 $754,525
President and Chief Operating
Officer
5,478 415,505
5,952 328,414
Bruce C. Godfrey.............. $5,763 $748,840
Executive Vice President and
Chief Financial Officer
4,965 391,427
4,790 338,521
Mark Haverkate................ $16,045 $308,177
Executive Vice President,
Business Development
3,641 296,872
5,058 243,010
Michael A. Adams.............. $16,045 $369,314
President, Technology and
Network Development
3,853 297,526
3,991 172,876
</TABLE>
- ----------
(1) The only type of 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 - RCN paid life insurance; $2,217 - 401(k) RCN match; (ii) Bruce
Godfrey: $486 - RCN paid life insurance; $5,277 - 401(k) RCN match; (iii)
Michael Mahoney: $486 - RCN paid life insurance; $5,385 - 401(k) RCN match;
(iv) Mark Haverkate: $486 - RCN paid life insurance; $2,499 - 401(k) RCN
match; (v) Michael Adams: $483 - RCN paid life insurance; $3,675 - 401(k)
RCN match; $11,887 - Relocation costs.
The following amounts are for 1996 fiscal year: (i) David McCourt: $396 -
RCN paid life insurance; $5,082 - 401(k) RCN match; (ii) Bruce Godfrey: $396
- RCN paid life insurance; $4,569 - 401(k) RCN match; (iii) Michael Mahoney:
$396 - RCN paid life insurance; $5,082 - 401(k) RCN match; (iv) Mark
Haverkate: $392 - RCN paid life insurance; $3,249 - 401(k) RCN match; (v)
Michael Adams: $363 - RCN paid life insurance; $3,490 - 401(k) RCN match.
The following amounts are for 1995 fiscal year: (i) David McCourt: $530 -
RCN paid life insurance; $5,082 - 401(k) RCN match; (ii) Bruce Godfrey:
$510 - RCN paid life insurance; $4,280 - 401(k) RCN match; (iii) Michael
Mahoney: $870 - RCN paid life insurance; $5,082 - 401(k) RCN match; (iv)
Mark Haverkate: $861 - RCN paid life insurance; $4,197 - 401(k) RCN match;
(v) Michael Adams: $253 - RCN paid life insurance; $3,738 - 401(k) RCN
match.
Does not include amounts paid to certain senior offices listed for
relocation expenses incurred in moving said senior officers and their
families to RCN's new executive offices in Princeton, New Jersey.
As of December 31, 1997, the aggregate holdings and value of restricted
stock awards for RCN Common Stock were as follows:
<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 $153,442
</TABLE>
Vesting of restricted shares is accelerated upon a change in control of RCN.
Dividends, if any, are paid on restricted shares. Subject to continued
employment, restricted share units credited to participants' accounts vest in
three calendar years following the date on which the share units were
initially credited to the participant's account.
RCN Options/SAR Grants in Fiscal Year 1997
<TABLE>
<CAPTION>
Number % of Options
Securities Granted to Potential Realizable Value at
Underlying Employees in Total Exercise Assumed Annual Rates of
Options Fiscal Year or Base Price Expiration Stock Price Appreciation for
Name Granted(#) 1997 ($/sh) Date Option Term
- ---- ----------- --------------- ------------------ ------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
5%($) 10%($)
---------- -----------
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 1,200,000 1,207,200 1,529,800
Bruce C. Godfrey......... 84,000 456,000 845,040 1,288,360
Mark Haverkate........... 58,000 282,000 578,128 1,140,527
Michael A. Adams......... 58,000 142,000 574,114 893,711
</TABLE>
- ----------
(1) No RCN stock options were exercised by the Named Executive Officers during
the fiscal year ended December 31, 1997.
(2) Denominated in shares of RCN Common Stock.
(3) The fair market value of RCN Common Stock at December 31, 1997 was $17.125
per share.
Effect of Distribution on Equity-Related Benefits
In connection with the Distribution, each C-TEC option held by
the Named Executive Officers and all other holders of such options was
adjusted so that each such executive officer and other holder currently holds
options to purchase shares of Commonwealth Telephone Common Stock, RCN Common
Stock and Cable Michigan Common Stock, respectively. The number of shares
subject to, and the exercise price of, such options were adjusted to take into
account the Distribution and to ensure that the aggregate intrinsic value of
the resulting RCN, Cable Michigan and Commonwealth Telephone options
immediately after the Distribution was equal to the aggregate intrinsic value
of the C-TEC options immediately prior to the Distribution. Shares of
restricted C-TEC Common Stock awarded under the C-TEC 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. See Note (4) to "Security
Ownership of Certain Beneficial Owners and Management of RCN."
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 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 RCN 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
RCN has established a Compensation Committee, all the members
of which are non-employee directors.
One of the members, Eugene Roth, Esq., is a partner at Rosen,
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, RCN 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 LCI. 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. See "Business -- Relationship
Among RCN, Commonwealth Telephone and Cable Michigan."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF RCN
Set forth in the table below is information as of April 1, 1998
with respect to the number of shares of RCN Common Stock beneficially owned by
(i) each person or entity known by RCN to own more than five percent of the
outstanding RCN Common Stock, (ii) each director of RCN, (iii) each of the
Named Executive Officers of RCN and (iv) all directors and executive officers
of RCN as a group. To RCN'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 RCN Stock Dividend.
<TABLE>
<CAPTION>
RCN Common Stock
----------------------------------------
Number of
Shares Percent of
Beneficially Outstanding
Name of Beneficial Owner Owned(1) Shares(1)
- ------------------------ -------------- --------------
<S> <C> <C>
Directors and Named Executive Officers
Michael A. Adams (2)..................................................... 23,578 *
James Q. Crowe........................................................... 1,464 *
Alfred Fasola............................................................ 798 *
Bruce C. Godfrey (2)..................................................... 54,832 *
Stuart E. Graham......................................................... 10,806 *
Mark Haverkate (2)....................................................... 66,708 *
Richard R. Jaros......................................................... 6,638 *
Michael J. Mahoney (2)................................................... 63,180 *
Thomas J. May............................................................ 2,798 *
David C. McCourt (2)(3).................................................. 186,204 *
Thomas P. O'Neill, III................................................... 2,798 *
Eugene Roth.............................................................. 14,240 *
Walter Scott, Jr......................................................... 1,464 *
Dennis Spina............................................................. -- --
Michael B. Yanney........................................................ 5,520 *
All Directors and Executive Officers as a Group (20 persons)(2)(3)....... 445,835 *
5% Stockholders
Level 3 Telecom Holdings, Inc.(4)........................................ 26,640,970 46
</TABLE>
- ----------
* Less than 1% of outstanding shares.
(1) Includes shares of RCN Common Stock acquired in respect of Matching Shares
(as defined below) but excludes RCN Share Units (as defined below).
(2) Under the RCN 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 RCN 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.
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 10,872 12,706 10,872 23,578
Bruce C. Godfrey........ 14,636 20,098 34,734 20,098 54,832
David C. McCourt........ 76,788 54,708 131,496 54,708 186,204
Michael J. Mahoney...... 23,732 19,724 43,456 19,724 63,180
Mark Haverkate.......... 46,416 10,146 56,562 10,146 66,708
</TABLE>
(3) Includes 450 shares of RCN Common Stock which are owned by Mr. McCourt's
wife. Mr. McCourt disclaims beneficial ownership of such shares.
(4) LCI owns 90% of the common stock and all of the preferred stock of Level 3
Telecom. LCI is the successor to an entity known as Peter Kiewit Sons' Inc.
("Old PKS"). See "Level 3 Communications, Inc." below. David McCourt,
Chairman and Chief Executive Officer of RCN, owns the remaining 10% of the
common stock of Level 3 Telecom. The address for Level 3 Telecom and LCI is
1000 Kiewit Plaza, Omaha, Nebraska 68131.
The information set forth above does not give effect to the
ownership of RCN securities by Level 3 Telecom. Certain executive officers or
directors of RCN 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 of RCN."
Level 3 Communications, Inc.
Set forth below is certain information regarding the beneficial
ownership of equity securities of LCI 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. 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, LCI
merged into Old PKS which changed its name to Level 3 Communications, Inc. As
a result of the PKS Split-Off, LCI 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>
<CAPTION>
Name of Beneficial Owner Number of Percent of
Shares Shares
-------------- ---------------
<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 shares of the class.
(1) Includes 185,000 shares in the Jaros Family Limited Partnership.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF LANCIT
The following table sets forth, as of March 23, 1998, the
ownership of Lancit's Common Stock held by (i) each person who owns of record
or who is known by Lancit to own beneficially more than 5% of the Lancit
Common Stock, (ii) each of the chief executive officer and the four most
highly compensated executive officers during the fiscal year ended June 30,
1997, (iii) each of the directors of Lancit, and (iv) all of Lancit's
directors and executive officers as a group. As of such date, Lancit had
6,634,750 shares of Common Stock issued and outstanding. The number of shares
and the percentage of the class beneficially owned by the persons named in the
table and by all directors and executive officers as a group is presented in
accordance with Rule 13d-3 of the Exchange Act and includes, in addition to
shares actually issued and outstanding, unissued shares which are subject to
issuance upon the exercise of options or warrants which are or will become
exercisable within 60 days. All outstanding stock options to purchase Lancit
Common Stock that are held by the directors and officers of Lancit will be
canceled in accordance with the terms of the Merger Agreement. See "The
Merger--Lancit Stock Options and Warrants." Except as otherwise indicated,
the persons named in the table have sole voting and dispositive power with
respect to all securities listed.
<TABLE>
<CAPTION>
Lancit Common Stock
-------------------------------------------
Percent
Amount and Nature of of Class
Beneficial Ownership (%)
--------------------------- -----------
<S> <C> <C> <C>
Name of Beneficial Owners
Name and Address of 5% Shareholders
Discovery Communications, Inc.
7700 Wisconsin Avenue
Bethesda, Maryland 20814........................................... 876,232 (1) 12.4%
Directors and Executive Officers (2)
Laurence A. Lancit................................................. 578,545 (3) 8.7%
Cecily Truett...................................................... 575,613 (3) 8.7%
Susan L. Solomon................................................... 495,000 (4) 6.9%
Noel Resnick....................................................... 22,500 (5) *
John R. Costantino................................................. 32,400 (6) *
Marc L. Bailin..................................................... 15,000 (7) *
Joseph Kling....................................................... 9,000 (8) *
Roger C. Faxon..................................................... 4,000 (9) *
All Directors and Executive Officers as a Group (14 persons)....... 1,813,976 (10) 24.7%
</TABLE>
- ----------
* Less than 1% of the outstanding shares of Lancit Common Stock.
(1) Includes 438,116 shares of Lancit Common Stock which DCI has the right to
acquire upon the exercise of currently exercisable warrants. The foregoing
information is derived from the Statement on Schedule 13D of DCI, filed
with the Commission on September 27, 1996.
(2) The address for each of the directors and executive officers is c/o Lancit
Media Entertainment, Ltd., 601 West 50th Street, New York, New York 10019.
Only three executive officers are named in addition to the chief executive
officer because the employment of Arlene J. Scanlan, the former president
of Strategy and one of the four most highly compensated executive officers
for the fiscal year ended June 30, 1997, was terminated, effective
September 23, 1997.
(3) Laurence A. Lancit and Cecily Truett are husband and wife. The number of
shares shown for each of them includes (i) 553,113 shares of Lancit Common
Stock held by each of them individually, and (ii) 22,500 shares of Lancit
Common Stock which are the subject of currently exercisable stock options.
Additionally, the number of shares shown for Mr. Lancit includes 2,932
shares owned by the minor children of Mr. Lancit and Ms. Truett, for which
Mr. Lancit acts as custodian under the New York Uniform Transfers to Minors
Act. The number of shares shown for each of them excludes (i) 40,080
shares held by the Children's Trust, as to which each disclaims beneficial
ownership, (ii) 553,113 shares of Lancit Common Stock held by the other, as
to which each disclaims beneficial ownership, and (iii) 22,500 shares of
Lancit Common Stock which are the subject of options which are not
currently exercisable and will not become exercisable within 60 days.
(4) Includes 495,000 shares which are the subject of options granted to Ms.
Solomon which are currently exercisable. Excludes (i) 255,000 shares which
are the subject of options granted to Ms. Solomon which are not currently
exercisable and will not become exercisable within 60 days and are subject
to ratification by Lancit's shareholders, and (ii) any shares which may be
issuable, at the option of Lancit, upon the conversion of certain stock
appreciation rights which were granted to Ms. Solomon.
(5) Includes 22,500 shares of Lancit Common Stock which are the subject of
options granted to Ms. Resnick which are currently exercisable. Excludes
10,500 shares of Lancit Common Stock which are the subject of options
granted to Ms. Resnick which are not currently exercisable and will not
become exercisable within 60 days.
(6) Includes (i) 13,400 shares of Lancit Common Stock which Walden Partners
Ltd., of which Mr. Costantino is a vice president, director and principal,
has the right to acquire upon the exercise of currently exercisable stock
options, and (ii) 9,000 shares of Lancit Common Stock which Mr. Costantino
has the right to acquire upon the exercise of currently exercisable stock
options. Excludes 5,000 shares of Lancit Common Stock which are the
subject of options granted to Mr. Costantino which are not currently
exercisable and will not become exercisable within 60 days.
(7) Includes 9,000 shares of Lancit Common Stock which Mr. Bailin has the
right to acquire upon the exercise of currently exercisable stock options.
Excludes (i) 15,000 shares of Lancit Common Stock owned by Marie Valdes,
M.D., wife of Mr. Bailin, as to which shares Mr. Bailin disclaims any
beneficial interest, and (ii) 5,000 shares of Lancit Common Stock which are
the subject of options granted to Mr. Bailin which are not currently
exercisable and will not become exercisable within 60 days.
(8) Includes 6,000 shares of Lancit Common Stock which Mr. Kling has the right
to acquire upon the exercise of currently exercisable stock options.
Excludes 5,000 shares of Lancit Common Stock which are the subject of
options granted to Mr. Kling which are not currently exercisable and will
not become exercisable within 60 days.
(9) Includes (i) 1,000 owned jointly with Mr. Faxon's wife, and (ii) 3,000
shares of Lancit Common Stock which are the subject of currently
exercisable stock options. Excludes 5,000 shares of Lancit Common Stock
which are the subject of options granted to Mr. Faxon which are not
currently exercisable and will not become exercisable within 60 days.
(10) Includes an aggregate of 699,650 shares of Lancit Common Stock which the
executive officers and directors have the right to acquire upon the
exercise of currently exercisable stock options or stock options which
become exercisable within 60 days. Excludes an aggregate of 356,750 shares
of Lancit Common Stock which are the subject of options granted to the
executive officers and directors which are not currently exercisable and
will not become exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK OF RCN
The following description of the capital stock of RCN is based
upon the RCN Certificate of Incorporation and the RCN Bylaws and by applicable
provisions of law. The following description is qualified in its entirety by
reference to such RCN Certificate of Incorporation and RCN Bylaws, which are
filed as exhibits to the Registration Statement.
Authorized Capital Stock
The RCN Certificate of Incorporation authorizes the issuance of
100 million shares of RCN Common Stock, par value $1.00 per share, 200 million
shares of RCN Class B Stock, par value $1.00 per share, and 25 million shares
of RCN Preferred Stock par value $1.00 per share. RCN intends to propose to
its annual meeting of shareholders a proposal to amend the RCN Certificate of
Incorporation to increase the number of authorized shares of RCN Common Stock
to 200 million and the number of authorized shares of RCN Class B Stock to 400
million.
RCN Common Stock
Subject to the rights of the holders of any RCN Preferred Stock
which may be outstanding, each holder of RCN Common Stock on the applicable
record date is entitled to receive such dividends as may be declared by the RCN
Board out of funds legally available therefor, and, in the event of liquidation,
to share pro rata in any distribution of RCN's assets after payment or providing
for the payment of liabilities and the liquidation preference of any outstanding
RCN Preferred Stock. Each holder of RCN Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of shareholders, including the election of directors.
Holders of RCN Common Stock have no cumulative voting rights or preemptive
rights to purchase or subscribe for any stock or other securities and there are
no conversion rights or redemption or sinking fund provisions with respect to
such stock. On May 5, 1998, there were 57,847,890 shares of RCN Common Stock
issued and outstanding. Based on the number of shares of Lancit Common Stock
outstanding on May 5, 1998 and the maximum Stock Exchange Ratio of 0.05 shares
of RCN Common Stock for every share of Lancit Common Stock, it is anticipated
that there will be approximately 58,179,628 shares of RCN Common Stock
outstanding upon consummation of the Merger. On March 9, 1998, the RCN declared
the RCN Stock Dividend. The record date for the RCN Stock Dividend was March
20, 1998. Shareholders of record of RCN at the market close on that date
received an additional share of RCN Common Stock for each share held. The
distribution date for the RCN Stock Dividend was April 3, 1998. 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 this RCN Stock
Dividend, except as otherwise set forth herein. The RCN Common Stock is
admitted for trading on the NASDAQ.
The shares of the RCN Common Stock issued pursuant to the
Merger Agreement will be fully paid and nonassessable. The RCN Certificate of
Incorporation contains no restrictions on the alienability of the RCN Common
Stock. For further information on the securities laws restrictions, if any,
on transferability of the RCN Common Stock, see "The Merger--Rule 145
Restrictions" and "Trading Market." Except as disclosed in the section
entitled "Certain Statutory, Charter and Bylaw Provisions for RCN," no
provision of the RCN Certificate of Incorporation or RCN Bylaws and no
provision of any agreement or plan involving RCN is in effect that would
discriminate against any existing or prospective holder of such securities as
a result of such security holder owning a substantial amount of securities.
RCN Class B Stock
The RCN Class B Stock is in all material respects identical to
the RCN Common Stock except that (i) the RCN Class B Stock is generally
non-voting, (ii) the RCN Common Stock is convertible at the option of the
holder into RCN Class B Stock and (iii) in certain mergers, distributions and
other transactions in which the holders of RCN Common Equity are entitled to
receive equity interests of one or more corporations (including RCN), the
equity interests distributed in respect of the RCN Common Stock and the RCN
Class B Stock may have rights and privileges that are substantially equivalent
to the rights and privileges of the RCN Common Stock and the RCN Class B Stock,
respectively. As of the date hereof, there are no outstanding shares of RCN
Class B Stock and RCN does not have any current plan or intention to issue any
RCN Class B Stock.
Preferred Stock
Under the RCN Certificate of Incorporation, the RCN Board has
the authority to create one or more series of preferred stock, to issue shares
of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of RCN Preferred Stock, as well as authorized
but unissued shares of RCN Common Equity, are available for issuance without
further action by RCN's shareholders, unless shareholder action is required by
applicable law or by the rules of a stock exchange or quotation system on which
any series of RCN's stock may then be listed or quoted. No shares of RCN
Preferred Stock will be issued in connection with the Merger.
Exchange Agent
First Union National Bank (the "Exchange Agent") serves as the
Registrar and Exchange Agent for RCN Common Stock and will serve as the
Exchange Agent in respect of the Lancit Common Stock in connection with the
Merger. See "Exchange Procedures."
CERTAIN STATUTORY, CHARTER AND BYLAW PROVISIONS FOR RCN
Certain provisions of the DGCL, the RCN Certificate of
Incorporation and the RCN Bylaws summarized in the following paragraphs may be
deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders. The following is a summary
of certain of these provisions. The RCN Certificate of Incorporation and the
RCN Bylaws are filed as exhibits to the Registration Statement.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. The RCN
Certificate of Incorporation and the RCN Bylaws provide for the RCN Board to
be divided into three classes of directors. The term of office of the first
class expires at the 1998 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting held
thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members
of the RCN Board will be elected each year and, except as described above,
each of the directors serves a staggered three-year term. See "Management of
RCN--Executive Officers and Directors." Moreover, as is permitted under the
DGCL only in the case of a corporation having a classified board, the RCN
Certificate of Incorporation and the RCN Bylaws provide that directors may be
removed only for cause.
These provisions could prevent a shareholder (or group of
shareholders) having majority voting power from obtaining control of the RCN
Board until the second annual shareholders' meeting following the date the
acquirer obtains such voting power. Accordingly, these provisions could have
the effect of discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of RCN.
Shareholder Action by Written Consent; Special Meetings. The
RCN Certificate of Incorporation and the RCN Bylaws provide that no action
required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting, and that no action may be taken
by the written consent of shareholders in lieu of a meeting. The RCN
Certificate of Incorporation and the RCN Bylaws also provide that special
meetings of RCN's shareholders may be called only by the RCN Board, the
Chairman of the RCN Board or the Chief Executive Officer of RCN. These
provisions may make it more difficult for shareholders to take action opposed
by the RCN Board.
Advance Notice Provisions. The RCN Bylaws establish an advance
written notice procedure for shareholders seeking to nominate candidates for
election as directors at an annual meeting of shareholders or to bring
business before an annual meeting of shareholders of RCN. The RCN Bylaws
provide that only persons who are nominated by or at the direction of the RCN
Board, or by a shareholder who has given timely written notice to the
Secretary of RCN prior to the meeting at which directors are to be elected,
will be eligible for election as directors of RCN. The RCN Bylaws also
provide that at any meeting of shareholders only such business may be
conducted as has been brought before the meeting by or at the direction of the
RCN Board or, in the case of an annual meeting of shareholders, by a
shareholder who has given timely written notice to the Secretary of RCN of
such shareholder's intention to bring such business before such meeting.
Under the RCN Bylaws, for any such shareholder notice to be timely, such
notice must be received at the principal executive offices of RCN in writing
not less than 60 days nor more than 90 days prior to the meeting; provided,
however, that in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder must be received not later than the close of business on
the 10th day following the day on which such notice or public disclosure was
given or made. Under the RCN Bylaws, a shareholder's notice must also contain
certain information specified in the RCN Bylaws. These provisions may
preclude or deter some shareholders from bringing matters before, or making
nominations for directors at, an annual meeting.
Preferred Stock. Under the RCN Certificate of Incorporation,
the RCN Board will have the authority, without further shareholder approval,
to create one or more series of preferred stock, to issue shares of preferred
stock in such series up to the maximum number of shares of preferred stock
authorized, and to determine the preferences, rights, privileges and
restrictions of any series, including the dividend rights, voting rights,
rights and terms of redemption, liquidation preferences, the number of shares
constituting any such series and the designation of such series. Pursuant to
this authority, the RCN Board could create and issue a series of preferred
stock with rights, privileges or restrictions having the effect of
discriminating against an existing or prospective holder of such securities as
a result of such security holder beneficially owning or commencing a tender
offer for a substantial amount of RCN Common Stock. One of the effects of
authorized but unissued and unreserved shares of capital stock may be to
render more difficult or discourage an attempt by a potential acquirer to
obtain control of RCN by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of RCN's management. The
issuance of such shares of capital stock may have the effect of delaying,
deferring or preventing a change in control of RCN without any further action
by the shareholders of RCN.
Amendment of Certain Charter and Bylaw Provisions. The RCN
Certificate of Incorporation provides that the RCN Board may adopt, amend or
repeal any provision of the RCN Bylaws. The RCN Certificate of Incorporation
and the RCN Bylaws also provide that RCN Bylaw provisions may be adopted,
amended or repealed by the affirmative vote of shareholders holding not less
than 66 2/3% of the total number of votes entitled to be cast in the
election of directors.
Any amendment, modification or repeal of the provisions of
the RCN Certificate of Incorporation relating to the election and removal
of directors, the right to call special meetings, the prohibition on action
by written consent, amendment of the RCN Bylaws and the limitation of
liability and indemnification of officers and directors will require
approval by the affirmative vote of shareholders holding at least 66 2/3%
of the total number of votes entitled to vote generally in the election of
directors.
Delaware Takeover Statute
RCN is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested shareholder" for a period of three years following the date that
such shareholder became an interested shareholder, unless (i) prior to such
date either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding, shares owned by (A) persons who
are both directors and officers and (B) employee stock plans in certain
circumstances), or (iii) on or after such date the business combination is
approved by the board and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of at least
66(2)/(3)% of the outstanding voting stock which is not owned by the interested
shareholder. A "business combination" includes a merger, consolidation, asset
sale, or other transaction resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more
of the corporation's voting stock. The restrictions imposed by Section 203
will not apply to a corporation if, among other things, (i) the corporation's
original certificate of incorporation contains a provision expressly electing
not to be governed by Section 203 or (ii) 12 months have passed after the
corporation, by action of its shareholders holding a majority of the
outstanding stock, adopts an amendment to its certificate of incorporation or
Bylaws expressly electing not to be governed by Section 203. RCN has not
elected out of Section 203 and, therefore, the restrictions imposed by Section
203 will apply to RCN. Prior to the Distribution, the RCN Board approved of
Level 3 Telecom becoming an interested shareholder and, consequently, Section
203 would not apply to any business combination with Level 3 Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the DGCL and the RCN Certificate of
Incorporation and the RCN Bylaws relate to the limitation of liability and
indemnification of directors and officers of RCN. These various provisions
are described below.
The RCN Certificate of Incorporation provides that RCN's
directors are not personally liable to RCN or its shareholders for monetary
damages for breach of their fiduciary duties as a director to the fullest
extent permitted by the DGCL. Under the DGCL, directors would not be
personally liable to RCN or its shareholders for monetary damages for breach
of their fiduciary duties as a director, except for (i) any breach of the
director's duty of loyalty to RCN or its shareholders, (ii) acts or omissions
not in good faith or involving intentional misconduct or a knowing violation
of law, (iii) any transaction from which the director derived improper
personal benefit or (iv) the unlawful payment of dividends or unlawful stock
repurchases or redemptions. This exculpation provision may have the effect
of reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or RCN from bringing a lawsuit against
directors of RCN for breach of their fiduciary duties as directors. However,
the provision does not affect the availability of equitable remedies such as
an injunction or rescission.
The RCN Certificate of Incorporation also provides that each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or officer of RCN or is or was serving at the
request of RCN as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified and held
harmless by RCN to the fullest extent permitted by the DGCL. This right to
indemnification shall also include the right to be paid by RCN the expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by the DGCL. This right to
indemnification shall be a contract right. RCN may, by action of the RCN
Board, provide indemnification to such of the employees and agents of RCN to
such extent and to such effect as the RCN Board determines to be appropriate
and authorized by the DGCL.
RCN purchases and maintains insurance on behalf of any person
who is or was a director, officer, employee or agent of RCN, or is or was
serving at the request of RCN as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not RCN would have the power or the obligation to
indemnify him or her against such liability under the provisions of the RCN
Certificate of Incorporation.
COMPARISON OF SHAREHOLDERS' RIGHTS
General
The rights of holders of Lancit Common Stock are currently
governed by the NYBCL and the Lancit Certificate of Incorporation and the
Lancit Bylaws. If the Merger is consummated, Lancit Shareholders will become
holders of RCN Common Stock, which will result in their rights as shareholders
being governed by the laws of the State of Delaware (rather than the law of
New York which governs their rights as Lancit Shareholders) and by the RCN
Certificate of Incorporation and the RCN Bylaws. It is not practical to
describe all the differences between the DGCL and the NYBCL and between (i)
the RCN Certificate of Incorporation and the RCN Bylaws and (ii) the Lancit
Certificate of Incorporation and the Lancit Bylaws. The following is a summary
of principal differences which may affect the rights of Lancit Shareholders.
The following discussions are not intended to be complete and are qualified
in its entirety by reference to the DGCL, the NYBCL, the RCN Certificate of
Incorporation, the RCN Bylaws, the Lancit Certificate of Incorporation and the
Lancit Bylaws. For information as to how such documents may be obtained, see
"Additional Information." Holders of Lancit Common Stock should also consider
the information set forth in "Risk Factors--RCN Risk Factors--Control by Level
3 Telecom Holdings, Inc.; Conflicts of Interest" in reviewing the following.
The RCN Certificate of Incorporation and the RCN Bylaws are not
being amended in connection with the Merger.
Authorized Capital Stock
The authorized capital stock of RCN consists of 100 million
shares of RCN Common Stock having a par value of $1.00 per share, 200 million
shares of RCN Class B Stock having a par value of $1.00 per share and 25
million shares of preferred stock having a par value of $1.00 per share. As of
the Record Date, approximately 57,847,890 shares of RCN Common Stock, no
shares of the RCN Class B Stock and no shares of RCN Preferred Stock were
outstanding. Holders of RCN Common Equity do not have preemptive rights. RCN
intends to propose to its annual meeting of shareholders a proposal to amend
the RCN Certificate of Incorporation to increase the number of authorized
shares of RCN Common Stock to 200 million and the number of authorized shares
of RCN Class B Stock to 400 million. See "Description of Capital Stock of
RCN."
On March 9, 1998, the RCN declared the RCN Stock Dividend. The
record date for the RCN Stock Dividend was March 20, 1998. Shareholders of
record of RCN at the market close on that date received an additional share of
RCN Common Stock for each share held. The distribution date for the stock
dividend was April 3, 1998. 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 this RCN Stock Dividend except as otherwise set
forth herein.
The authorized capital stock of Lancit consists of 15 million
shares of Lancit Common Stock having a par value of $.001 per share. As of the
Record Date, 6,634,750 shares of Lancit Common Stock were outstanding. Holders
of Lancit Common Stock do not have preemptive rights.
Under the RCN Certificate of Incorporation, the RCN Board has
the authority to create one or more series of preferred stock, to issue
shares of preferred stock in such series up to the maximum number of shares of
preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of RCN Preferred Stock, as well as authorized
but unissued shares of RCN Common Equity, will be available for issuance
without further action by RCN's shareholders, unless shareholder action is
required by applicable law or by the rules of a stock exchange or quotation
system on which any series of RCN's stock may then be listed or quoted. The
Lancit Certificate of Incorporation does not provide for issuance of preferred
stock.
Directors
The RCN Certificate of Incorporation provides that the RCN
Board shall consist of not less than three and not more than 24 directors, as
determined by the RCN Board. The RCN Board currently consists of 12
directors. The RCN Board is classified into three classes. The RCN
Certificate of Incorporation and the RCN Bylaws provide that directors may be
removed only for cause with the affirmative vote of the holders of not less
than a majority of the total voting power of all outstanding shares entitled
to vote. See "Certain Statutory, Charter and Bylaw Provisions of RCN--Charter
and Bylaw Provisions."
The Lancit Bylaws provide that the Lancit Board shall consist
of not less than three and not more than 15 directors, as determined by the
Lancit Board. The Lancit Board currently consists of seven directors. Lancit
does not have a classified board. The Lancit Bylaws provide that directors may
be removed (i) for cause by majority vote of all directors then in office or
(ii) with or without cause by vote of the shareholders of Lancit.
Consequently, gaining control of the board, including
nominating directors, and removal of directors is more difficult under the RCN
Bylaws than the Lancit Bylaws.
Annual and Special Meetings of Shareholders
Under the NYBCL and the DGCL, special meetings of shareholders
may be called by the board of directors and by such other person or persons
authorized to do so by the corporation's certificate of incorporation or
Bylaws. The RCN Certificate of Incorporation and the RCN Bylaws provide that
special meetings of RCN's shareholders may be called only by the RCN Board,
the Chairman of the Board or the Chief Executive Officer of RCN. The RCN Bylaws
also stipulate that business transacted at any special meeting shall be
limited to the purposes stated in the notice of the special meeting. The
Lancit Bylaws provide that special meetings of shareholders may be called by
the Chief Executive Officer of Lancit or the Lancit Board, and must be called
by the Chief Executive Officer of Lancit at the written request of
shareholders holding at least twenty (20%) of the outstanding shares of Lancit
Common Stock entitled to vote.
The NYBCL provides that if, for a period of one month after the
date fixed by or under the bylaws of a corporation for the annual meeting of
shareholders, or if no date has been fixed for a period of 13 months after the
last annual meeting, or there is a failure to elect a sufficient number of
directors to conduct the business of the corporation, the board of directors
shall call a special meeting for the election for directors. If the board
fails to call such meeting within two weeks after the expiration of such
period, or if it is so called but there is a failure to elect such directors
for a period of two months after the expiration of such period, holders of 10%
of the shares entitled to vote in an election of directors may, in writing,
demand the call of a special meeting for the election of directors. Under the
DGCL, if an annual meeting is not held within 30 days of the date designated
for such a meeting, or is not held for a period of 13 months after the last
annual meeting, the Delaware Court of Chancery may summarily order a meeting
to be held upon the application of any shareholder or director. In both New
York and Delaware, the number of shares represented at such meeting
constitutes a quorum without regard to other provisions of law.
Voting; Written Consents of Shareholders
Under the NYBCL and the DGCL, unless the certificate of
incorporation provides otherwise, a majority of the shares entitled to vote
constitutes a quorum, and shareholder action is generally by majority vote,
except that directors are elected by a plurality vote and, under certain
circumstances, the NYBCL requires the vote of at least 66 2/3% of the
outstanding shares in connection with certain mergers, consolidations and
sales of assets (see "--Mergers and Business Combinations; Sales of Assets").
The RCN Bylaws provide that a majority of the shares entitled to vote
constitutes a quorum, and all action may be authorized by the vote of the
majority of shares entitled to vote except that directors may be elected by a
plurality vote, unless otherwise provided by the DGCL. The Lancit Bylaws
provide that a majority of the shares issued and outstanding entitled to vote
shall constitute a quorum, and a plurality of the votes cast is required for
election of directors and that a majority of votes cast is required for
shareholder action. See also "--Amendment of Bylaws" and "--Amendment of
Certificate of Incorporation."
Under the DGCL, unless otherwise provided by a corporation's
certificate of incorporation, any action which is to be taken by shareholders
may be taken without a meeting if such action is authorized by written consent
signed by shareholders having not less than the minimum number of votes
necessary to take such action at a meeting at which all shares entitled to
vote were present and voting. The RCN Certificate of Incorporation and the RCN
Bylaws provide that no action required or permitted to be taken at an annual
or special meeting of shareholders may be taken without a meeting and that no
action may be taken by the written consent of shareholders in lieu of a
meeting. Under the NYBCL, any required or permitted action taken by
shareholders may be taken without a meeting with the written consent of all
outstanding shares entitled to vote, unless the certificate of incorporation
otherwise provides for a lesser number. The Lancit Certificate of
Incorporation does not otherwise provide. Consequently, action without a
meeting is possible under the Lancit Certificate of Incorporation, but not
under the RCN Certificate of Incorporation, making shareholder action more
difficult.
Notice of Business
The RCN Bylaws provide that at any meeting of the shareholders,
only business brought before the meeting (i) by or at the direction of the RCN
Board or (ii) in the case of an annual meeting of shareholders, by any
shareholder who complies with the notice procedures shall be conducted. In
addition, no business shall be brought by a shareholder before a special
meeting of shareholders. The Lancit Bylaws provide that at an annual meeting
of shareholders, only business which was (i) specified in the notice of the
meeting, (ii) otherwise properly brought by or at the direction of the Lancit
Board or an authorized director or officer of Lancit or (iii) otherwise
properly brought by a shareholder shall be conducted. The Lancit Bylaws do
not have similar provisions for special meetings.
Under both the RCN Bylaws and the Lancit Bylaws, for business
to be properly brought by a shareholder, the shareholder must have delivered a
notice which was received at the principal executive offices of the
corporation not less than 60 days nor more than 90 days prior to the meeting.
However, in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close
of business on the 10th day following the day on which such notice of the date
of the meeting or such public disclosure was given or made for RCN and the
15th day for Lancit. In the case of Lancit, the previous sentence only applies
if the date of a meeting has been changed more than 30 calendar days from the
date contemplated at the time of the previous year's proxy statement. Under
both RCN Bylaws and Lancit Bylaws, a shareholder's notice must set forth (i) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
address, as they appear on the corporation's books, of the shareholder
proposing such business, (iii) the class and number of shares of the
corporation which are beneficially owned by the shareholder and (iv) any
material interest of the shareholder in such business.
Nomination of Directors
Under both RCN Bylaws and Lancit Bylaws, nominations for
directors may be made at a meeting of shareholders (a) by or at the direction
of the board of directors or (b) by any shareholder entitled to vote for the
election of directors at the meeting and who complies with the notice
procedures. Such nominations, other than those made by or at the direction of
the board of directors, shall be made pursuant to timely notice delivered to
or mailed and received at the principal executive offices of the corporation
not less than 60 days nor more than 90 days prior to the meeting. However, in
the event that less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting or such public disclosure was given or made for RCN and the 15th
day for Lancit. In the case of Lancit, previous sentence only applies to (i)
special meetings and (ii) annual meetings only if the date of the annual
meeting has been changed more than 30 calendar days from the date contemplated
at the time of the previous year's proxy statement.
Under both RCN Bylaws and Lancit Bylaws, a shareholder's notice
must set forth (i) as to each person whom the shareholder proposes to nominate
for election or reelection as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a
director if elected); and (ii) as to the shareholder giving the notice (A) the
name and address, as they appear on the corporation's books, of such
shareholder and (B) the class and number of shares of the corporation which
are beneficially owned by such shareholder. The RCN Bylaws also require (i) a
description of all arrangements or understandings between such shareholder and
each proposed nominee and any other person or persons (including their names
and addresses) pursuant to which the nomination(s) are to be made by such
shareholder and (ii) any other information relating to such shareholder that
is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Section 14A
under the Exchange Act.
The Lancit Bylaws also provide that in the event that a person
is validly designated as a nominee and thereafter becomes unable or unwilling
to stand for election to the Lancit Board, the Lancit Board or the shareholder
who proposed such nominee, as the case may be, may designate a substitute
nominee; provided however, that in the case of persons not nominated by the
Lancit Board, such substitution is subject to certain notice provisions. The
RCN Bylaws do not contain a similar provision.
Amendment of Bylaws
The DGCL reserves the power to amend, repeal, or adopt bylaws
to the shareholders, unless the certificate of incorporation also confers such
power upon the board of directors. The RCN Certificate of Incorporation
currently confers such powers upon the RCN Board. Under the RCN Certificate
of Incorporation and the RCN Bylaws, bylaws may be adopted, amended or
repealed by the affirmative vote of the holders of not less than 66 (2)/(3)%
of the outstanding shares entitled to vote or by the RCN Board.
Under the NYBCL, Bylaws may be adopted, amended or repealed by
a majority of the votes of the shares at the time entitled to vote in the
election of any directors. When so provided in the certificate of
incorporation or a bylaw adopted by the shareholders, Bylaws may also be
adopted, amended or repealed by the board by such vote as therein specified,
but any bylaw adopted by the board may be amended or repealed by the
shareholders entitled to vote thereon. The Lancit Bylaws provide that the
Bylaws may be amended, repealed or adopted by vote of the holders of the shares
at the time entitled to vote in the election of any directors. The Lancit
Bylaws may also be amended, repealed or adopted by the Lancit Board but any
bylaw adopted by the Lancit Board may be amended or repealed by the
shareholders entitled to vote thereon as provided in the Lancit Bylaws.
Additionally, the Lancit Bylaws provide that if any bylaw regulating an
impending election of directors is adopted, amended or repealed by the Lancit
Board, there shall be set forth in the notice of the next meeting of
shareholders for the election of directors the bylaw so adopted, amended or
repealed, together with a concise statement of the changes made.
Amendment of Certificate of Incorporation
Under the DGCL, amendments to certificates of incorporation
generally require the authorization of the board of directors and the approval
of shareholders holding a majority of the outstanding shares entitled to vote on
such amendment, unless a greater proportion is specified in the certificate of
incorporation. In addition, amendments which make changes relating to the
capital stock by increasing its par value or aggregate number of authorized
shares, or otherwise adversely affecting the rights of a class, must be approved
by the majority vote of each class or series of stock affected, even if such
stock would not otherwise have voting rights. The RCN Certificate of
Incorporation provides that the RCN Certificate of Incorporation may be amended
in any manner permitted by the DGCL; provided that any amendment, modification
or repeal of the provisions of the RCN Certificate of Incorporation relating to
the election and removal of directors, the right to call special meetings, the
prohibition on action by written consent, amendment of the RCN Bylaws and the
limitation of liability and indemnification of officers and directors will
require approval by the affirmative vote of shareholders holding at least 66
2/3% of the total number of votes entitled to vote generally in the election of
directors.
Under the NYBCL, an amendment to the certificate of
incorporation requires the authorization of the board of directors followed by
the approval of the holders of a majority of all outstanding shares entitled
to vote; however, whenever the certificate of incorporation requires action to
be taken by a greater number or proportion of votes, such provision shall not
be altered, amended or repealed except by such greater vote. In addition,
certain specified amendments affecting the rights of a class of securities
must be approved by vote of a majority of all outstanding shares of such class
entitled to vote, even though they ordinarily would not have voting rights.
Under the NYBCL, certain specified amendments to the certificate of
incorporation may be made by the board of directors without shareholder
approval. The Lancit Certificate of Incorporation does not specify a
procedure for amending the Lancit Certificate of Incorporation.
The supermajority approval requirements for amending certain
provisions of the RCN Certificate of Incorporation may prevent the holders of
a majority of the outstanding shares of RCN Common Stock from adopting an
amendment to the RCN Certificate of Incorporation, whereas the vote of a
majority of the outstanding shares of Lancit Common Stock is (subject to any
applicable class voting requirement or any greater vote mandated by the NYBCL)
sufficient to adopt any amendment to the Lancit Certificate of Incorporation
that is presented to its shareholders for approval under the NYBCL.
Mergers and Business Combinations; Sales of Assets
Under the DGCL, when shareholder approval is required for a
merger, or consolidation or a sale, lease or exchange of all or substantially
all of a corporation's assets, such transaction must be approved by a majority
of outstanding shares entitled to vote, unless a greater proportion is
specified in the certificate of incorporation. The RCN Certificate of
Incorporation does not provide for a greater vote. Under the NYBCL, whenever
shareholder approval is required for a merger or consolidation or sale, lease,
exchange or disposition of all or substantially all of a corporation's assets,
such transaction must be approved by two-thirds of the outstanding shares
entitled to vote, if the certificate of incorporation does not otherwise state
and the corporation was in existence on February 23, 1998. Lancit was in
existence on February 23, 1998 and the Lancit Certificate of Incorporation
does not elect out of the 66(2)/(3)% requirement.
Under the DGCL, unless required by a corporation's certificate
of incorporation (the RCN Certificate of Incorporation does not contain such
requirement), no vote of shareholders of the surviving corporation in a merger
is required if (i) the agreement of merger does not amend the certificate of
incorporation of the surviving corporation, (ii) each share of stock of such
surviving corporation outstanding immediately prior to the effective date of
the merger will be an identical outstanding or treasury share of the surviving
corporation after such effective date, (iii) either (A) no shares of common
stock of the surviving corporation and no shares, securities or obligations
convertible into such stock are to be issued or delivered under the plan of
merger or (B) the authorized unissued shares or treasury shares of common
stock of the surviving corporation to be issued or delivered under the plan of
merger plus those initially issuable upon conversion of any other securities
or obligations to be issued or delivered under such plan, do not exceed 20% of
the issuer's common shares outstanding immediately prior to the merger and
(iv) certain other requirements are satisfied.
Under the DGCL, a "business combination" with an "interested
shareholder" (as defined in the DGCL) of a publicly held Delaware corporation
is subject to a three-year moratorium unless specified conditions are met. See
"Certain Statutory, Charter and Bylaw Provisions of RCN--Delaware Takeover
Statute." Under the NYBCL, certain types of "business combinations" with an
"interested shareholder" (as defined in the NYBCL) of a New York corporation
are subject to a five-year moratorium unless specified conditions are met.
Briefly, under the NYBCL, a "business combination" includes mergers,
consolidations, sales of assets, or sales or issuances of securities with, to
or caused by the interested shareholder, its affiliates or its subsidiaries;
and "interested shareholder" is a person who, together with affiliates and
associates, owns (or within five years, did own) directly or indirectly 20% or
more of the corporation's voting stock.
Dividends, Redemptions and Repurchases
Under the DGCL, a corporation may generally pay dividends out
of surplus or its net profits for the fiscal year the dividend is declared.
The NYBCL allows corporations to pay dividends out of surplus only. The RCN
Certificate of Incorporation provides that dividends may not be declared or
paid on RCN Common Stock unless equal dividends are also declared and paid on
RCN Class B Stock, with the exception that distributions of stock will be made
in the same class of stock as the underlying shares. RCN also has entered
into a Credit Agreement and Indentures which may restrict its ability to pay
dividends. See "Dividends" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of RCN--Liquidity and Capital
Resources."
Shareholders Lists; Inspections Rights
Under the DGCL, shareholders have a right during ordinary
business hours and for at least ten days prior to any shareholder meeting and
during such meeting to examine a list of shareholders of RCN for any purpose
germane to such meeting. Additionally, under the DGCL, any shareholder, upon
written demand, also has the right to inspect for any proper purpose the
corporation's books and records, including the shareholder list, during normal
business hours.
Under the NYBCL, a person who is a shareholder of record, upon
at least five days' prior written demand, has the right to examine, during
normal business hours, minutes of shareholder meetings and the record of
shareholders and to make extracts therefrom for any purpose reasonably related
to such person's interest as a shareholder. The access of a shareholder may be
denied, however, if such shareholder does not furnish an affidavit that such
inspection is not for a purpose which is in the interest of a business or
object other than the corporation's and that such shareholder has not within
five years sold or offered for sale any list of shareholders of any
corporation.
Indemnification; Limitation of Liability
Both Delaware and New York allow broad indemnification by a
corporation of its officers, directors, employees and other agents and permit,
with certain exceptions, corporations to provide in their certificate of
incorporation or Bylaws (which RCN and Lancit have done) for elimination of
liability of directors to the corporation or its shareholders for monetary
damages for breach of such directors' fiduciary duty of care, with certain
exceptions.
The DGCL authorizes a Delaware corporation to indemnify any
person who was, is, or is threatened to be made, a party in any action (other
than an action by or in the right of a corporation) by reason of the fact that
he is or was a director, officer, employee or agent of the corporation if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful with respect to actions taken by or in the right of the
corporation. With respect to actions by or in the right of the corporation,
court approval is required for indemnification relating to any claim as to
which a person has been adjudged liable to the corporation.
The DGCL requires indemnification for expenses actually and
reasonably incurred by any director, officer, employee or agent in connection
with a proceeding against such person for actions in such capacity to the
extent that the person has been successful on the merits or otherwise. The
disinterested members of the board of directors (or independent legal counsel
of shareholders) must determine in each instance where indemnification is not
required by the DGCL, that such director, officer, employee or agent is
entitled to indemnification. The DGCL provides that the statutory
indemnification is not exclusive.
The RCN Certificate of Incorporation provides that a director
will not have personal liability to RCN or any shareholder for monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by the DGCL. In addition, the RCN Certificate of Incorporation
provides that RCN will indemnify to the fullest extent permitted by the DGCL
each director and each person who was or is a party or is threatened to be
made a party to any action (civil, criminal or otherwise) by reason of the
fact that he is or was a director or officer of RCN or is or was serving at
the request of RCN as a director or officer of another entity. This right is a
contractual right. RCN may, by action of the RCN Board, provide
indemnification to employees and agents of RCN.
Under the NYBCL, a corporation may indemnify any person made,
or threatened to be made, a party to any action or proceeding (other than one
by or in the right of the corporation to procure a judgment in its favor),
whether civil or criminal, by reason of the fact that he was a director or
officer of the corporation if such director or officer acted in good faith for
a purpose which he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, in criminal proceedings, in addition, had no
reasonable cause to believe his conduct was unlawful. A corporation may
indemnify any person made, or threatened to be made, a party to an action by
or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the corporation
if he acted in good faith for a purpose which he reasonably believed to be in,
or not opposed to, the best interests of the corporation, except that no
indemnification may be made in respect of (i) a threatened action, or a
pending action which is settled or otherwise disposed of, or (ii) any claim,
issue or matter as to which such person has been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought or, if no action was brought, any court of competent jurisdiction,
determines upon application that, in view of all circumstances, the person is
fairly and reasonably entitled to an indemnity for such portion of the
settlement amount and expenses as the court deems proper.
Indemnification under the NYBCL is not exclusive of other
indemnification rights to which a director or officer may be entitled, whether
contained in the certificate of incorporation or bylaws, or, when authorized
by such certificate of incorporation or bylaws, (i) a resolution of
shareholders or directors or (ii) an agreement providing for such
indemnification; provided that no indemnification may be made to or on behalf
of any director or officer if a judgment or other final adjudication adverse
to the director or officer establishes that his acts were committed in bad
faith or were the result of active and deliberate dishonesty and were material
to the cause of action so adjudicated, or that he personally gained in fact a
financial profit or other advantage to which he was not legally entitled.
Under the NYBCL, any person to whom such provisions regarding
indemnification apply who has been successful on the merits or otherwise in
the defense of a civil or criminal action or proceeding is entitled to
indemnification. Except as provided in the preceding sentence, unless ordered
by a court pursuant to the NYBCL, indemnification under the NYBCL pursuant to
the above paragraphs shall be made only if authorized in the specific case and
after a finding that the director or officer met the requisite standard of
conduct (i) by the board acting by a quorum of disinterested directors or (ii)
if such quorum is not available, if so directed by either (A) the board upon
the written opinion of counsel or (B) by shareholders. The NYBCL also
provides for certain notices to shareholders regarding amounts paid for
indemnification of directors and officers.
The Lancit Certificate of Incorporation eliminates to the
fullest extent permitted by the NYBCL personal liability of directors to
Lancit or its shareholders for damages for any breach of duty in such capacity.
Appraisal Rights
Under the DGCL, a shareholder who is entitled to vote and does
not vote in favor of a statutory merger or consolidation and demands appraisal
of his shares with respect thereto may, under certain circumstances, be
entitled to an appraisal by the Delaware Court of Chancery of the "fair value"
of his shares and receive such amount in lieu of the consideration otherwise
receivable in the transaction. Unless the corporation's certificate of
incorporation provides otherwise (the RCN Certificate of Incorporation does
not), such dissenters' rights are not available in certain circumstances,
including (i) to shareholders of a corporation whose shares are either (A)
listed on a national securities exchange or designated as a national market
security by the NASDAQ or (B) held of record by more than 2,000 holders and
(ii) to shareholders of a corporation surviving a merger if no vote of
shareholders of the surviving corporation is required to approve the merger.
Appraisal rights are available to any shareholder required to accept for his
shares anything except (i) shares of stock of the surviving corporation, (ii)
shares of any other corporation which shares are listed on a national
securities exchange or designated as a national market security by the NASDAQ
or held of record by more than 2,000 holders, (iii) cash in lieu of fractional
shares or (iv) any combination of the foregoing. No appraisal rights are
available to holders of RCN Common Stock with respect to the Merger.
Under the NYBCL, a shareholder, subject to certain conditions,
shall have the right to receive payment of the "fair value" of his shares in
the event he is entitled to vote and does not assent to certain mergers,
consolidations, sales and other dispositions of assets requiring shareholder
approval. Appraisal rights are not available (i) to shareholders of the parent
corporation in certain mergers with subsidiaries, (ii) to shareholders of the
surviving corporation unless their rights are adversely affected and (iii) to
shareholders of shares which were, as of the record date fixed to determine the
shareholders entitled to receive notice of the meeting of shareholders to vote
upon the plan of merger or consolidation, listed on a national securities
exchange or designated as a national market security by the NASDAQ. No
appraisal rights are available to shareholders of Lancit as the Lancit Common
Stock is admitted for trading on the NASDAQ. See "Introduction--Appraisal
Rights."
EXCHANGE PROCEDURES
In order to receive shares of RCN Common Stock, together with
any cash in lieu of fractional shares, pursuant to the Merger, each Lancit
Shareholder will be required to surrender the certificates evidencing such
shareholder's shares of Lancit Common Stock to the Exchange Agent. Promptly
after the Effective Time, the Exchange Agent will mail or make available to
each shareholder a notice and letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the shares of Lancit
Common Stock shall pass, only upon proper delivery of the shares to the
Exchange Agent) advising such shareholder of the effectiveness of the Merger
and the procedures to be used in effecting the surrender of shares of Lancit
Common Stock in connection therewith. Promptly after surrender of such
shares, the shareholder will receive RCN Common Stock, together with any cash
in lieu of fractional shares. Lancit Shareholders should surrender shares
only with a letter of transmittal. PLEASE DO NOT SEND SHARES WITH THE
ENCLOSED PROXY.
If payment of the RCN Common Stock, together with any cash in
lieu of fractional shares, is to be made to a person other than a person in
whose name shares of Lancit Common Stock are registered, it shall be a
condition of payment that the shares so surrendered be properly endorsed or
otherwise be in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of the shares, or shall
establish to the satisfaction of LME and RCN that such tax either has been
paid or is not applicable.
Until surrendered and exchanged in accordance with the Merger
Agreement, after the Effective Time each share of Lancit Common Stock shall
represent only the right to receive RCN Common Stock, together with any cash
in lieu of fractional shares, to which such shares are entitled; provided
however, that until the share certificates representing such shares are
surrendered, no dividend payable to holders of record of RCN Common Stock as
of any date subsequent to the Effective Time shall be paid to the holder of
such certificate in respect of the shares of RCN Common Stock evidenced
thereby and such holder shall not be entitled to vote such shares of RCN
Common Stock. Upon surrender of a certificate formerly evidencing Lancit
Common Stock which have been converted, there shall be paid to the record
holder of any certificate of RCN Common Stock issued in exchange therefor,
without interest thereon, any dividends and other distributions which, between
the Effective Time and the time of such surrender, shall have become payable
with respect to the number of whole shares of RCN Common Stock represented
thereby. At the close of business on the day prior to the date of the
Effective Time, the stock transfer books of Lancit shall be closed and no
further transfers shall be made. If, thereafter, any shares are presented for
transfer, such shares shall be canceled and exchanged for RCN Common Stock,
together with any cash in lieu of fractional shares. No party shall be liable
to any holder of certificates formerly representing Lancit Common Stock for
any amount paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
LEGAL MATTERS
The validity of the Merger Shares is being passed upon for RCN
by Davis Polk & Wardwell, New York, New York.
Legal matters, including the tax treatment of the transaction,
in connection with the Merger will be passed upon for Lancit by Christy &
Viener, 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 Proxy Statement--Prospectus and in the
Registration Statement 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 Proxy Statement--Prospectus and the 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.
The consolidated financial statements and the related financial
statement schedule of Lancit Media Entertainment, Ltd. as of June 30, 1997 and
for the fiscal year then ended included in this Proxy Statement--Prospectus
have been audited by Ernst & Young LLP, independent auditors, as stated in
their reports thereon appearing elsewhere herein. The consolidated financial
statements and the related financial statement schedule of Lancit Media
Entertainment, Ltd. as of June 30, 1996 and 1995 and for the years then ended
included in this Proxy Statement--Prospectus have been audited by Feldman
Sherb Ehrlich & Co., P.C. (formerly Feldman Radin & Co., P.C.), independent
auditors, as stated in their reports thereon appearing elsewhere herein.
ADDITIONAL INFORMATION
RCN and Lancit are subject to the informational requirements of
the Exchange Act, and, in accordance therewith are required to file reports
and other information with the Commission. Reports, proxy statements and other
information filed by RCN or Lancit with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained by mail
from the Commission's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, including RCN and
Lancit, that file electronically with the Commission. In addition, such
reports, proxy statements and other information concerning RCN or Lancit 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.
RCN has filed with the Commission a Registration Statement on
Form S-4 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Merger Shares. This
Proxy Statement--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 RCN and the Merger Shares, reference is
hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Proxy Statement--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.
All information contained in this Proxy Statement--Prospectus
with respect to RCN and LME was supplied by RCN and all information contained
in this Proxy Statement--Prospectus with respect to Lancit was supplied by
Lancit. Although neither RCN nor Lancit has any knowledge that would indicate
that any statements or information relating to the other party contained
herein is inaccurate or incomplete, neither RCN nor Lancit can warrant the
accuracy or completeness of such statements or information as they relate to
the other party.
INDEX TO FINANCIAL STATEMENTS
RCN Corporation
Report of Independent Accountants..........................................F-1
Consolidated Statements of Operations for the three years ended
December 31, 1997, 1996 and 1995.......................................F-2
Consolidated Balance Sheets at December 31, 1997 and 1996..................F-3
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995.......................................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995...................F-7
Notes to Consolidated Financial Statements.................................F-8
Erols Internet, Inc.
Report of Ernst & Young LLP, Independent Auditors.........................F-31
Balance Sheets as of December 31, 1996 and 1997...........................F-32
Statements of Operations for the period from August 1, 1995
(inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997............................................F-33
Statements of Stockholders' Deficit for the period from
August 1, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997............................F-34
Statements of Cash Flows for the period from August 1, 1995
(inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997............................................F-35
Notes to Financial Statements.............................................F-36
Lancit Media Entertainment, Ltd.
Report of Independent Auditors............................................F-46
Independent Auditors' Report..............................................F-47
Consolidated Balance Sheets as of June 30, 1997 and 1996..................F-48
Consolidated Statements of Operations for the
three years ended June 30, 1997, 1996 and 1995........................F-49
Consolidated Statements of Stockholders' Equity for the
three years ended June 30, 1997, 1996 and 1995........................F-50
Consolidated Statements of Cash Flows for the
three years ended June 30, 1997, 1996 and 1995........................F-51
Notes to Consolidated Financial Statements................................F-52
Independent Auditors' Report..............................................F-63
Report of Independent Auditors............................................F-64
Schedule II -- Valuation and Qualifying Accounts..........................F-65
Consolidated Balance Sheets as of December 31, 1997.......................F-66
Consolidated Statements of Operations for the
Six Months ended December 31, 1997 and 1996 (unaudited)...............F-67
Consolidated Statements of Cash Flows for the
Six Months ended December 31, 1997 and 1996 (unaudited)...................F-68
Notes to Consolidated Financial Statements................................F-69
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of RCN Corporation:
We have audited the accompanying consolidated balance sheets of RCN
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCN Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Cooper & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Sales ..................................................... $127,297 $104,910 $91,997
Costs and expenses, excluding depreciation and
amortizatio .............................................. 134,967 79,107 75,003
Nonrecurring charges ...................................... 10,000 -- --
Depreciation and amortization ............................. 53,205 38,881 22,336
--------- --------- ---------
Operating (loss) .......................................... (70,875) (13,078) (5,342)
Interest income ........................................... 22,824 25,602 29,001
Interest expense .......................................... (25,602) (16,046) (16,517)
Other income (expense), net ............................... 131 (546) (304)
--------- --------- ---------
(Loss) income before income taxes ......................... (73,522) (4,068) 6,838
(Benefit) provision for income taxes ...................... (20,849) 979 1,119
--------- --------- ---------
(Loss) income before minority interest and equity in
unconsolidated entities ................................... (52,673) (5,047) 5,719
Minority interest in loss (income) of consolidated entities 7,296 1,340 (144)
Equity in (loss) of unconsolidated entities ............... (3,804) (2,282) (3,461)
--------- --------- ---------
(Loss) income before extraordinary item ................... (49,181) (5,989) 2,114
Extraordinary charge - debt prepayment penalty, net of tax
of $1,728 ............................................... (3,210) -- --
--------- --------- ---------
Net (loss) income ......................................... $(52,391) $(5,989) $2,114
========= ========= =========
Basic earnings per average common share:
Income (loss) before extraordinary charge ................. $ (0.89) $ (0.11) $ (0.04)
Extraordinary charge - debt prepayment penalty ............ $ (0.06) -- --
Net income (loss) to shareholders ......................... $ (0.95) $ (0.11) $ (0.04)
Weighted average shares outstanding ....................... 54,965,716 54,918,394 54,890,334
Diluted earnings per average common share:
Income (loss) before extraordinary charge ................. $ (0.89) $ (0.11) $ (0.04)
Extraordinary charge - debt prepayment penalty ............ $ (0.06) -- --
Net income (loss) to shareholders ......................... $ (0.95) $ (0.11) $ (0.04)
Weighted average shares and common stock equivalents
outstanding ........................................... 54,965,716 54,918,394 54,890,334
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
--------------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments.............................................. $ 222,910 $ 61,843
Short-term investments........................................................... 415,603 46,831
Accounts receivable from related parties......................................... 9,829 12,614
Accounts receivables, net of reserve for doubtful accounts of $2,134 in 1997 and
$861 in 1996.................................................................. 17,815 10,413
Unbilled revenues................................................................ 1,695 844
Material and supply inventory, at average cost................................... 2,745 1,140
Prepayments and other............................................................ 5,314 4,556
Deferred income taxes............................................................ 4,821 4,371
Investments restricted for debt service.......................................... 22,500 --
--------------- -----------
Total current assets 703,232 142,612
--------------- -----------
Notes receivable - affiliates....................................................... -- 155,481
Property, plant and equipment, net of accumulated depreciation of $107,419 in 1997
and $84,529 in 1996.............................................................. 200,340 135,828
Investments restricted for debt service............................................. 39,411 --
Investments......................................................................... 70,424 76,547
Intangible assets, net.............................................................. 96,547 93,471
Deferred charges and other assets................................................... 41,038 24,146
--------------- -----------
Total assets........................................................................ $ 1,150,992 $628,085
=============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable to related parties.............................................. $3,748 $4,880
Accounts payable................................................................. 24,835 13,642
Advance billings and customer deposits........................................... 7,318 6,859
Accrued taxes.................................................................... 488 1,950
Accrued interest................................................................. 5,549 5,041
Accrued contract settlements..................................................... 3,126 3,565
Accrued cable programming expense................................................ 3,498 3,188
Accrued expenses................................................................. 21,143 18,167
--------------- -----------
Total current liabilities........................................................... 69,705 57,292
--------------- -----------
Long-term debt...................................................................... 686,103 131,250
Notes payable - affiliates.......................................................... -- 11,554
Deferred income taxes............................................................... 19,612 28,245
Other deferred credits.............................................................. 2,596 3,290
Minority interest................................................................... 16,392 5,389
Commitments and contingencies.......................................................
Preferred stock..................................................................... -- --
Common shareholders' equity......................................................... 356,584 390,765
--------------- -----------
Total liabilities and shareholders' equity.......................................... $ 1,150,992 $628,085
=============== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Cash Flows from operating activities
Net income (loss)....................................................... $(52,391) $(5,989) $2,114
Gain on pension curtailment/settlement.................................. -- (3,437) --
Accretion of discounted debt............................................ 8,103 -- --
Gain on sale of partnership interest.................................... (661) -- --
Extraordinary item - debt prepayment penalty............................ 3,210 -- --
Depreciation and amortization........................................... 53,205 38,881 22,336
Deferred income taxes and investment tax credits, net................... (10,503) (6,477) 6,696
Provision for losses on accounts receivable............................. 2,732 1,788 614
Equity in loss of unconsolidated entities............................... 3,804 2,282 3,461
Minority interest....................................................... (7,296) (1,340) 144
Net change in certain assets and liabilities, net of business acquisitions:
Accounts receivable and unbilled revenues............................ (14,979) (3,780) (5,550)
Material and supply inventory........................................ (1,605) (814) 777
Accounts payable..................................................... 11,193 2,954 3,983
Accrued expenses..................................................... 3,353 4,283 2,783
Accounts receivable from related parties............................. 3,180 1,572 11,860
Accounts payable to related parties.................................. (1,132) (5,448) (419)
Other, net........................................................... 367 597 529
Other................................................................... 1,081 (1,241) (769)
------- ------ -------
Net cash provided by operating activities.................................. 1,661 23,831 48,559
------- ------ -------
Cash flows from investing activities:
Additions to property, plant and equipment.............................. (79,042) (38,548) (29,854)
Purchase of short-term investments...................................... (445,137) (75,091) (238,257)
Sales and maturities of short-term investments.......................... 76,923 149,086 245,112
Acquisitions, net of cash acquired...................................... (30,490) (30,090) (121,147)
Purchase of loan receivable............................................. -- (13,088) --
Proceeds from sale of partnership interest.............................. 1,990 -- --
Other................................................................... (14) (1,646) (2,057)
------- ------ --------
Net cash used in investing activities...................................... 475,860 9,377 (146,203)
------- ------ -------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Redemption of long-term debt............................................ (141,250) (44,750) (28,741)
Issuance of long-term debt.............................................. 688,000 19,000 19,300
Change in affiliate notes, net.......................................... 97,624 32,802 (6,130)
Extraordinary item - debt prepayment penalty............................ (3,210) -- --
Payments made for debt financing costs.................................. (19,743) -- --
Cash contribution from joint venture partner............................ 9,016 -- --
(Increase) related to investments restricted for debt service........... (61,250) -- --
Proceeds from issuance of stock......................................... 230 -- --
Transfers from C-TEC.................................................... 89,323 78,550 132,707
Transfers (to) C-TEC.................................................... (23,474) (76,211) (148,339)
-------- ------- -------
Net cash provided by (used in) financing activities........................ 635,266 9,391 (31,203)
-------- ------- -------
Net increase (decrease) in cash and temporary cash investments............. 161,067 23,845 (128,847)
Cash and temporary cash investments at beginning of year................... 61,843 37,998 166,845
-------- ------- -------
Cash and temporary cash investments at end of year......................... $222,910 $61,843 $37,998
======== ======= =======
Supplemental disclosures of cash flow information
Cash paid during the periods
for:
Income taxes............................................................ $1,090 $549 $497
======== ======= =======
Interest (net of amounts capitalized)................................... $16,536 $16,046 $16,404
======== ======= =======
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as a purchase. A summary of the
transaction is as follows:
Cash paid........................................................ $40,000
Non-capitalizable costs ......................................... (10,000)
Reduction of minority interest................................... (3,812)
---------
Fair value of assets acquired.................................... $26,188
=========
In 1996, C-TEC acquired an 80.1% interest in Freedom New York, L.L.C.. The
acquisition was accounted for as a purchase. A summary of the acquisition is as
follows:
Cash paid........................................................... $28,906
Liabilities assumed................................................. 7,621
Deferred tax asset recognized....................................... (167)
Minority interest recognized........................................ 6,188
---------
Fair value of assets acquired....................................... $42,548
=========
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
In 1995, C-TEC acquired all the outstanding Common Stock of Twin County Trans
Video, Inc. and a related covenant not to compete. The consideration for the
acquisition was as follows:
Cash paid (including $1,000 deposit in 1994)................... $ 37,313
Issuance of 5% Promissory Note................................. 4,000
Capital contribution by stockholder............................ 39,493
Liabilities assumed............................................ 16,364
Deferred tax liability incurred................................ 33,797
------------
Fair value of assets acquired.................................. $ 130,967
============
In 1996, the $4,000 promissory note was canceled and the Company paid cash of
$500 in settlement of certain purchase price adjustments.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to Shareholders' Net Investment in connection with the
Distribution.
BECO's contribution of the IRU to the RCN-BECOCOM joint venture (Note 7(a)) is
reflected as "Advanced Fiber Plant" as its fair value.
See accompanying notes to Consolidated Financial Statements.
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
<TABLE>
<CAPTION>
Common Shares Cumulative Total
Issued and Additional Paid Shareholder's Translation Shareholder's
Outstanding Common Stock in Capital Deficit Net Investment Adjustment Equity
------------- ------------ -------------- ------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 .......... 1,400 $ 1 $ $ -- $372,846 $ -- $372,847
Net Income ...................... 2,114 2,114
Transfers from C-TEC ............ 21,714 21,714
Cumulative translation adjustment (2,606) (2,606)
----------- --------- --------- -------- ----------- ----------- -----------
Balance, December 31, 1995 ......... 1,400 1 -- -- 396,674 (2,606) 394,069
Net loss ........................ (5,989) (5,989)
Transfers from C-TEC ............ 3,134 3,134
Cumulative translation adjustment (449) (449)
----------- --------- --------- -------- ----------- ----------- -----------
Balance, December 31, 1996 ......... 1,400 1 -- -- 393,819 (3,055) 390,765
Net loss from 1/1/97 through
9/30/97 ...................... (35,275) 35,275
Net loss from 10/1/97 through
12/31/97 ..................... (17,116) (17,116)
Transfers from C-TEC ............ 17,980 17,980
Common stock issued in connection
with the distribution ........ 54,967,952 54,968 321,556 (376,524) --
Issuance of common stock ........ 20,518 20 210 230
----------- --------- --------- -------- ----------- ----------- -----------
Balance, December 31, 1997 ......... $54,989,870 $54,989 $321,766 $(17,116) $ -- $ (3,055) $356,584
=========== ========= ========= ======== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, RCN Corporation (the "Company" or "RCN") was
operated as part of C-TEC Corporation ("C-TEC"). On September 30, 1997, C-TEC
distributed 100 percent of the outstanding shares of common stock of its wholly
owned subsidiaries, RCN Corporation ("RCN") and Cable Michigan, Inc. ("Cable
Michigan") to holders of record of C-TEC's Common Stock and C-TEC's Class B
Common Stock as of the close of business on September 19, 1997 (the
"Distribution") in accordance with the terms of a Distribution Agreement dated
September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN consists primarily of
C-TEC's bundled residential voice, video and Internet access operations in the
Boston to Washington, D.C. corridor, its existing New York, New Jersey and
Pennsylvania cable television operations, a portion of its long distance
operations and its international investment in Megacable, S.A. de
C.V.("Megacable") Cable Michigan, Inc. consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc.. In connection with the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE").
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of all wholly and majority owned subsidiaries. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods. All material
intercompany transactions and balances have been eliminated. Investments
accounted for by the equity method include a 40% interest in Megacable, a
Mexican cable television system operator. Joint ventures which the Company
controls and in which the minority investors do not possess significant veto
rights are consolidated. Other joint ventures are accounted for by the equity
method.
C-TEC's corporate services group has historically provided substantial
support services such as finance, cash management, legal, human resources,
insurance and risk management and its financial statements are included in the
consolidated financial statements of the Company. Prior to the Distribution, the
corporate office allocated the cost for these services pro rata among the
business units supported primarily based on assets; contribution to consolidated
earnings before interest, depreciation, amortization, and income taxes; and
number of employees. In the opinion of management, the method of allocating
these costs is reasonable; however, the costs of these services remaining with
the Company after allocation to C-TEC's other business units are not necessarily
indicative of the costs that would have been incurred by the Company on a
stand-alone basis. Also included in the Company's consolidated financial
statements are the financial statements of the corporate financial services
company which invests excess cash of, and advances funds to the Company and
prior to the Distribution, C-TEC. The financial services company charges
interest expense on outstanding advances and pays interest income on excess cash
invested for affiliates.
CTE, RCN and Cable Michigan have entered into certain agreements providing
for the Distribution, and governing various ongoing relationships, including the
provision of support services, between the three companies, including a
distribution agreement and a tax-sharing agreement.
2. SEGMENT INFORMATION
The Company is developing advanced fiber optic networks to provide a wide
range of telecommunications services including local and long distance
telephone, video programming and data services (including high speed Internet
access), primarily to residential customers in selected high density markets in
the Boston to Washington, D.C. corridor. The Company also seeks to serve certain
commercial accounts on or near its networks. RCN's initial advanced fiber
optic networks have been established in New York City and, through a joint
venture with the Boston Edison Company ("BECO"), in Boston and surrounding
communities. RCN has also entered into a joint venture named Starpower
Communications, LLC ("Starpower") with Pepco Communications, LLC ("Pepco
Communications"), an indirect wholly owned subsidiary of Potomac Electric Power
Company ("PEPCO"), to develop an advanced fiber network in the Washington, D.C.
area. In February 1998, RCN acquired Boston's and Washington, D.C.'s largest
Internet service providers ("ISP"), Ultranet Communications, Inc. ("Ultranet")
and Erols Internet, Inc. ("Erols"), respectively. The Company also has hybrid
fiber/coaxial operations in New York (outside New York City), New Jersey and
Pennsylvania, wireless video operations in New York City and certain other
operations, including long distance telephone.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Hybrid Fiber/Coaxial
Sales................................................................ $ 92,100 $ 84,096 $ 66,404
Operating income before depreciation and amortization................ 39,767 40,094 28,458
Depreciation and amortization........................................ 33,713 33,131 20,723
Operating Income..................................................... 6,054 6,963 7,735
Additions of property, plant and equipment........................... 19,258 14,010 19,226
Identifiable assets.................................................. 159,763 335,285 359,401
Advanced Fiber, Wireless Video and Other Operating
Sales................................................................ $ 35,111 $ 20,768 $ 25,528
Operating loss before depreciation and amortization.................. (39,882) (11,711) (8,416)
Depreciation and amortization........................................ 18,480 4,970 904
Operating loss....................................................... (58,362) (16,681) (9,320)
Additions of property, plant and equipment........................... 56,454 23,714 6,453
Identifiable assets.................................................. 166,478 87,419 14,491
Corporate
Sales................................................................ $ 86 $ 46 $ 65
Operating loss before depreciation and amortization and nonrecurring
charge............................................................ (7,555) (2,580) (3,048)
Nonrecurring charge.................................................. 10,000 -- --
Depreciation and amortization........................................ 1,012 780 709
Operating loss....................................................... (18,567) (3,360) (3,757)
Additions of property, plant and equipment........................... 3,330 824 4,175
Identifiable assets.................................................. 824,751 205,381 275,718
Consolidated
Sales................................................................ $ 127,297 $ 104,910 $ 91,997
Operating loss before depreciation and amortization and nonrecurring
charge............................................................ (7,670) 25,803 16,994
Nonrecurring charge.................................................. 10,000 -- --
Depreciation and amortization........................................ 53,205 38,881 22,336
Operating loss....................................................... (70,875) (13,078) (5,342)
Additions of property, plant and equipment........................... 79,042 38,548 29,854
Identifiable assets.................................................. 1,150,992 628,085 649,610
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Temporary Cash Investments - For purposes of reporting cash flows,
the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be temporary cash investments.
Temporary cash investments are stated at cost which approximates market.
Short Term Investments and Investments Restricted for Debt Service -
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date in accordance with Statement of Financial Accounting
Standards No. 115 -- "Accounting for Certain Investments in Debt and Equity
Securities." At December 31, 1997 and 1996, marketable debt and equity
securities have been categorized as available for sale. The Company states its
short term investments at cost, which approximates market. Investments
restricted for debt service have been categorized as held to maturity.
Property, Plant and Equipment and Depreciation - Property, plant and
equipment reflects the original cost of acquisition or construction, including
payroll and related costs such as taxes, pensions and other fringe benefits, and
certain general administrative costs.
Depreciation is provided on the straight-line method based on the useful
lives of the various classes of depreciable property. The average estimated
lives of depreciable property, plant and equipment are:
Lives
-----------
Hybrid fiber/coaxial plant 5-22 years
Advanced fiber plant 10-15 years
Wireless & other plant 5 years
Buildings and leasehold improvements 5-45 years
Furniture, fixtures and vehicles 3-10 years
Other 3 years
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred. Major replacements and betterments
are capitalized. Gain or loss is recognized on major retirements and
dispositions.
Intangible Assets - Intangible assets are amortized on a straight-line
basis over the expected period of benefit ranging from 2 to 15 years.
Accounting for Impairments - The Company follows the provisions of
Statement of Financial Accounting Standards No. 121 -- "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of "
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue Recognition - Local telephone service revenue is recorded as earned
based on tariffed rates. Long distance telephone service revenue is recorded
based on minutes of traffic processed and tariffed rates or contracted fees.
Revenues from cable programming services are recorded in the month the service
is provided. Internet access service revenues are recorded based on contracted
fees.
Advertising Expense - Advertising costs are expensed as incurred.
Advertising expense charged to operations was $12,203, $1,441 and $862 in 1997,
1996 and 1995, respectively.
Stock Based Compensation - The Company applies Accounting Principles Board
Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans. The Company has adopted the disclosure - only
provisions of Statement of Financial Accounting Standards No. 123 -- "Accounting
for Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share - The Company has adopted statement of Financial
Accounting Standards No. 128 --"Earnings Per Share" ("SFAS 128"). Basic earnings
(loss) per share is computed based on net income (loss) divided by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to be
dilutive common stock equivalents. The conversion of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and have a dilutive effect if the Company had
income from continuing operations is 517,506.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by the number of average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common equity for each
share of C-TEC common equity owned.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ------------ -------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge............ $ 49,181 $ (5,989) $ 2,114
=========== =========== ===========
Basic earnings per average common share:
Average shares outstanding........................... 54,965,716 54,918,394 54,890,334
(Loss) income per average common share............... $ (0.89) $ (0.11) $ (0.04)
Diluted earnings per average common share:
Average shares outstanding........................... 54,965,716 54,918,394 54,890,334
----------- ----------- -----------
Dilutive shares resulting from stock options......... 54,965,716 54,918,394 54,890,334
=========== =========== ===========
(Loss) income per average common share............... $ (0.89) $ (0.11) $ (0.04)
</TABLE>
Income Taxes - The Company and its subsidiaries report income for federal
tax purposes on a consolidated basis.. Prior to the Distribution, the Company
and its subsidiaries were included in the consolidated federal income tax return
of C-TEC. Income tax expense is allocated to subsidiaries on a separate return
basis except that the Company's subsidiaries receive benefit for the utilization
of net operating losses and investment tax credits included in the consolidated
return even if such losses and credits could not have been used on a separate
return basis. The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes." The statement
requires the use of an asset and liability approach for financial reporting
purposes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Investment tax credits ("ITC") for the Company have been deferred in prior
years and are being amortized over the average lives of the applicable property.
Foreign Currency Translation - The Company has a 40% interest in Megacable.
For purposes of determining its equity in the earnings of Megacable, the Company
translates the revenues and expenses of Megacable into U.S. dollars at the
average exchange rates that prevailed during the period. Assets and liabilities
are translated into U.S. dollars at the rates in effect at the end of the fiscal
period. Prior to 1997, the Company's share of the gains or losses that result
from this process are shown in the cumulative translation adjustment account in
the common shareholders' equity section of the balance sheet. Effective January
1, 1997, since the three-year cumulative rate of inflation at December 31, 1996
exceeded 100%, Mexico is treated for accounting purposes as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The remeasurement
of the Mexican peso into U.S. dollars creates translation adjustments which are
included in net income. The Company's proportionate share of gains and losses
resulting from transactions of Megacable, which are made in currencies different
from its own, are included in income as they occur.
4. BUSINESS COMBINATIONS
The following business combinations were transacted by wholly owned
subsidiaries of C-TEC. The acquired businesses were transferred to the Company
in connection with the Distribution.
On August 30, 1996, FNY Holding Company, Inc., formerly a wholly owned
subsidiary of C-TEC ("FNY") acquired from Kiewit Telecom Holdings, C-TEC's
controlling shareholder at the time, an 80.1% interest in Freedom New York, LLC
and all related rights and liabilities ("Freedom") for cash consideration of
approximately $29,000. In addition, FNY assumed liabilities of approximately
$7,600. (In March 1996, Freedom had acquired the wireless cable television
business of Liberty Cable Television). The acquisition was accounted for as a
purchase, and accordingly, Freedom is included in the Company's consolidated
financial statements since September 1996. The full fair value of assets
acquired and liabilities assumed has been reflected in the Company's financial
statements with minority interest reflecting the separate 19.9% ownership.
FNY allocated the purchase price paid on the basis of the fair value of
property, plant and equipment and identifiable intangible assets acquired and
liabilities assumed. There was no excess cost over fair value of net assets
acquired.
Contingent consideration of $15,000 was payable in cash and was to be based
upon the number of net eligible subscribers, as defined in the Acquisition
Agreement, in excess of 16,563 delivered to the Company. The contingent
consideration is not included in the acquisition cost total above but was to
have been recorded when and if the future delivery of subscribers occurred. In
addition, FNY paid $922 to Kiewit Telecom Holdings which represents compensation
for foregone interest on the amount invested by Kiewit Telecom Holdings in
Freedom. This amount has been charged to operations.
On March 21, 1997, the Company paid $15,000 in full satisfaction of
contingent consideration payable for the original acquisition of Freedom.
Additionally, pursuant to the terms of the Freedom Operating Agreement, the
assets of RCN Telecom Services of New York, Inc., a wholly-owned subsidiary of
RCN, were contributed to Freedom, in which the Company had an 80.1% ownership
interest prior to such contribution. Subsequent to this contribution, the
Company paid $15,000 to acquire the minority ownership of Freedom. These amounts
were primarily allocated to excess cost over fair value of net assets acquired
and are being amortized over a period of approximately six years. The Company
also paid $10,000 to terminate a marketing services agreement between Freedom
and an entity controlled by Freedom's former minority owners. The Company
charged this amount to operations for the quarter ended March 31, 1997.
On May 15, 1995, C-TEC Cable Systems, Inc, ("RCN Cable") formerly a wholly
owned subsidiary of C-TEC, acquired 40% of the outstanding common stock of Twin
County Trans Video, Inc. ("Twin County") in exchange for cash of approximately
$26,300, including a $1,000 deposit made in 1994, and a $4,000, 5% promissory
note of RCN Cable. In addition, RCN Cable paid $11,000 in consideration of a
noncompete agreement and assumed liabilities of approximately $16,400. The
remaining shares were subject to an escrow agreement, pending completion of the
merger, and were required to be voted under the direction of RCN Cable. As of
May 15, 1995, RCN Cable also assumed management of Twin County. As a result, RCN
Cable had control of Twin County and accordingly Twin County is consolidated in
the Company's financial statements since May 1995, the date of the original
acquisition. The remaining outstanding common stock of Twin County was acquired
in September 1995 in exchange for $52,000 stated value redeemable convertible
preferred stock of C-TEC. The preferred stock has a stated dividend rate of 5%,
beginning January 1, 1996. The fair value of the preferred stock, as determined
by an independent appraiser was $39,500 which was recorded as additional paid-in
capital to the Company. In 1996, the $4,000 promissory note was canceled and RCN
Cable paid cash of $500 in settlement of certain purchase price adjustments.
RCN Cable has allocated the purchase price paid for Twin County on the
basis of the fair value of property, plant and equipment and identifiable
intangible assets acquired and liabilities assumed. The excess of the
consideration for the acquisition over the fair value of the net assets acquired
of approximately $16,700 has been allocated to goodwill and is being amortized
over a period of approximately 10 years.
In January 1995, RCN International Holdings, Inc. (formerly C-TEC
International, Inc.), formerly a wholly owned subsidiary of C-TEC, purchased a
40% equity position in Megacable. The aggregate consideration for the purchase
was cash of $84,115. The Company accounts for its investment by the equity
method of accounting. The original excess cost over the underlying equity in the
net assets acquired is approximately $94,000, which is being amortized on a
straight-line basis over 15 years.
In January 1995, RCN Cable purchased the assets of Higgins Lake Cable, Inc.
for cash of approximately $4,750.
In June 1995, C-TEC invested approximately $2,220 for a one-third interest
in a partnership which intends to provide alternative access telephone service
to commercial subscribers. C-TEC transferred this investment to RCN Cable in
1996 at net book value of $1,977. The Company disposed of its investment in 1997
and realized a gain of $661.
In November 1995, the Company purchased the assets used in the provision of
residential telephone services in New York by RealCom Office Communications,
Inc. for cash of approximately $1,050.
The following unaudited pro forma summary presents information as if the
acquisitions of Freedom and Twin County had occurred at the beginning of 1996.
The pro forma information is provided for information purposes only. It is based
on historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the consolidated entities.
Years Ended December 31,
--------------------------------
1997 1996
------------ -------------
(Unaudited)
Sales....................................... $127,297 $110,116
(Loss) from continuing operations
before extraordinary items................ $(72,245) $(20,189)
Net (loss).................................. $(53,831) $(16,807)
Pro Forma Earnings Per Share:
(Loss) from continuing operations
before extraordinary items................ $ (1.31) $ (0.37)
Net (loss).................................. $ (0.98) $ (0.31)
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at cost, include the following at December
31, 1997 and 1996:
1997 1996
------------ -------------
Federal Agency notes........................ $110,966 $ --
Commercial Paper............................ 43,859 8,823
Corporate debt securities................... 222,785 38,008
Certificates of deposit..................... 37,993 --
----------- -----------
Total....................................... $415,603 $ 46,831
=========== ===========
At December 31, 1997, short term investments with an amortized cost of
$329,714 have contractual maturities of one to three years. All remaining short
term investments have contractual maturities under one year.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997 1996
------------ -------------
Hybrid fiber/coaxial plant.................. $157,652 $148,172
Advanced fiber plant........................ 76,572 29,226
Wireless & other plant...................... 4,771 4,245
Buildings, leasehold improvements
and land.................................. 16,607 10,989
Furniture, fixtures and vehicles............ 23,399 18,119
Construction in process..................... 28,195 9,013
Other....................................... 563 593
----------- -----------
Total property, plant and equipment......... 307,759 220,357
Less accumulated depreciation............... (107,419) (84,529)
----------- -----------
Property, plant and equipment, net.......... $200,340 $135,828
=========== ===========
Depreciation expense was $24,257, $19,372 and $13,236 for the years ended
December 31, 1997, 1996 and 1995, respectively.
7. INVESTMENTS AND JOINT VENTURES
Investments at December 31, are as follows:
1997 1996
------------ -------------
Megacable................................... $ 70,363 $ 74,232
Partnership................................. -- --
Other....................................... 61 --
----------- -----------
Total Investments........................... $ 70,424 $ 76,547
=========== ===========
Investments carried on the equity method consist of the following at
December 31:
Percentage Owned
1997 1996
------------ -------------
Megacable................................... 40.00% 40.00%
Partnership Interest........................ -- 33.33%
Starpower Communications, LLC............... 50.00% --
a. In September 1996, RCN and Boston Edison Company ("BECO"), through
wholly owned subsidiaries, entered into a letter of intent to form a joint
venture to utilize 126 fiber miles of BECO's fiber optic network to deliver
RCN's comprehensive communications package in Greater Boston. The venture, in
the form of an unregulated entity with a term expiring in the year 2060, was
formed pursuant to a joint venture agreement dated December 23, 1996 (the
"Boston Joint Venture Agreement") providing for the organization and operation
of RCN-BECOCOM, LLC ("RCN-BECOCOM"). RCN-BECOCOM was organized to own and
operate an advanced fiber optic telecommunications network and to provide, in
the market in and around Boston, Massachusetts , voice, video and data services,
as well as the communications support component of energy related customer
services offered by BECO. RCN owns 51% of the equity interest in RCN-BECOCOM and
BECO, owns the remaining 49% interest. Future capital contributions are required
to be made on a 51% and 49% basis for RCN and BECO, respectively.
The closing of the transactions contemplated by the Boston Joint Venture
Agreement occurred on June 17, 1997. RCN will manage the business of RCN-BECOCOM
pursuant to the terms of the Management Agreement and, in consideration
therefor, will receive reimbursement for its reasonable costs, and a
performance-based fee (based on factors including the number of subscribers and
operating cash flow) to be determined by agreement of RCN and RCN-BECOCOM. The
initial term of the agreement expires on December 31, 2001. The agreement
provides for automatic successive three-year renewal periods, unless notice is
given ninety days before the end of the period. As a result of its ownership,
management and control, this joint venture with BECO is consolidated in RCN's
financial statements.
Pursuant to an Indefeasible Right of Use Agreement ("IRU Agreement") , BECO
will, for certain agreed upon fees, (i) provide construction services to build
out the Network, (ii) make available to RCN-BECOCOM (a) all of the available
capacity of BECO's existing fiber backbone, and (b) the ability to use BECO's
real estate, poles, easements and other interests for the construction and
operation of the Network and (iii) maintain the Network. BECO's construction
obligations expire on June 17, 2007 and the term of the IRU Agreement expires on
December 31, 2060. One year before each respective expiration date, BECO agrees
to commence good-faith negotiations to extend construction obligations beyond
June 17, 2007 and to allow continued use of BECO's facilities beyond December
31, 2060. The fair value of the IRU transferred by BECO to the joint venture is
reflected as "Advanced Fiber Plant" in property, plant and equipment.
BECO will have the right at the time of the Distribution and every two
years thereafter to convert its ownership interest in RCN-BECOCOM into the
Common Stock of RCN pursuant to specific terms and conditions. If BECO exercises
its conversion rights, BECO will remain obligated to make 49% of all cash
contributions by the parties and any cash contributions made after conversion
will result in it owning a portion of RCN-BECOCOM based on the value of
RCN-BECOCOM at the time of the contribution. BECO may exercise its conversion
rights in whole or in part from time to time. In January 1998, BECO notified RCN
that it has elected to exercise its option to the full extent permitted by the
Exchange Agreement with respect to 1997. RCN and BECO are presently in
discussions with respect to the calculation of the agreed upon value for the
exercise of such option.
b. On August 1, 1997, RCN and Potomac Capital Investment Corporation
("PCI"), a wholly owned subsidiary of PEPCO, entered into a letter of intent
(the "Letter of Intent") to form a joint venture which will own and operate a
communications network to provide voice, video, data and other communications
services to residential and commercial customers in the greater Washington,
D.C., Virginia and Maryland area (the "Washington, D.C. Market"). Starpower, an
unregulated limited liability company with a perpetual term, was formed on
October 28, 1997 to construct, own, lease, operate and market a network for the
selling of voice, video, data and other telecommunications services to all
potential commercial and residential customers in the Washington, D.C. Market.
RCN, owns 50% of the equity interest in Starpower and PCI, owns the remaining
50% interest.
The closing of the Starpower joint venture (the "Starpower Closing")
occurred on December 19, 1997.
Pursuant to the Amended and Restated Operating Agreement, RCN and Pepco
Communications are each required to make additional capital contributions in
accordance with a schedule set forth in such agreement on a 50%/50% basis.
Failure of either RCN or Pepco Communications to make a scheduled capital
contribution or to vote in favor of certain additional capital contributions may
result in the recalculation of equity interests. The business and affairs of
Starpower is to be managed by RCN and Pepco Communications. So long as RCN and
Pepco Communications maintain a 50%/50% equity interest in the joint venture,
each of RCN and Pepco Communications will appoint three members to the operating
committee, the approval of which is required for any business action. Certain
fundamental business actions, such as mergers, acquisitions, sales of
substantially all of the assets, liquidation and amendments to the certificate
of organization or any agreement signed at the Starpower Closing, require the
unanimous approval of the operating committee regardless of whether the parties
continue to maintain a 50%/50% ownership interest. As a result of the joint
control, Starpower is accounted for under the equity method of accounting.
A subsidiary of RCN will provide support services including customer
service, billing, marketing and certain administrative, accounting and technical
support services, each of which shall be provided at cost.
c. The basis of the Company's investment in Megacable exceeded its
underlying equity in the net assets of Megacable when acquired by approximately
$94,000 which excess is being amortized on a straight-line basis over 15 years.
At December 31, 1997, the unamortized excess over the underlying equity in the
net assets was $75,886. The Company recorded its proportionate share of (losses)
and amortization of excess cost over net assets of ($3,869), ($2,190) and
($3,061) in 1997, 1996 and 1995, respectively.
Effective January 1, 1997, since the three-year cumulative rate of
inflation at December 31, 1996 exceeded 100%, Mexico is being treated for
accounting purposes under Statement of Financial Accounting Standards No. 52
- --"Foreign Currency Translation", as having a highly inflationary economy. As a
result, the financial statements of Megacable are remeasured as if the
functional currency were the U.S. dollar. The remeasurement of the Mexican peso
into U.S. dollars creates translation adjustments which are included in net
income. Exchange gains (losses) of $(12), $247, and $(932) in 1997, 1996, and
1995, respectively, including translation losses in 1997, are included in the
respective statements of operations through the Company's proportionate share of
losses of Megacable.
The following table reflects the summarized financial position and results
of operations of Megacable as of and for the years ended December 31, 1997 and
1996:
1997 1996
------------ -------------
Assets...................................... 76,323 67,672
Liabilities................................. 8,347 6,455
Stockholders' equity........................ 67,976 61,217
Sales....................................... 30,441 23,225
Costs and expenses.......................... 23,389 15,689
Foreign currency transaction gains
(losses)................................... (31) 618
Net income.................................. 6,653 10,226
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31,
Amortization
Period 1997 1998
-------------- ----------- ------------
Franchises and subscriber lists....... 2-10.5 years $79,273 $78,720
Noncompete agreements................. 5-8 years 11,209 11,209
Goodwill.............................. 5-10 years 42,787 16,830
Building access rights................ 3-4 years 15,197 14,920
Other intangible assets............... 5-15 years 1,469 520
--------- ----------
Total intangible assets............... 149,935 122,199
Less accumulated amortization......... (53,388) (28,728)
Intangible assets, net................ $96,547 $ 93,471
========= ===========
Amortization expense charged to operations in 1997, 1996 and 1995 was
$28,948, $19,509 and $9,100, respectively.
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following at December 31:
1997 1996
---------- ------------
Note and interest receivable - Mazon Corporativo,
S.A. de C.V...................................... $17,682 $15,310
Debt issuance costs.............................. 19,743 309
Prepaid pension costs............................. -- 2,967
Prepaid professional services..................... 938 3,439
Other............................................. 2,675 2,121
--------- ----------
Total............................................. $41,038 $24,146
========= ==========
10. DEBT
a. Long-term debt
Long-term debt outstanding at December 31 is as follows:
1997 1996
---------- ------------
Senior Secured Notes 9.65% due 1999............... $ -- $131,250
Revolving Credit Agreement........................ 3,000 --
Term Credit Agreement............................. 100,000 --
Senior Notes 10% due 2007......................... 225,000 --
Senior Discount Notes 111/8% due 2007............. 358,103 --
--------- ----------
Total............................................. 686,103 131,250
Due within one year............................... -- --
--------- ----------
Total Long -Term Debt............................. $686,103 $131,250
========= ==========
In October 1997, pursuant to Rule 144A of the Securities Exchange Act of
1933, the Company completed an offering of 10% Senior Notes with an aggregate
principal amount of $225,000 and 11 1/8% Senior Discount Notes with an aggregate
principal amount at maturity of $601,045, both due 2007, to qualified
institutional buyers as defined in Rule 144A. The Senior Discount Notes were
issued at a discount and generated gross proceeds to the Company of $350,000. In
December 1997, the Company commenced an SEC registered Exchange Offer of its 10%
Senior Notes due 2007, Series B for any and all outstanding 10% Senior Notes due
2007, Series A and its 11 1/8% Senior Discount Notes due 2007, Series B for any
and all outstanding 11 1/8% Senior Discount Notes due 2007 Series A. The
Exchange Offer closed in January of 1998. All outstanding notes were exchanged.
The 10% Senior Notes were issued under an indenture dated October 17, 1997
(the "10% Indenture") between the Company and The Chase Manhattan Bank, as
Trustee. The 10% Senior Notes are general senior obligations of the Company
which mature on October 15, 2007 and are collateralized by a pledge of the
Escrow Account which contains approximately $61,000 of the net proceeds from the
sale of the 10% Senior Notes plus approximately $1,000 of aggregate interest,
representing funds that, together with the future proceeds from the investment
thereof, will be sufficient to pay interest on the 10% Senior Notes for six
scheduled interest payments. Interest on the 10% Senior Notes is payable in cash
semi-annually in arrears on each April 15 and October 15, commencing April 15,
1998.
The 10% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 10% Senior Notes are redeemable, in whole or in part, at any time on or
after October 15, 2002 at the option of the Company. The 10% Senior Notes have
redemption prices starting at 105% of the principal amount and declining to 100%
of the principal amount, plus any accrued interest.
The 11-1/8% Senior Discount Notes were issued under an indenture dated
October 17, 1997 (the "11-1/8% Indenture")between the Company and The Chase
Manhattan Bank, as Trustee. The 11-1/8% Senior Discount Notes are general senior
obligations of the Company, limited to $601,045 aggregate principal amount at
maturity and will mature on October 15, 2007. The 11-1/8% Senior Discount Notes
were issued at a discount to yield gross proceeds of $350,000. The 11-1/8%
Senior Discount Notes will not bear cash interest prior to October 15, 2002.
The 11-1/8% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 11-1/8% Senior Discount Notes are redeemable, in whole or in part, at
any time on or after October 15, 2002 at the option of the Company. The 11-1/8%
Senior Discount Notes have redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued interest.
Certain subsidiaries of the Company, including RCN Cable, have in place a
$125,000 credit agreement comprised of two credit facilities. The first is a
five year revolving credit facility in the amount of $25,000 which provides
credit availability through June 30, 2002. Revolving loans may be repaid and
reborrowed from time to time. The second is a term credit facility in the amount
of $100,000 which is to be repaid over six years in quarterly installments from
September 30, 1999 through June 30, 2005. Interest only is due through June 30,
1999. The interest rate is based on either a LIBOR or Base Rate option, at the
election of the Company (6.82% at December 31, 1997). The credit agreement is
collateralized by a pledge by the Company of its stock in RCN Cable and may, in
the future, be secured by pledges of stock of subsidiaries of the Company. At
December 31, 1997, the entire $100,000 term credit facility is outstanding and
$3,000 of the revolving credit facility is outstanding. RCN Cable used a portion
of its initial Borrowings under the credit facilities to prepay higher priced
Senior Secured Notes. The early extinguishment of the Senior Secured Notes
resulted in an extraordinary charge of $3,210, net of taxes of $1,728. The
credit agreement contains restrictive covenants which, among other things,
require the Company to maintain certain debt to cash flow and interest coverage
ratios and place certain limitations on additional debt and investments. The
Company does not believe that these covenants will materially restrict its
activities.
In 1989, in order to complete the August 29, 1989 Michigan Cable Television
acquisition, RCN Cable entered into a private placement of Senior Secured Notes
for $150,000 and a $70,000 Revolving Secured Credit Agreement, which was
voluntarily reduced to $60,000 in 1990 and which, in accordance with its terms,
reduced on a quarterly basis, through original scheduled maturity in September
1996. In August 1996, RCN Cable obtained an amendment and waiver related to this
Revolving Secured Credit Agreement which extended final maturity to December
1996 and increased the amount of available Borrowings. Additionally, the
restrictive covenant relating to limitations on the amount of capital
expenditures was waived for the year ending December 31, 1996. The Senior
Secured Notes were collateralized by the stock of certain cable subsidiaries of
the Company. On September 1, 1996 and on each September 1 thereafter, a
mandatory principal repayment was required on the Senior Secured Notes. The
Senior Secured Notes contained restrictive covenants which, among other things,
required maintenance of a specified debt to cash flow ratio. These notes were
prepaid in 1997 as discussed above. The Senior Secured Notes were classified as
long-term at December 31, 1996 since the Company had the intent and the ability
to refinance this obligation on a long-term basis through the above credit
facilities.
In connection with the acquisition of Twin County Trans Video, Inc., RCN
Cable issued a $4,000 promissory note at 5% due in May 2003. The note was
unsecured. In September 1996, the note was canceled in settlement of certain
purchase price adjustments.
Contractual maturities of long-term debt are as follows:
Year Ending December 31, Aggregate Amounts
------------------------ -----------------
1998................................... $ --
1999................................... $ 3,750
2000................................... $11,250
2001................................... $16,250
2002................................... $20,500
b. Short-term debt
At December 31, 1997, the Company had unused lines of credit for $5,500 at
prime (8.50% at December 31, 1997). Short-term unsecured Borrowings may be made
under these lines of credit. The amounts available under these lines of credit
are reduced by outstanding letters of credit ($3,060 at December 31,1997). All
unused lines of credit are cancelable at the option of the banks. There are no
commitment or facility fees associated with maintaining availability of the
above-mentioned lines of credit.
11. INCOME TAXES
The (benefit) provision for income taxes is reflected in the Consolidated
Statements of Operations as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal............................................... $ (11,795) $ 5,730 $ (5,713)
State................................................. 1,449 1,102 375
--------------- ---------- -----------
Total Current............................................ (10,346) 6,832 (5,338)
--------------- ---------- -----------
Deferred:
Federal............................................... (10,161) (4,751) 7,016
State................................................. (342) (1,000) (377)
--------------- ---------- -----------
Total Deferred........................................... (10,503) (5,751) 6,639
--------------- ---------- -----------
Amortization of ITC...................................... -- (102) (182)
--------------- ---------- -----------
Provision (benefit) for income taxes:
Before extraordinary item............................. (20,849) 979 1,119
Extraordinary item.................................... (1,728) -- --
--------------- ---------- -----------
Total (benefit) provision for income taxes............... $ (22,577) $ 979 $ 1,119
=============== ========== ===========
</TABLE>
At December 31, 1997 and 1995, the Company had tax related balances due
from affiliates of $3,186 and $501, respectively. At December 31, 1996, the
Company had tax related balances due to affiliates of $817.
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Net operating loss carryforwards........................................... $10,078 $ 2,130
Alternative minimum tax credits............................................ 167 219
Employee benefit plans..................................................... 1,031 882
Reserve for bad debt....................................................... 844 693
Start-up costs............................................................. 586 959
Investment in unconsolidated entity........................................ 3,985 4,771
Accruals for nonrecurring charges and contract settlements................. 2,368 2,299
Other, net................................................................. 1,823 1,888
--------- ----------
Total deferred tax assets.................................................. 20,882 13,841
--------- ----------
Property, plant and equipment.............................................. (14,759) (15,019)
Intangible assets.......................................................... (11,253) (17,776)
All other.................................................................. (1,257) (1,229)
--------- ----------
Total deferred liabilities................................................. (27,269) (34,024)
--------- ----------
Subtotal................................................................... (6,387) (20,183)
Valuation allowance........................................................ (8,404) (3,691)
--------- ----------
Total deferred taxes....................................................... $(14,791) $(23,874)
========= ==========
</TABLE>
In the opinion of management, based on the future turnaround of existing
temporary differences for the consolidated taxpaying group, primarily
depreciation, the Company will more likely than not be able to realize
substantially all of its deferred tax assets.
A valuation allowance has been provided for the portion of deferred tax
assets which, in the opinion of management is uncertain as to their realization.
The valuation allowance relates primarily to state net operating loss
carryforwards generated by certain subsidiaries.
The net change in the valuation allowance for deferred tax assets during
1997 was an increase of $4,713.
Net operating losses will expire as follows:
Federal State
---------- ----------
1999.......................................... $2,793
2000.......................................... 3,087
2001.......................................... 14,532
2002.......................................... 3,141
2003.......................................... 10,244
2004.......................................... 3,767
2011.......................................... 38,116
2012.......................................... 8,028
2017.......................................... $ 8,218 --
---------- ----------
Total......................................... $ 8,218 $83,708
========== ==========
The provision (benefit) for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 35%. The differences
are as follows:
For the Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- ---------
(Loss) income before (benefit) provision
for the income taxes and
extraordinary item ...................... $(70,030) $(5,010) $3,233
======== ======== ========
Federal income tax benefit at
statutory rate ........................... $(24,511) $(1,753) $1,131
State income taxes net of federal
income tax benefit ....................... 719 66 (33)
Investment tax credits amortized ........... -- (102) (50)
Amortization of goodwill ................... 830 779 388
Estimated nondeductible expenses ........... 1,913 1,564 (93)
Adjustment to prior year accrual ........... (197) 421 (161)
Other, net ................................. 397 4 (63)
-------- -------- --------
Total (benefit) provision for
income taxes ............................. $(20,849) $ 979 $1,119
======== ======== ========
In 1995, C-TEC received official notification of final settlement from the
Internal Revenue Service relating to the examination of C-TEC's consolidated
federal income tax returns for 1989, 1990 and 1991. The most significant
adjustment relates to the disallowance of the claimed amortization of certain
intangible assets. As a result of the disallowance, the Company's taxes payable
for prior years increased approximately $580. The amount accrued in previous
years was sufficient to satisfy the above adjustment. No additional accrual
during 1995 was required.
In 1997 and 1996, estimated non-deductible expenses relate primarily to
charges in connection with the restructuring of the Company.
12. STOCKHOLDERS' EQUITY AND STOCK PLANS
The Company has authorized 100,000,000 shares of $1 par value common stock
and 200,000,000 shares of $1 par value Class B nonvoting common stock. The
Company also has authorized 25,000,000 shares of $1 par value preferred stock.
At December 31, 1997, 54,989,870 shares of common stock are issued and
outstanding.
In March 1998, the Company's Board of Directors approved a two-for-one
stock split, payable in the form of a 100% stock dividend. The record date for
the stock split is March 20, 1998. Stockholders of record at the market close on
that date will receive an additional share of RCN common stock for each share
held. The distribution date for the stock dividend will be April 3, 1998. All
share and per share data, stock option data, and market prices of the Company's
common stock have been restated to reflect this stock split.
In connection with the Distribution, the Company Board adopted the 1997 RCN
Corporation Stock Option Plan ("the 1997 Plan"), designed to provide equity
based compensation opportunities to key employees when shareholders of the
Company have received a corresponding benefit through appreciation in the value
of RCN Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 5,000,000 shares of Common Stock, plus 3,040,100
shares of Common Stock issuable in connection with the Distribution related
option adjustments, may be issued pursuant to Awards granted under the 1997
Plan.
Unless earlier terminated by the Company Board, the 1997 Plan will expire
on the tenth anniversary of the Distribution. The Company Board or the
Compensation Committee may, at any time, or from time to time, amend or suspend
and, if suspended, reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of RCN were granted stock
option awards under C-TEC's stock option plans. In connection with the
Distribution 3,040,100 options covering Common Stock were issued. Each C-TEC
option was adjusted so that each holder would currently hold options to purchase
shares of CTE Common Stock, RCN Common Stock and Cable Michigan Common Stock.
The number of shares subject to, and the exercise price of, such options were
adjusted to take into account the Distribution and to ensure that the aggregate
intrinsic value of the resulting RCN, Cable Michigan and CTE options immediately
after the Distribution was equal to the aggregate intrinsic value of the C-TEC
options immediately prior to the Distribution.
Information relating to stock options is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding December 31, 1994............... 1,431,000
Granted.................................. 1,257,000
Exercised................................ --
Canceled................................. 280,000
---------
Outstanding December 31, 1995............... 2,408,000
Granted.................................. 190,000
Exercised................................ 58,000
Canceled................................. 272,000
---------
Outstanding December 31, 1996............... 2,268,000 $7.10
Granted.................................. 4,862,100 $14.31
Exercised................................ 20,000 $8.07
Canceled................................. 3,000 $8.36
--------- --------
Outstanding December 31, 1997............... 7,107,100 $14.31
========= ========
Shares exercisable December 31, 1997........ 1,221,000 $7.05
The following table summarizes stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------------- -----------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$6.24 to $8.40 .... 3,017,100 7.5 years $ 7.36 1,221,000 $7.05
$15.32 to $16.82 .. 4,090,000 9.8 years 15.33 -- --
--------- ---------
Total ............. 7,107,100 1,221,000
========= =========
</TABLE>
No compensation expense related to stock option grants was recorded in 1997
as the option exercise prices were equal to fair market value on the date
granted.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black Scholes
option pricing model with weighted average assumptions for dividend yield of 0%
for 1997, 1996 and 1995; expected volatility of 38.6% prior to the Distribution
and 49.8% subsequent to the Distribution for 1997, 39.5% for 1996, and 35.9% for
1995; risk-free interest rate of 6.52%, 5.95% and 6.32% for 1997, 1996 and 1995,
respectively; and expected lives of 5 years for 1997, 1996 and 1995.
The weighted-average fair value of options granted during 1997 was $7.46.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:
1997 1996 1995
----------- ---------- ---------
Net earnings - as reported................. $(52,391) $(5,989) $2,114
Net earnings - pro forma................... $(54,419) $(6,612) $1,695
Basic earnings pr share - as reported...... $ (0.95) $(0.11) $ 0.04
Basic earnings per share - pro forma....... $ (0.99) $(0.12) $ 0.03
Diluted earnings per share - as reported... $ (0.95) $(0.11) $ 0.04
Diluted earnings per share - pro forma..... $ (0.99) $(0.12) $ 0.03
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the C-TEC "Executive Stock Purchase Plan" or "C-TEC
ESPP"). Under the C-TEC ESPP, participants may purchase shares of C-TEC Common
Stock in an amount of between 1% and 20% of their annual base compensation and
between 1% and 100% of their annual bonus compensation provided, however, that
in no event shall the participant's total contribution exceed 20% of the sum of
their annual compensation, as defined by the C-TEC ESPP. Participant's accounts
are credited with the number of share units derived by dividing the amount of
the participant's contribution by the average price of a share of C-TEC Common
Stock at approximately the time such contribution is made. The share units
credited to a participant's account do not give such participant any rights as a
shareholder with respect to, or any rights as a holder or record owner of, any
shares of C-TEC Common Stock. Amounts representing share units that have been
credited to a participant's account will be distributed, either in a lump sum or
in installments, as elected by the participant, following the earlier of the
participant's termination of employment or three calendar years following the
date on which the share units were initially credited to the participant's
account. It is anticipated that, at the time of distribution, a participant will
receive one share of C-TEC Common Stock for each share unit being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow.
Shares of restricted C-TEC Common Stock awarded under the C-TEC Executive
Stock Purchase Plan and share units awarded under the C-TEC ESPP that relate to
C-TEC Common Stock were adjusted so that following the Distribution, each such
participant was credited with an aggregate equivalent value of restricted shares
of common stock of Commonwealth Telephone Enterprises, the Company and Cable
Michigan. In 1997, the Company's Board of Directors approved the RCN Corporation
Executive Stock Purchase Plan (the "RCN ESPP"), with terms substantially the
same as the C-TEC ESPP. The number of shares which may be distributed under the
RCN ESPP as matching shares or in payment of share units is 250,000. At December
31, 1997, 61,412 matching shares have been issued under the RCN ESPP, none of
which are vested. The Company recognizes the cost of the matching shares over
the vesting period. Expense recognized in 1997 and 1996 was $80 and $145,
respectively.
13. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
County Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows:
1996 1995
------- --------
Benefits earned during the year (service cost)............ $2,365 $1,656
Interest cost on projected benefit obligation............. 3,412 3,083
Actual return on plan assets.............................. (3,880) (12,897)
Other components - net.................................... (1,456) 8,482
------- --------
Net periodic pension cost................................. $441 $ 324
======= ========
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost:
December 31,
-------------------
1996 1995
------- --------
Discount rate............................................. 7.5% 7.0%
Expected long-term rate of return on plan assets.......... 8.0% 8.0%
Weighted average long-term rate of compensation
increases............................................... 6.0% 6.0%
The Company's allocable share of the consolidated net periodic pension
costs, based on the Company's proportionate share of consolidated annualized
salaries as of the valuation date, was approximately $158 and $251 for 1996 and
1995, respectively. These amounts are reflected in operating expenses. As
discussed below, no pension cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants in
December 1996. In December 1996, C-TEC allocated pension plan assets of $6,984
and the related liabilities to a separate plan for employees who no longer
accrue benefits after lump sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $3,437. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation. Such excess amounts to
$3,917 which, along with unrecognized items of $1,148 results in prepaid pension
cost of $2,769, which is included in "Prepayments and other" in the accompanying
1997 and 1996 consolidated balance sheets.
The following table sets forth the plans' funded status and amounts
recognized in C-TEC's balance sheet at December 31, 1996:
Plan assets at fair value.......................................... $55,325
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested............................................................. 32,372
Nonvested.......................................................... 1,704
----------
Total.............................................................. 34,076
Effect of increases in compensation................................ 6,042
----------
Plan assets in excess of (less than) projected
benefit obligation............................................... 15,207
Unrecognized transition asset...................................... (3,463)
Unrecognized prior service cost.................................... 2,438
Unrecognized net gain.............................................. (11,215)
----------
Prepaid pension cost............................................... $ 2,967
==========
C-TEC's pension plan has assets in excess of the accumulated benefit
obligation. Plan assets include cash, equity, fixed income securities and pooled
funds under management by an insurance company. Plan assets include common stock
of C-TEC with a fair value of approximately $5,835 at December 31, 1996.
Prepaid pension cost is included in "Deferred Charges and Other Assets" in
the accompanying 1996 consolidated balance sheet. The prepaid pension asset was
transferred to CTE in connection with the Distribution in 1997.
C-TEC sponsors a 401(k) savings plan covering substantially all employees
of the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employees contributions. Contributions charged to expense were
$354 and $268 in 1996 and 1995, respectively. Contributions charged to expense
in 1997 prior to the Distribution were $515.
In connection with the Distribution, RCN established a qualified savings
plan under Section 401(k) of the Code that will also qualify as an ESOP under
Sections 401(a) and 4975(e)(7) of the Code (the "ESOP"). Eligible active
employees under the ESOP, employees of the Company Businesses who make Section
401(k) contributions and certain other employees will be allocated shares of
Company Common Stock. Contributions charged to expense in 1997 were $306.
The Company provides certain postemployment benefits to former or inactive
employees of the Company who are not retirees. These benefits are primarily
short-term disability salary continuance. The Company accrues the cost of
postemployment benefits over employees' service lives. The Company uses the
services of an enrolled actuary to calculate the expense. Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries. The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost. The net periodic postemployment benefit cost
(credit) was approximately $458, $539 and ($106) in 1997, 1996 and 1995,
respectively.
14. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1997
related to its 1998 construction budget.
b. Total rental expense, primarily for office space and pole rentals, was
$3,505, $3,632 and $2,846 for 1997, 1996 and 1995, respectively. At December 31,
1997, rental commitments under noncancelable leases, excluding annual pole
rental commitments of approximately $794 that are expected to continue
indefinitely, are as follows:
Aggregate
Year Amounts
---- ---------
1998........................................ $3,725
1999........................................ $3,314
2000........................................ $2,939
2001........................................ $2,826
2002........................................ $2,848
Thereafter.................................. $8,501
c. The Company has outstanding letters of credit aggregating $3,060 at
December 31, 1997.
d. The Company has entered into various noncancelable contracts for network
services. Future obligations under these agreements are as follows:
Network
Year Services
---- ---------
1998........................................ $3,026
1999........................................ $3,064
2000........................................ $3,012
2001........................................ $2,762
2002........................................ $ 12
Thereafter.................................. $ 14
e. The Company is subject to the provisions of the Cable Television
Consumer Protection and Competition Act of 1992, as amended, and the
Telecommunications Act of 1996. The Company has either settled challenges or
accrued for anticipated exposures related to rate regulation. However, there is
no assurance that there will not be additional challenges to its rates.
f. In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial position or results of operations or
liquidity of the Company.
g. The Company has agreed to indemnify Cable Michigan and CTE and their
respective subsidiaries against any and all liabilities which arise primarily
from or relate primarily to the management or conduct of the business of the
Company prior to the effective time of the Distribution. The Company has also
agreed to indemnify Cable Michigan and CTE and their respective subsidiaries
against 30% of any liability which arises from or relates to the management or
conduct prior to the effective time of the Distribution of the businesses of
C-TEC and its subsidiaries and which is not a true CTE liability, a true Cable
Michigan liability or a true Company liability.
The Tax Sharing Agreement, by and among the Company, Cable Michigan and CTE
(the "Tax Sharing Agreement"), governs contingent tax liabilities and benefits,
tax contests and other tax matters with respect to tax returns filed with
respect to tax periods, in the case of the Company, ending or deemed to end on
or before the Distribution Date. Under the Tax Sharing Agreement, Adjustments
(as defined in the Tax Sharing Agreement) to taxes that are clearly attributable
to the Company Group, the Cable Michigan Group, or the CTE Group will be borne
solely by such group. Adjustments to all other tax liabilities will be borne 50%
by CTE, 30% by the Company and 20% by Cable Michigan.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the Capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in tax attributable thereto.
h. Under the Starpower Amended and Restated Operating Agreement, the
Company is committed to make quarterly capital contributions aggregating the
following in the years ended December 31:
1998........................................ $56,250
1999........................................ $68,750
2000........................................ $25,000
i. If, within five years after the Distribution, the ESOP portion of the
401(k) Plan does not hold shares representing at least 3% of the number of
shares of Company Common Stock outstanding immediately after the Distribution as
increased by the number of shares issuable to BECO pursuant to the Exchange
Agreement (collectively, "Outstanding Company Common Stock") with a market value
at such time of not less than $24,000, RCN will issue to the ESOP, in exchange
for a note from the ESOP (the "ESOP Note"), the amount of Company Common Stock
necessary to increase the ESOP's holdings of Company Common Stock to that level,
provided, however, that RCN is not obligated to issue shares to the ESOP in
excess of 5% of the number of shares of Outstanding Company Common Stock.
15. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company had the following transactions with affiliates during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Corporate office costs allocated to affiliates....................... $12,091 $ 12,362 $ 10,009
Cable staff and customer service costs allocated to Cable Michigan... 3,489 3,577 2,952
Interest income on affiliate notes................................... 8,688 15,119 17,340
Interest expense on affiliate notes.................................. 537 354 279
Long-distance terminating access charge expense from CTE............. 1,312 728 862
Royalty fees charged by CTE.......................................... 669 859 533
Revenue from engineering services.................................... -- 296 2,169
Other affiliate revenues............................................. 1,576 -- 6
Other affiliate expenses............................................. 2,199 1,980 2,090
</TABLE>
At December 31, 1997 and 1996, the Company has accounts receivable from
related parties of $9,829 and $12,614, respectively, for these transactions. At
December 31, 1997 and 1996, the Company has accounts payable to related parties
of $3,748 and $4,880, respectively, for these transactions.
The Company had notes receivable of $7,914 in 1996 from advances by the
Company's corporate financial services company to CTE. The Company also had
notes receivable of $147,567 at December 31, 1996, from Cable Michigan, Inc.
primarily related to the acquisition of the Michigan cable operations and
subsequent operations. All intercompany notes receivable were settled in
connection with the Distribution.
The Company had notes payable of $11,854 in 1996 from excess cash advanced
by CTE to the Company's corporate financial services company for investment. All
intercompany notes payable were settled in connection with the Distribution.
16. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables, cash and temporary cash investments, and short-term
investments.
The Company places its cash and temporary investments with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base primarily centered
in the Boston to Washington, D.C. corridor of the United States. The Company
routinely assesses the financial strength of its customers. As a consequence,
concentrations of credit risk are limited.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
b. Short-term investments
Short-term investments consist of commercial paper, corporate debt
securities, certificates of deposit and federal agency notes. Short-term
investments are carried at amortized cost which approximates fair value due to
the short period of time to maturity.
c. Long-term investments
Long-term investments consist of investments accounted for under the equity
method for which disclosure of fair value is not required. The note and interest
receivable are carried at cost plus accrued interest which management believes
approximates fair value.
d. Investments restricted for debt service
Investments restricted for debt service consists of an amount placed in
escrow from the proceeds of the 10% Senior Notes which, together with the
proceeds from the investment thereof, will be sufficient to pay interest on the
10% Senior Notes for six scheduled interest payments. Investments restricted for
debt service are carried at amortized cost.
e. Long-term debt
The fair value of fixed rate long-term debt was estimated based on the
Company's current incremental borrowing rate for debt of the same remaining
maturities. The fair value of floating rate debt is considered to be equal to
the carrying value since the debt reprices at least every six months and the
Company believes that its credit risk has not changed from the time the floating
rate debt was borrowed and therefore, it would obtain similar rates in the
current market.
f. Letter of credit
The contract amount of letters of credit represents a reasonable estimate
of their value since such instruments reflect fair value as a condition of their
underlying purpose and are subject to fees competitively determined in the
marketplace.
The estimated carrying fair value of the Company's financial instruments
are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments................ $222,910 $222,910 $61,843 $61,843
Short-term investments............................. $415,603 $415,603 $46,831 $46,831
Note and interest receivable....................... $17,682 $17,682 $15,310 $15,310
Investments restricted for debt service............ $61,911 $61,911 -- --
Financial Liabilities
Fixed rate long-term debt:
Senior Secured Notes............................ -- -- $131,250 $137,459
Senior Notes 10%................................ $225,000 $233,438 -- --
Senior Discount Notes 11.125%................... $358,103 $377,156 -- --
Floating rate long-term debt:......................
Revolving Credit Agreement...................... $ 3,000 $ 3,000 -- --
Term Credit Agreement........................... $100,000 $100,000 -- --
Unrecognized financial instruments:................
Letters of credit............................... $ 3,060 $ 3,060 $ 3,060 $ 3,060
</TABLE>
18. QUARTERLY INFORMATION (Unaudited)
<TABLE>
<CAPTION>
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................................. $29,677 $31,029 $31,148 $35,443
Operating income (loss) before depreciation,
amortization and nonrecurring charges.............. $ 4,153 $ 850 $(4,332) ($8,341)
Operating (loss)...................................... $(18,037) $(12,416) $(18,011) $(22,411)
Loss before extraordinary charge...................... N/A N/A N/A $(17,116)
Loss before extraordinary charge per average (0.31)
common share....................................... N/A N/A N/A $
Common Stock closing price
High.................................................. N/A N/A $ 16.63 $ 21.63
Low................................................... N/A N/A $ 12.44 $ 12.50
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................................. $24,165 $24,852 $26,746 $29,147
Operating income before depreciation and
amortization....................................... $ 4,199 $ 7,777 $ 9,188 $ 4,639
Operating (loss)...................................... $(4,621) $(1,233) $ (19) $(7,205)
</TABLE>
19. SUBSEQUENT EVENTS
a. In February 1998, the Company completed an offering of 9.8% Senior
Discount Notes with an aggregate principal amount at maturity of $567,000, due
February 2008. The 9.8% Senior Discount Notes were issued at a discount and
generated gross proceeds to the Company of $350,587.
The 9.8% Senior Discount Notes are general senior obligations of the
Company, limited to $567,000 aggregate principal amount at maturity and will
mature on February 15, 2008. The 9.8% Senior Discount Notes were issued at
a discount to yield gross proceeds of $350,587. The 9.8% Senior Discount Notes
will not pay cash interest prior to February 15, 2003. The yield to maturity of
the 9.8% Senior Discount Notes, determined on a semi-annual bond equivalent
basis, will be 9.8% per annum.
The 9.8% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinate indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 9.8% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of the Company. The 9.8% Senior
Discount Notes may be redeemed at redemption prices starting at 104.9% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued and unpaid interest.
b. On January 21, 1998, RCN entered into the Agreement and Plan of Merger
(the "Erols Merger Agreement") among RCN, Erols Internet, Inc. ("Erols"), Erol
Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands corporation ("Gold
& Appel"), and ENET Holdings, Inc., a Delaware corporation and a wholly owned
subsidiary of RCN ("ENET"), to acquire all of the outstanding shares of common
stock of Erols. The merger was consummated on February 20, 1998. Erols merged
with and into ENET (the "Erols Merger"), with ENET as the surviving corporation.
The approximate total Erols Merger consideration was $29,200 in cash, 1,730,648
shares of RCN common stock plus the assumption and repayment of $5,800 of debt.
Additionally, the Company is converting approximately 999,000 Erols stock
options to 699,104 RCN stock options at an average exercise price of $3.424 per
share. The transaction was accounted for under the purchase method of
accounting.
RCN expects to contribute to Starpower approximately 60% of the subscribers
acquired in the acquisition of Erols.
c. On January 21, 1998, RCN, UNET Holdings, Inc., a wholly owned subsidiary
of RCN, and Ultranet Communications, Inc. ("Ultranet") entered into an Agreement
and Plan of Merger (the "Ultranet Merger Agreement"). The total consideration
for the acquisition was 7,368 in cash, 890,384 shares of RCN common stock, and
$3,000 in deferred compensation. Additionally, the Company is converting 63,500
UltraNet stock options to 117,052 RCN stock options at an average exercise price
of $1.825 per share and making cash payments aggregating approximately $503 to
certain other holders of UltraNet stock options. The transaction was consummated
on February 27, 1998. The transaction was accounted for under the purchase
method of accounting.
RCN expects to contribute to RCN-BECOCOM approximately 30% of the
subscribers acquired in the acquisition of Ultranet.
d. RCN paid $12,500 in cash in January 1998 as its initial capital
contribution to Starpower.
e. In January 1998, BECO notified RCN that it has elected to exercise its
option to the full extent permitted by the Exchange Agreement (Note 7) with
respect to 1997. RCN and BECO are presently in discussions with respect to the
calculation of the agreed upon value for the exercise of such option.
f. On February 27, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Lancit Media Entertainment, Ltd. ("Lancit")
and LME Acquisition Corporation ("MergerSub"), a wholly owned subsidiary of RCN.
Pursuant to the terms of the Merger Agreement, MergerSub will be merged with and
into Lancit (the "Merger") such that immediately following the Merger, Lancit
will be a wholly-owned subsidiary of RCN. The consummation of the Merger is
subject to customary conditions, including the adoption and approval of the
Merger and the Merger Agreement by the stockholders of Lancit in accordance with
the provisions of applicable law and the filing and effectiveness of a
registration statement of RCN. There is no assurance that this transaction will
be consummated.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Erols Internet, Inc.
We have audited the accompanying balance sheets of Erols Internet, Inc. as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for the period from August 1, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Erols Internet, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from August 1, 1995 (inception) to December 31, 1995 and years
ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
January 15, 1998, except for Note 10,
as to which the date is February 20, 1998
EROLS INTERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $2,540,857 $ 103,718
Accounts receivable, less allowance of $42,000 and $161,000 at December
31, 1996 and 1997, respectively........................................... 233,508 544,051
Restricted cash.............................................................. -- 150,000
Note receivable from related parties......................................... 350,000 370,572
Prepaid expenses and other current assets.................................... 21,815 19,953
------------- -------------
Total current assets............................................................ 3,146,180 1,188,294
Property and equipment, net..................................................... 10,499,332 17,840,969
Restricted cash................................................................. 850,166 743,353
Deposits........................................................................ 63,321 395,711
------------- -------------
Total assets.................................................................... $14,558,999 $20,168,327
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities:
Accounts payable............................................................. $9,973,259 $8,651,104
Accrued expenses............................................................. 586,874 1,404,170
Current portion of unearned revenues......................................... 12,916,864 25,582,996
Notes payable................................................................ 700,000 700,000
Current portion of capital lease obligations................................. 613,506 1,466,701
Current portion of deferred gain............................................. 42,444 66,079
------------- -------------
Total current liabilities....................................................... 24,832,947 37,871,050
------------- -------------
Long-term portion of unearned revenues.......................................... 3,440,928 8,906,491
Note payable to stockholder..................................................... -- 5,000,000
Long-term portion of capital lease obligations.................................. 994,343 1,852,026
Long-term portion of deferred gain.............................................. 60,722 66,580
Deferred rent................................................................... 120,611 134,376
Commitments..................................................................... -- --
Stockholders' deficit:
Preferred Stock, $.001 par value; 10,000,000 shares authorized............... -- --
Common Stock, $.001 par value; 50,000,000 shares authorized; 5,586,492
and 5,836,779 shares issued and 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
EROLS INTERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
August 1, 1995 Year ended December 31,
(inception) to ----------------------------------
December 31, 1995 1996 1997
----------------- -------------- ---------------
<S> <C> <C> <C>
Net revenues:
Dial access revenues....................................... $ 125,752 $10,948,863 $ 33,588,925
Other revenues............................................. -- -- 2,939,215
------------- -------------- ---------------
Total net revenues............................................ 125,752 10,948,863 36,528,140
------------- -------------- ---------------
Costs and expenses:
Cost of dial access revenues............................... 63,030 6,002,155 13,338,452
Cost of other revenues..................................... -- -- 1,198,837
Operations and customer support............................ 125,095 6,227,011 9,930,114
Sales and marketing........................................ 188,314 9,475,585 19,777,437
General and administrative................................. 90,880 2,092,421 5,584,224
Depreciation and amortization.............................. 16,741 2,013,967 6,360,573
------------- -------------- ---------------
Total costs and expenses...................................... 484,060 25,811,139 56,189,637
Loss from operations.......................................... (358,308) (14,862,276) (19,661,497)
Other income (expense):
Other expense, net......................................... (658,421) (1,628,201) (49,157)
Interest expense, net...................................... (1,545) (150,376) (161,979)
------------- -------------- ---------------
Net loss...................................................... $(1,018,274) $(16,640,853) $(19,872,633)
============= ============== ===============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred Stock Accumulated Stockholders'
Shares Amount Paid-in Capital Compensation Deficit Deficit
----------- --------- --------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 ............. -- $ -- $ -- $ -- $ -- $ --
Net loss ........................... -- -- -- (1,018,274) (1,018,274)
--------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1995 .......... -- -- -- -- (1,018,274) (1,018,274)
Contribution of divisional equity to
Erols Internet, Inc. (Note 1) ... 424 -- 1,000 -- -- 1,000
Recapitalization of Erols Internet,
Inc. (Note 1):
Retirement of Common Stock of
Erols Computer, Inc. ........... (424) -- (1,000) -- -- (1,000)
Issuance of Common Stock of Erols
Internet, Inc. ................. 4,272,023 4,272 5,803 -- -- 10,075
Issuance of Common Stock ........... 1,314,469 1,314 2,757,186 -- -- 2,758,500
Compensatory stock options ......... -- -- 364,250 (364,250) -- --
Net loss ........................... -- -- -- -- (16,640,853) (16,640,853)
--------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1996 .......... 5,586,492 5,586 3,127,239 (364,250) (17,659,127) (14,890,552)
Issuance of Common Stock ........... 250,287 251 938,849 -- -- 939,100
Compensatory stock options ......... -- -- -- 161,889 -- 161,889
Net loss ........................... -- -- -- -- (19,872,633) (19,872,633)
--------- --------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 .......... 5,836,779 $5,837 $4,066,088 $(202,361) $(37,531,760) $(33,662,196)
========= ========= ============ ============ ============ ============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
August 1, 1995
(Inception) to Year ended December 31,
December 31, ------------------------------
1995 1996 1997
--------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss .............................................. $(1,018,274) $(16,640,853) $(19,872,633)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ................... 16,741 2,013,967 6,360,573
Allowance for doubtful accounts ................. -- 42,000 119,000
Gain related to sale-leaseback transactions ..... (42,444)
Stock and stock option compensation expense ..... -- -- 161,889
Changes in operating assets and liabilities:
Accounts receivable ........................... (14,764) (260,744) (450,115)
Prepaid expenses and other current assets ..... -- (21,815) 1,862
Restricted cash ............................... -- (850,166) (43,187)
Deposits ...................................... -- (63,321) (332,390)
Accounts payable .............................. 92,400 9,880,859 (1,322,155)
Accrued expenses .............................. 29,241 557,633 817,296
Unearned revenues ............................. 743,496 15,614,296 18,131,695
Deferred rent ................................. 68,105 52,506 13,765
----------- ------------ ------------
Net cash (used in) provided by operating activities ... (83,055) 10,324,362 3,543,156
INVESTING ACTIVITIES
Purchases of property and equipment ................ (416,945) (10,174,143) (11,350,440)
Proceeds from disposal of property and equipment ... -- -- 12,172
Advance under note receivable from related parties . -- (350,000) --
----------- ------------ ------------
Net cash used in investing activities ................. (416,945) (10,524,143) (11,338,268)
FINANCING ACTIVITIES
Proceeds from notes payable to bank ................ 500,000 700,000 600,000
Proceeds from notes payable to related party ....... -- -- 5,000,000
Payments of notes payable to bank .................. -- (500,000) (600,000)
Payments on obligations under capital leases ....... -- (227,937) (581,127)
Net proceeds from issuance of Common Stock ............ -- 2,768,575 939,100
----------- ------------ ------------
Net cash provided by financing activities ............. 500,000 2,740,638 5,357,973
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents .. -- 2,540,857 (2,437,139)
Cash and cash equivalents at beginning of period ...... -- -- 2,540,857
----------- ------------ ------------
Cash and cash equivalents at end of period ............ $ -- $ 2,540,857 $ 103,718
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ......................................... $ 1,545 $ 159,196 $ 281,085
=========== ============ ============
</TABLE>
See accompanying notes
EROLS INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1. Organization
Erols Internet, Inc. (the "Company") began operations on August 1, 1995 as
a division of OEO, Inc., which changed its name to Erols Internet, Inc. on
December 2, 1996. The Company is an Internet service provider ("ISP"), offering
a combination of low priced, high quality Internet access in targeted markets
located throughout the corridor stretching from Massachusetts to Virginia.
From its inception on August 1, 1995 through December 2, 1996, the Company
operated as a division of OEO, Inc., a company that had two divisions consisting
of the Company's ISP operations and a computer, television and video cassette
recorder repair division. On December 2, 1996, OEO, Inc. reincorporated in the
State of Delaware and changed its name to Erols Internet, Inc. Shortly
thereafter, on December 28, 1996, the assets and liabilities of the computer,
television and video cassette recorder repair division were spun-off to a newly
formed Virginia corporation named Erol's Computer & TV/VCR, Inc.
The financial statements of Erols Internet, Inc. as of and for the five
month period ended December 31, 1995 have been prepared on the basis that Erols
Internet, Inc. operated as a division of OEO, Inc. and accordingly, there are no
equity accounts such as common stock or paid in capital related to the Internet
division. The financial statements of Erols Internet, Inc. as of December 31,
1996 have been prepared on the basis that Erols Internet, Inc. operated as a
separately incorporated company and accordingly, reflect the shares of Common
Stock issued to the former stockholder of OEO, Inc. as a result of the
reincorporation and recapitalization of Erols Internet, Inc. Additionally, the
statements of operations for the period from August 1, 1995 (inception) to
December 31, 1995 and for the period from January 1, 1996 to December 28, 1996
have been prepared from the historical books and records of the Internet
division and include all amounts directly attributable and identifiable to the
Internet business as well as indirect expenses, such as physical operating costs
and management salaries. The physical operating costs and management salaries
were charged based on square feet and hours attributable to the Internet
business, respectively.
The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure, increase internal
staffing, develop its systems and expand into new markets. The Company expects
to continue to focus on increasing its subscriber base and geographic coverage.
Accordingly, the Company expects its cost and operating expenses and capital
expenditures to continue to increase significantly, all of which will have a
negative impact on short-term operating results. The online services and
Internet markets are highly competitive. The Company believes that existing
competitors, Internet-based services, Internet service providers, Internet
directory services and telecommunication companies are likely to enhance their
service offerings resulting in greater competition for the Company. The
competitive conditions could have the following effects: require additional
pricing programs, increase spending on marketing, limit the Company's ability to
expand its subscriber base and result in increase attrition in the existing
subscriber base. There can be no assurance that growth in the Company's revenues
or subscriber base will continue or that the Company will be able to achieve or
sustain profitability or positive cash flow.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents. On December 31, 1997, the Company had purchased
$5,125,000 of U.S. Government securities under agreements to resell on January
1, 1998. Due to the short-term nature of the agreements, the Company did not
take possession of the securities which were held by the Company's asset
managers. The market value of the securities approximated the carrying amount at
December 31, 1997.
Restricted Cash
Certain capital lease agreements generally require the Company to maintain
restricted cash deposit accounts with a bank which amounted to $850,166 and
$893,353 as of December 31, 1996 and 1997, respectively.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." The Company made no adjustments to the carrying values of the
assets during the period from August 1, 1995 (inception) to December 31, 1995
and during the years ended December 31, 1996 and 1997.
Stock Compensation
The Company accounts for its stock-based compensation in accordance with
APB No. 25 "Accounting for Stock Issued to Employees" ("APB 25") using the
intrinsic value method. The Company has made pro forma disclosures required by
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") using the
fair value method.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. During the period from August 1, 1995 (inception) to December 31, 1995
and the years ended December 31, 1996 and 1997, the Company offered one, two and
three year contracts for Internet access that are generally paid for in advance
by customers. The Company has deferred recognizing revenue on these advance
payments and amortizes the amounts to revenue on a straight-line basis as the
services are provided.
The Company allows for cancellations of up to thirty days after service is
initiated for a full refund. Any cancellations in the period subsequent to the
first thirty days of service are refunded on a pro-rata schedule. The Company
reviews its history of cancellations periodically and, when appropriate, records
a reserve for estimated amount of returns.
The Company recognizes web page hosting revenues when the services are
rendered. During the year ended 1997, the Company offered monthly and one year
contracts to host customers' web pages. The revenues related to these contracts
were recognized on the straight line basis over the term of the contract.
Revenues from internet classes and product sales are recognized as the service
is performed or product shipped.
Costs of Revenues
Cost of dial access revenues primarily consists of telecommunication
expenses inherent in the network infrastructure. Cost of dial access revenues
also includes fees paid for lease of the Company's backbone, as well as license
fees for Web browser software based on a per user charge, other license fees
paid to third-party software vendors, product costs, and contractor fees for
distribution of software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from August 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, the Company expensed $121,451, $6,530,877 and
$12,267,445, respectively, as advertising costs.
Income Taxes
Prior to December 28, 1996, the Internet Business operated as a division of
OEO, Inc. and accordingly, a consolidated tax return for OEO, Inc. was filed.
Since OEO, Inc. generated consolidated net losses for the period from August 1,
1995 to December 28, 1996, no provision for income taxes would have been
recorded for the consolidated company and, as such, no additional disclosure has
been made as to the Internet division's portion of the net losses for tax
purposes. In connection with the reincorporation of OEO, Inc. and the spin-off
of Erol's Computer & TV/VCR, Inc., the provision for income taxes and the
resulting deferred tax asset (see Note 8) for the Company using the liability
method was calculated for the period December 2, 1996 through December 31, 1996.
There was no provision for income taxes required for this period.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, restricted cash and
accounts receivable. The cash and restricted cash are held by a high credit
quality financial institution. For accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for credit losses,
and such losses have been within management's expectations. The concentration of
credit risk is mitigated by the large customer base. The carrying amount of
the receivables approximates their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results. Although
the Company attempts to maintain multiple vendors for each required product, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are currently acquired from two sources. In addition,
some of the Company's suppliers have limited resources and production capacity.
If the suppliers are unable to meet the Company's needs as it builds out its
network infrastructure, then delays and increased costs in the expansion of the
Company's network infrastructure could result, which would affect operating
results adversely.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Comprehensive Income",
which is required to be adopted for the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the Statements of Stockholders' Deficit. The Company will be
required to restate earlier periods provided for comparative purposes. The
disclosure for comprehensive income is not expected to be material.
3. Property and Equipment
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is calculated using the straight-line method over estimated
useful lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Property and equipment consisted of the following:
December 31,
---------------------------
1996 1997
----------- -----------
Computer equipment ............................. $11,570,218 $24,517,954
Furniture, fixtures, and office equipment ...... 721,218 1,378,768
Leasehold improvements ......................... 238,604 335,528
----------- -----------
12,530,040 26,232,250
Less accumulated depreciation .................. 2,030,708 8,391,281
----------- -----------
$10,499,332 $17,840,969
=========== ===========
4. Notes Payable
Pursuant to a promissory note agreement dated December 20, 1995, the
Company owed $500,000 to a financial institution as of December 31, 1995. The
loan bore interest at an annual rate of 1.5% plus prime rate (10% at December
31, 1995). Prior to the repayment of the loan balance, the loan was
collateralized by certain assets of the Company and was guaranteed by an officer
and stockholder of the Company. During 1996, the Company repaid the balance of
the note plus unpaid interest totaling $16,131.
As of December 31, 1996 and 1997, the Company had a short-term line of
credit arrangement with a bank which allowed for aggregate borrowings up to
$700,000. As of December 31, 1996 and 1997, $700,000 was outstanding under this
arrangement. The line of credit bears interest at the bank prime rate plus
1-1/2% per annum (10% as of December 31, 1997). As of December 31, 1996 and
1997, the Company has accrued $2,051 and $7,158, respectively, of interest
related to this line of credit. The note is due on September 25, 1998. The line
of credit is personally guaranteed by an officer and stockholder of the Company.
See Note 6.
During December 1997, the Company entered into a subordinated revolving
line of credit agreement, with a maximum borrowing amount of $5,000,000, and a
$5,000,000 subordinated note payable agreement with a stockholder. The Company
received the proceeds from the $5,000,000 note payable in December 1997 and
utilized the proceeds to repay certain accounts payable. The subordinated
revolving line of credit and note payable bear interest at a fluctuating rate
equal to the greater of 11% per annum or 4-1/2 per annum over the prime rate.
The subordinated revolving line of credit agreement provides for an unused
facility fee equal to 1/2% of the difference between the average daily balance
outstanding and the $5,000,000 maximum borrowing amount, payable quarterly. The
revolving line of credit and the note payable are secured by certain assets of
the Company. The balance of the note payable, as well as any outstanding
borrowings under the line of credit facility, are due upon the acquisition of
more than 50% of the Company's outstanding Common Stock or the sale in an
underwritten public offering of debt or equity securities issued by the Company.
5. Commitments
Operating Leases
The Company leases office space and various office and computer equipment
under non-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:
1998................................ $ 1,301,609
1999................................ 914,082
2000................................ 578,203
2001................................ 461,561
2002................................ 314,831
---------------
$ 3,570,286
===============
Capital Leases
The Company leases certain office and computer equipment as a result of
sales-leaseback agreements, which will be accounted for as capital leases. The
Company recorded approximately $192,000 of deferred gain related to the
difference between the sale price of the equipment and present value of the
minimum lease payments. The Company will amortize the deferred gain to other
income over the lease term. Computer equipment held under capital leases at
December 31, 1996 and 1997 amounted to $1,956,407 and $4,320,349, respectively.
Accumulated amortization related to this equipment amounted to $480,384 and
$1,329,551 at December 31, 1996 and 1997, respectively. Amortization related to
capital leased equipment is included in depreciation and amortization expense.
The non-cash portion of these transactions has been excluded from the Statements
of Cash Flows.
As of December 31, 1997, future minimum lease payments under the capital
leases are as follows:
1998............................................... $ 1,805,933
1999............................................... 1,487,236
2000............................................... 536,826
----------------
3,829,995
Less interest...................................... (511,268)
----------------
Present value of net minimum payments.............. 3,318,727
Less current portion............................... 1,466,701
----------------
$ 1,852,026
================
Letters of Credit
During 1996 and 1997, in connection with capital lease agreements, the
Company obtained several letters of credit with a financial institution in the
amounts of the lease obligations. As collateral for these letters of credit, the
financial institution required that the Company invest certain amounts in
certificate of deposits at the financial institution. The total amount of cash
restricted in connection with these letters of credit is approximately $905,000
and $837,000 at December 31, 1996 and 1997, respectively. The certificates of
deposit bear interest at a rate of 4.7%, mature in one year and are renewable at
the option of the financial institution. The letters of credit expire in 1998
and will be automatically renewed, subject to certain withdrawal privileges by
the Company, by the financial institution for an additional one year period for
each year under which the capital lease obligations are outstanding.
Employment Agreements
During 1996 and 1997, the Company executed employment agreements with
certain key executives under which the Company is required to pay the following
base salaries annually over the next two years:
1998...................................... $ 840,000
1999...................................... 225,000
----------------
$ 1,065,000
================
Other Commitments
Effective January 31, 1997, the Company entered into an ISP License
Agreement with a vendor. The Company agreed to license a minimum of 1,000,000
software mailbox products in exchange for $3,000,000, which is to be paid in
quarterly installments over the next three years. After exceeding the 1,000,000
software mail box products, the Company may license additional mailbox products
for a fee of $3.00 per mailbox.
6. Related Party Transactions
Since inception, the Company has shared common facilities and operating
costs such as executive management salaries, accounting, supplies, marketing,
etc., with Erol's Computer & TV/VCR, Inc. (the "Affiliated Company") which
shares common ownership with the Company. During the period from August 1, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and 1997,
$11,530, $721,557 and $0 were charged to operations related to shared facilities
and operating costs, respectively.
The Company executed a promissory note agreement with an Individual (the
"Individual"), an officer and stockholder of the Company, and the Affiliated
Company, whereby the Company agreed to loan $350,000 to the Individual and the
Affiliated Company. The note bears annual interest at a rate equivalent to the
federal rate, defined by the Internal Revenue Code. The balance of the note plus
compounded interest will become due to the Company three weeks after the date on
which the short-term line of credit arrangement expires and the Individual has
been released as a guarantor of the line of credit arrangement with the bank.
Since inception in August 1995 through December 31, 1996, Erols Internet
paid certain expenses related to the Affiliated Company on behalf of the
Affiliated Company. These expenses amounted to $658,422 and $1,645,511 during
the period from August 1, 1995 (inception) to December 31, 1995 and during the
year ended December 31, 1996, respectively. Since there is no intention to repay
these amounts to the Company, the Company has written off the receivable and has
included the amount in other expense in the Statements of Operations.
Effective January 1, 1997, the Company entered into a five year management
agreement with Erol's Computer & VCR (the "Affiliated Company"). Pursuant to
this agreement, the Company will provide office space, general and
administrative services, sales services and print advertising services to the
Affiliated Company in exchange for a management fee. The management fee is based
on actual direct labor charges to the Affiliated Company and an allocation of
facilities costs based on square feet used by the Affiliated Company. During the
year ended December 31, 1997, the management fee amounted to $58,784. The
$58,784 is included in accounts receivable as of December 31, 1997. During
December 1997, the parties agreed to terminate the agreement effective December
31, 1997.
The Company purchased computer equipment for resale and internal use from
the Affiliated Company. During the year ended December 31, 1997, purchases
amounted to $532,714.
7. Stockholders' Deficit
Equity transactions
During 1995, the Company operated as a division of OEO, Inc. and
accordingly, had no Common Stock outstanding. During 1996, as a part of the
reorganization, the sole common stockholder was issued 4,272,023 shares of
voting Common Stock, par value $0.001 in Erols Internet, Inc.
In December 1996, the Company completed a private placement to raise total
proceeds of approximately $3,000,000 from an outside investor (the "Minority
Stockholder"). The Company sold 1,314,469 shares of voting Common Stock at $2.29
per share.
In May 1997, the Company completed a private placement to raise total
proceeds of approximately $500,000 from the Minority Stockholder. The Company
sold 131,447 shares of voting Common Stock at $3.80 per share.
In September 1997, the Company completed a private placement to raise total
proceeds of approximately $500,000 from the Minority Stockholder. The Company
sold 114,600 shares of voting Common Stock at $4.36 per share.
On December 4, 1997, the Board of Directors and stockholders of the Company
approved a 1 for 2.3583672 reverse stock split of the Company's $0.001 par value
voting Common Stock, which became effective on December 5, 1997. In addition,
the Company eliminated the authorized non-voting Common Stock. All references in
the accompanying financial statements to the number of shares of Common Stock
and per-share amounts have been restated to reflect these transactions.
Stock Option Plan
During 1996, the Company adopted a stock option plan (the "Option Plan")
which permits the Company to grant up to 657,234 voting Common Stock options to
employees, board members and others who contribute materially to the success of
the Company. During 1997, the Company increased the number of options available
for grant under the plan to 826,843. Stock options are generally granted at
prices which the Company's Board of Directors believes approximates the fair
market value of its Common Stock at the date of grant. Individual grants
generally become exercisable ratably over a period of three years from the date
of hire. The contractual term of the options is ten years from the date of
grant.
In December 1996, the Company issued 328,617 options to a certain officer
at an exercise price of $1.18 which was considered to be below fair market value
at the time of the option grant. Accordingly, the Company recorded deferred
stock compensation of $364,250 which will be amortized to expense over the
vesting period of three years beginning in January 1997, of which $161,889 was
recognized as expense during 1997.
Common stock option activity was as follows:
Year ended December 31,
1996 1997
------------------- ---------------------
Weighted Weighted
Number Average Average
of Exercise Exercise
Shares Price Shares Price
------- -------- ---------- ---------
Outstanding at beginning of year .... -- $ -- 455,823 $ 1.49
Options granted ..................... 455,823 1.49 675,611 3.04
Options exercised ................... -- -- (4,240) 3.32
Options canceled or expired ......... -- -- (75,333) 2.29
------- ----- --------- ------
Outstanding at end of year .......... 455,823 $1.49 1,051,861 $ 2.42
======= ===== ========= ======
Exercisable at year-end ............. -- $ -- 264,278 $ 1.91
======= ===== ========= ======
As of December 31, 1997, there were 95,119 options available for future
grants under the Option Plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -----------------------------
Number Average Weighted- Number Weighted-
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 1997 Life Price 1997 Price
- ------------------------ ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lss than $2.30................................. 784,238 9.0 $ 1.82 253,332 $ 1.81
$2.30 - $4.75................................... 267,623 9.0 4.18 10,946 4.17
--------- ---- ------- ----
$1.18 - $4.55................................... 1,051,861 2.42 264,278 1.91
========= ======= ======= ======
</TABLE>
Had compensation expense related to the stock option plan been determined
based on the fair value at the grant date for options granted during the period
from August 1, 1995 to December 31, 1995 and for the years ended December 31,
1996 and 1997 consistent with the provisions of SFAS 123, the Company's net loss
would have been as follows:
Period from
August 1, 1995
(inception) to Years Ended December 31,
December 31,
1995 1996 1997
-------------- --------------- ----------------
Net loss--pro forma......... $ (1,018,274) $ (16,690,399) $ (20,086,156)
============ ============= =============
The effect of applying SFAS 123 on 1995, 1996 and 1997 pro forma net loss
as stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1996 and 1997: dividend yield of
0%, expected volatility of 70%; risk-free interest rate of 6.5%; and expected
terms from 3 to 4 years. The weighted average fair values of the options granted
in 1996 and 1997 with a stock price equal to the exercise price is $1.31 and
$1.79, respectively. The weighted average fair value of the options granted in
1996 with a stock price greater than the exercise price in 1996 is $0.38.
Reserve for Issuance
As of December 31, 1997, the Company had reserved 11,151,220, respectively,
shares of non-voting common stock, preferred stock and voting Common Stock
options.
8. Income Taxes
Net deferred income tax assets are as follows:
December 31,
-------------------------------
1996 1997
-------------- --------------
Unearned revenue $ 1,307,553 $ 7,766,210
Operating loss carryforwards 1,913,864 2,793,213
Provision for bad debts 15,960 61,305
Accrued vacation -- 50,005
Deferred rent -- 51,009
Stock options -- 61,452
Depreciation (228,000) (267,131)
-------------- --------------
Deferred tax assets 3,009,377 10,516,063
Valuation allowance (3,009,377) (10,516,063)
-------------- --------------
Net deferred tax assets $ -- $ --
============== ==============
At December 31, 1997, the Company has net operating loss carryforwards
amounting to approximately $7,358,305. Operating loss carryforwards expire in
2010 and 2011.
9. Contingencies
On September 1, 1997, a motion for judgment was filed against the Company
in Virginia state court by the Company's former Vice President, Marketing. The
motion for judgment alleges breach of contract and wrongful termination and
seeks punitive and compensatory damages of approximately $1,000,000.
Additionally, the Company's former Vice President, Marketing seeks to exercise
certain stock options. Discovery has just been initiated and, therefore, it is
premature to reach an opinion on liability or the extent of exposure. However,
the Company believes that it has a meritorious defense and is conducting a
vigorous defense. The Company doesn't believe that the conclusion of this matter
will materially affect the Company's financial position or results of
operations.
10. Subsequent Event
On January 21, 1998, the Company entered into an Agreement and Plan of
Merger with RCN Corporation ("RCN"). In the transaction, RCN will issue common
stock and replacement stock options valued at $48,500,000 and pay $35,000,000 in
cash, including the assumption and repayment of the $5,700,000 note payable, in
exchange for all of the outstanding equity securities of Erols Internet, Inc.
The Agreement and Plan of Merger was closed on February 20, 1998.
In conjunction with the merger agreement with RCN, certain outstanding
options held by two employees of the Company became fully vested. Additionally,
all outstanding options held by non-employees will fully vest and be repurchased
by the Company at a price equal to the difference between $14 and the option
exercise price multiplied by the number of outstanding options.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lancit Media Entertainment, Ltd.
We have audited the accompanying consolidated balance sheet of
Lancit Media Entertainment, Ltd. and Subsidiaries (the "Company") as of June
30, 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Lancit Media Entertainment, Ltd. and Subsidiaries at June 30, 1997, and the
consolidated results of its operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred losses in each of the last two fiscal years and as more fully
described in Note 2, the Company anticipates that additional funding will be
necessary to sustain the Company's operations through the fiscal year ending
June 30, 1998. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ ERNST & YOUNG, LLP
---------------------------------
Ernst & Young, LLP
Certified Public Accountants
New York, New York
October 13, 1997
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of
Lancit Media Productions, Ltd.
We have audited the accompanying consolidated balance sheet of
Lancit Media Productions, Ltd. and Subsidiaries as of June 30, 1996
and the related statements of operations, stockholders' equity and cash
flows for the years ended June 30, 1996 and 1995. 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 financial
position of Lancit Media Productions, Ltd. and Subsidiaries as of June 30,
1996 and the results of its operations and cash flows for each of the years
ended June 30, 1996 and 1995 in conformity with generally accepted accounting
principles.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
------------------------------------------
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
August 28, 1996
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 4,461,627 $ 3,358,230
Accounts receivable, net.................................................. 1,698,250 2,683,433
Film and program costs, net............................................... 1,718,526 5,527,106
Prepaid expenses.......................................................... 270,215 268,175
------------ -----------
TOTAL CURRENT ASSETS....................................................... 8,148,618 11,836,944
ACCOUNTS RECEIVABLE - NON-CURRENT.......................................... 211,500 1,378,078
FIXED ASSETS, NET.......................................................... 525,530 832,606
GOODWILL, NET.............................................................. 263,302 279,754
DEPOSITS................................................................... 50,363 60,784
------------ -----------
TOTAL ASSETS............................................................... $ 9,199,313 $14,388,166
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,116,028 $ 732,158
Participations payable 1,342,702 1,199,991
Deferred revenue.......................................................... 1,009,413 1,651,279
------------ -----------
TOTAL CURRENT LIABILITIES.................................................. 4,468,143 3,583,428
PARTICIPATIONS PAYABLE - NON-CURRENT....................................... 88,009 598,461
DEFERRED REVENUE - NON-CURRENT............................................. 317,620 828,713
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.......................................................... 195,360 94,056
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, authorized - 15,000,000 shares;
issued and outstanding - 6,634,750 shares at June 30, 1997 and
6,187,634 shares at June 30, 1996....................................... 6,635 6,188
Additional paid-in capital................................................ 17,504,536 12,579,402
Accumulated deficit....................................................... (13,380,990) (3,302,082)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY................................................. 4,130,181 9,283,508
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 9,199,313 $14,388,166
============ ===========
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Production and royalties....................................... $ 1,943,807 $ 6,812,975 $15,532,607
Licensing agent fees........................................... 1,208,250 2,248,238 2,349,872
------------- ----------- -----------
3,152,057 9,061,213 17,882,479
------------- ----------- -----------
OPERATING EXPENSES:
Production and royalties....................................... 3,026,577 6,580,666 13,550,150
Licensing agent - direct costs................................. 809,823 1,175,699 1,184,345
General and administrative..................................... 4,073,089 2,438,471 2,168,827
Write-downs related to projects and restructuring charge....... 5,456,180 2,650,000 --
------------- ----------- -----------
13,365,669 12,844,836 16,903,322
------------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS................................... (10,213,612) (3,783,623) 979,157
INTEREST INCOME - NET........................................... 255,508 276,570 506,316
------------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST.................................... (9,958,104) (3,507,053) 1,485,473
PROVISION FOR INCOME TAXES - CURRENT............................ (19,500) (87,900) (38,000)
MINORITY INTEREST............................................... (101,304) (105,760) (199,974)
------------- ----------- -----------
NET INCOME (LOSS)............................................... $ (10,078,908) $(3,700,713) $ 1,247,499
============= =========== ===========
Basic income (loss) per common share............................ $ (1.54) $ (0.60) $ 0.20
============= =========== ===========
Basic weighted average shares used in computation............... 6,538,851 6,177,051 6,127,551
============= =========== ===========
Diluted income (loss) per common share.......................... $ (1.54) $ (0.60) $ 0.20
============= =========== ===========
Diluted weighted average shares used in computation............. 6,538,851 6,177,051 6,365,741
============= =========== ===========
See notes to consolidated financial statements.
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
--------------------- Paid-in (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity
--------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE - June 30, 1994.......... 6,101,634 $6,102 $12,401,247 $ (848,868) $ 11,558,481
Shares issued in connection
with exercise of options
and warrants (net of
expenses)..................... 56,000 56 165,059 -- 165,115
Net income...................... -- -- -- 1,247,499 1,247,499
--------- ------ ----------- ------------ ------------
BALANCE - June 30, 1995.......... 6,157,634 6,158 12,566,306 398,631 12,971,095
Shares issued in connection
with exercise of options
(net of expenses)............. 30,000 30 13,096 -- 13,126
Net loss........................ -- -- -- (3,700,713) (3,700,713)
--------- ------ ----------- ------------ ------------
BALANCE - June 30, 1996.......... 6,187,634 6,188 12,579,402 (3,302,082) 9,283,508
Shares issued in connection
with exercise of options
(net of expenses)............. 9,000 9 16,241 -- 16,250
Shares issued in connection
with investment by
Discovery
Communications, Inc. (net
of expenses).................. 438,116 438 4,698,893 -- 4,699,331
Warrants issued in exchange
for consulting services
rendered...................... -- -- 210,000 -- 210,000
Net loss........................ -- -- -- (10,078,908) (10,078,908)
--------- ------ ----------- ------------ ------------
BALANCE - June 30, 1997.......... 6,634,750 $6,635 $17,504,536 $(13,380,990) $ 4,130,181
========= ====== =========== ============ ============
See notes to consolidated financial statements.
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $(10,078,908) $(3,700,713) $ 1,247,499
------------ ----------- -----------
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization of film and program costs..................... 1,465,831 3,869,945 6,334,297
Write-down related to projects ............................ 5,456,180 2,500,000 --
Depreciation and other amortization........................ 378,281 407,313 348,615
Minority interest.......................................... 101,304 105,760 199,974
Grant of warrants in exchange for services................. 210,000 -- --
Changes in operating assets and liabilities:
Accounts receivable - current.............................. 985,183 3,128,355 (3,796,488)
Accounts receivable - non-current.......................... 1,166,578 1,227,792 (3,105,670)
Film and program costs..................................... (3,113,431) (7,076,993) (8,557,597)
Prepaid expenses........................................... (2,040) (186,308) (24,491)
Deposits................................................... 10,421 (17,056) 2,185
Accounts payable and accrued expenses...................... 1,383,870 320,501 6,440
Participations payable - current........................... 142,711 293,628 906,363
Participations payable - non-current....................... (510,452) (341,462) 1,220,148
Deferred revenue - current................................. (641,866) (3,479,961) 1,611,401
Deferred revenue - non-current............................. (511,093) (938,346) 111,921
------------ ----------- -----------
6,521,477 (186,832) (4,742,902)
------------ ----------- -----------
CASH USED IN OPERATING ACTIVITIES............................. (3,557,431) (3,887,545) (3,495,403)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................... (54,753) (162,589) (334,680)
------------ ----------- -----------
CASH USED IN INVESTING ACTIVITIES............................. (54,753) (162,589) (334,680)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock in connection with DCI
agreement.................................................. 4,699,331 -- --
Issuance of common stock in connection with
exercise of options........................................ 16,250 13,126 165,115
------------ ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES......................... 4,715,581 13,126 165,115
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................. 1,103,397 (4,037,008) (3,664,968)
CASH AND CASH EQUIVALENTS - beginning of year................. 3,358,230 7,395,238 11,060,206
------------ ----------- -----------
CASH AND CASH EQUIVALENTS - end of year....................... $ 4,461,627 $ 3,358,230 $ 7,395,238
============ =========== ===========
CASH PAID DURING THE YEAR FOR:
Income taxes................................................. $ 52,058 $ 35,867 $ 14,684
============ =========== ===========
See notes to consolidated financial statements
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lancit Media Entertainment, Ltd. and Subsidiaries (the
"Company") includes Lancit Media Entertainment, Ltd. ("Lancit"), its
wholly-owned subsidiaries Frame Accurate, Inc. ("Frame"), Lancit Copyright
Corp. ("LCC"), and The Strategy Licensing Company, Inc. ("Strategy") (see Note
13).
Lancit creates, acquires, develops and produces high-quality
children's "edutainment" and family programming.
Frame is a provider of post-production services which include
personnel, facilities, graphics and dubbing, as well as other editing and
finishing services.
LCC was formed to own and administer various copyrights created
by the Company and currently administers all of the music publishing interests
which the Company retains with respect to the music sound tracks for both The
Puzzle Place and Backyard Safari, as well as for other productions created by
the Company.
Strategy is a merchandise licensing and promotions company that
performs licensing agent functions for properties and characters owned by
various copyright holders, including Strategy affiliates. Strategy is the
majority partner in The Puzzle Place Marketing Company, a joint venture with
Community Television of Southern California ("KCET").
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements include
the accounts of Lancit, Frame, LCC and Strategy. All material intercompany
accounts and transactions have been eliminated.
B. Cash and Cash Equivalents - The Company considers to be cash equivalents
all highly liquid temporary cash investments with an original maturity of
three months or less when purchased.
C. Accounts Receivable - Accounts receivable consists primarily of amounts
to be received from minimum contractual royalties and underwriting
agreements. Amounts to be received from minimum contractual royalties
result from the copyright holder entering into agreements with licensees
whereby the Company has licensed the right, during a specified term, to
utilize the copyright holders' copyright. Such amounts are due no later
than the conclusion of specified time periods which, for the most part,
occur within the next twenty-four months after entering into an agreement.
Amounts to be received from existing underwriting agreements are due mostly
within the next fiscal year.
D. Film and Program Costs - Film and program costs ("project costs"), which
include acquisition and development costs (such as story rights, scenarios
and scripts), production costs (including salaries and costs of talent),
production overhead and post-production costs, are stated at the lower of
cost less accumulated amortization or net realizable value and are deferred
and amortized under the "individual film forecast method" as required by
Statement of Financial Accounting Standards No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films" ("SFAS 53"). Film and
program costs are re-evaluated, on a project-by-project basis, in each
reporting period and, when necessary, are written down to net realizable
value (See Note 12).
E. Fixed Assets - Fixed assets are stated at cost. Depreciation on
production and office equipment is provided for using the straight-line
method over the estimated useful life of the related asset. Leasehold
improvements are amortized using the straight-line method over the shorter
of the lease term or estimated useful life of the asset.
F. Goodwill - Goodwill resulting from business acquisitions represents the
remaining unamortized value of the excess of the acquisition costs over the
fair value of the net assets of the business acquired. Goodwill is amortized
on the straight-line basis over a period not to exceed 20 years. The
Company periodically reviews the recoverability of its goodwill. Any
impairment is charged to expense when such determination is made.
Accumulated amortization at June 30, 1997 and 1996 was $64,496 and $48,044,
respectively.
G. Participations Payable - Participations payable represent the amount due
for profit participations and residuals. The participation amounts are
recorded when the revenue which gives rise to such participations is
recognized. Participants are paid when the actual cash is received and when
the entitled payees have been identified.
H. Deferred Revenue - Deferred revenue consists of licensing agent fees
remaining to be recognized based on guaranteed royalties, as well as
production funding received but not yet recognized as revenues based on
percentage of completion. The fees from guaranteed royalties are recognized
as revenue over a period which is no longer than the term of each
individual license agreement. In addition, any royalty amounts received as
advances by the Company as copyright holder are deferred and recognized as
revenues when all obligations and commitments associated with such
contracts have been met.
I. Net Income (Loss) Per Share - The Company has adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". Basic
earnings (loss) per share is computed based on net income (loss) divided by
the weighted average shares of common stock outstanding during the period.
J. Revenue Recognition - Revenues are primarily derived from the
following sources:
(a) (i) Production - Revenues from such activities, when performed for
a third party contracting entity such as a grantor, are recognized
using the percentage of completion method, recognizing revenue
relative to the proportionate progress on such contracts. When
producing a project subject to a commercial network presale, revenues
are generally recognized when the project is available for showing or
exploitation and the other requirements of SFAS 53 have been met.
(ii) Royalties - On many of the original projects it produces, the
Company retains, in varying degrees, ownership in such projects, and
derives royalties from their exploitation in both primary and
secondary markets worldwide. Such revenues are recognized when firm
sales are reported to the Company by designated sales representatives
in each market area or upon the Company meeting all commitments and
obligations (which are primarily broadcast-oriented) related to the
minimum contractual royalties under the licensing agreement. Such
agreements generally range from two to four years. Typically, on a
licensing contract, the Company does not begin to recognize
additional copyright-holder related royalty revenues beyond any
previously recorded minimum contractual royalty amounts until such
time as the licensee has recouped that full amount. Depending on the
particular licensee category and on the initial sales success of the
products in that category, such recoupment period may range anywhere
from one year to several years. The nature of the primary market and
the order of market exploitation varies from project to project, as
does the length of each project's revenue producing cycle. However,
such revenue cycles typically range from two to six years.
(b) Licensing agent fees - Revenues from such activities are derived from
a negotiated percentage, with the copyright holder, of overall
royalty revenue in a wide variety of categories. Licensing agent fees
derived from minimum contractual royalty commitments to the copyright
holder are recognized over a period which is no longer than the term
covered by each individual license. Once royalties generated on sales
of licensed product exceed the minimum contractual royalties provided
for in such agreements, the licensing agent will record, as revenue,
its entitled share of all royalties generated from that point
forward, upon knowing the royalties have been earned which may be at
the time of receipt.
K. Income Taxes - The Company accounts for income taxes by the liability
method as required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred tax
assets and liabilities are recognized with respect to the future tax
consequences attributable to differences between the financial statement
carrying values and tax bases of existing assets and liabilities and
operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment date.
L. Compensation Expense Associated with Stock Options and Stock
Appreciation Rights ("SARs") - The Company's policy is to record
compensation expense when stock options or SARs are granted at an exercise
price which is less than the fair market value of the Company's common
stock on the date of the grant. The amount recorded as compensation expense
is equal to the difference between the exercise price or the measuring
value, and the fair market value of the Company's common stock on the date
of grant. In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 prescribes
accounting and reporting standards for all stock-based compensation plans
and stock appreciation rights and requires that compensation expense be
recorded (i) using the new fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income (loss) and
earnings per share would have been had the Company adopted the new fair
value method. Effective July 1, 1996, the Company has adopted SFAS 123 and,
as allowed by the statement, intends to continue to account for its
stock-based compensation plans in accordance with the provisions of APB 25.
M. 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 amounts reported in the financial
statements and the footnotes thereto. Actual results could differ from
those estimates.
N. Restatement - The financial statements have been restated to reflect the
effect of Statement of Financial Accounting Standards No. 128 "Earnings per
Share" ("SFAS 128"). The primary elements of this standard are: (i)
replacement of primary earnings per share with basic earnings per share,
which eliminates the dilutive effect of options and warrants; (ii) use of
an average share price in applying the treasury method to compute dilution
for options and warrants for diluted earnings per share; and (iii)
disclosure reconciling the numerator and denominator of earnings per share
calculations.
2. CAPITAL REQUIREMENTS
Notwithstanding the Company's cash position at June 30, 1997,
the Company believes that additional funding will be necessary to sustain the
Company's operations through the fourth quarter of fiscal 1998. The Company is
actively seeking additional funding and has retained an investment banking
firm to assist it in these efforts. Among the alternatives being considered by
the Company are a sale of an interest in the Company, an acquisition of the
Company, and/or strategic alliances with industry partners. The Company
continues to pursue marketing efforts to generate cash from production and
licensing activities and, where appropriate, may explore turning to account
certain non-strategic assets. While there can be no assurance that any such
transactions will be available to the Company or, if available, that they will
be on terms favorable to the Company or its shareholders, the Company is
devoting considerable management and other resources to these efforts.
The Company also has taken steps to reduce, where appropriate,
its operating expenses. These steps include relocating Strategy, its
merchandising and licensing agent subsidiary, from Westport, Connecticut to
the Company's New York City offices, and certain staff reductions.
3. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $530,052 and $448,175
at June 30, 1997 and 1996, respectively.
4. FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Production and office equipment................. $1,858,191 $1,826,639
Leasehold Improvements.......................... 413,928 390,727
---------- ----------
2,272,119 2,217,366
Less accumulated depreciation and amortization.. 1,746,589 1,384,760
---------- ----------
Fixed assets, net............................... $ 525,530 $ 832,606
========== ==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
A. Leases
The Company leases facilities and office equipment under the
terms of several operating leases. The major portion of these operating leases
relate to the Company's four leases covering its facilities. One lease expires
in April 1998, two expire in September 1998 and the fourth expires in February
1999.
The following is a schedule of minimum future lease payments
under all operating leases at June 30, 1997:
<TABLE>
<CAPTION>
Year Ending June 30, Total
-------------------- --------
<S> <C>
1998..................................... $315,000
1999..................................... 107,000
--------
$422,000
========
</TABLE>
Rent expense was approximately $299,000, $296,000 and $355,000
for the years ended June 30, 1997, 1996 and 1995, respectively. Facility
leases, in some cases, also provide for escalations based on increases in real
estate taxes and maintenance charges.
B. Employment Agreements
The Company has employment agreements with seven individuals,
all of whom are officers of Lancit. The agreements expire at various times
through March 2000. Remaining commitments under the terms of these agreements
are approximately $2,019,000.
C. Bonus Plans
Officers as a group, under an incentive bonus plan (the "Bonus
Plan"), receive a bonus of 5% of pretax income (before bonus), for a fiscal
year, provided that (i) pretax income (before bonus) for such fiscal year is
at least $250,000, (ii) net income for such fiscal year exceeds net income for
the prior fiscal year and (iii) net income is at least $.05 per share
(adjusted for stock splits and stock dividends), on a diluted basis. No
amounts were accrued under the Bonus Plan for fiscal 1997 or fiscal 1996 and
$78,000 was accrued under the Bonus Plan for fiscal 1995.
D. Production Funding
In fiscal 1997, the Company substantially completed production
on episodes 41-65 of The Puzzle Place. After taking into account the portion
of the project funding expected to be contributed via existing underwriting
agreements and the Company's partner on the project, KCET, the Company
estimates less than $0.1 million will ultimately be required from the Company
to meet the current budget needs of the project.
The Company also substantially completed production on the
initial 13 episodes of Backyard Safari, which has been funded partially
through a grant from the National Science Foundation. In the event the Company
were to receive no outside production funding, the Company estimates that the
remaining cash outlay required for this project would be less than $0.5
million.
E. Consulting Agreements
The Company entered into several consulting agreements and
entered into an agreement terminating its relationship with a previous
consultant, during the fiscal year ended June 30, 1997. The term of the ongoing
agreements are month-to-month, with cancellation notices required from one to
three months in advance, with fees ranging from $5,000 to $10,000 per month. The
minimum commitment under the terms of these agreements, in the aggregate, is
approximately $206,000.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the fiscal year ended June 30, 1997, two customers
accounted for 64% and 30% of total revenues from production and royalties and
two customers accounted for 34% and 13% of licensing agent fees. For the
fiscal year ended June 30, 1996, two customers accounted for 35% and 24% of
total revenues from production and royalties and three customers accounted for
36%, 10% and 10% of licensing agent fees. For the fiscal year ended June 30,
1995, four customers accounted for 14%, 12%, 12% and 10% of total revenues
from production and royalties and two customers accounted for 40% and 20% of
licensing agent fees.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. The Company restricts placement of its temporary cash
investments to financial institutions with high credit ratings and limits the
amount of credit exposure with any one financial institution. At June 30,
1997, amounts receivable from three different entities accounted for 37%, 16%
and 12% of the Company's total accounts receivable. At June 30, 1996, amounts
receivable from three different entities accounted for 33%, 20% and 15% of the
Company's total accounts receivable. Allowances are maintained, as necessary,
for any potential credit losses.
7. FILM AND PROGRAM COSTS
Components of film and program costs (net of accumulated
amortization) consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Productions completed and released......... $ 828,905 $2,329,015
Productions completed and not released..... 376,165 --
Productions in progress.................... 110,340 2,851,378
Story rights and scenarios................. 403,116 346,713
---------- ----------
Total film and program costs, net.......... $1,718,526 $5,527,106
========== ==========
</TABLE>
Film and program costs are substantially made up of capitalized
television, production, and development costs incurred by the Company. The
Company capitalizes such costs and amortizes them to expense in accordance
with SFAS 53, which requires the Company to use estimates to determine the
future revenue-generating potential of its project which is subject to a
variety of risk factors. Revenues generated by television and movie
programming and related ancillary products depend in part upon general
economic conditions, but are more directly affected by the viewer and retail
response to the entertainment product made available to the marketplace. The
estimates used are re-evaluated periodically, and such re-evaluations have, in
the past, and may, in the future, require that the Company write down
unamortized capitalized amounts (See Note 12).
8. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In July 1990, the Company adopted a stock option plan (as
amended, the "1990 Plan") authorizing the issuance of options covering 200,000
shares of the Company's common stock, which, over the years has been increased
to cover the issuance of up to 1,000,000 shares of the Company's common stock.
Officers, directors, consultants and employees are eligible to participate in
the 1990 Plan and to receive non-qualified or, to the extent allowable,
incentive stock options pursuant to the 1990 Plan. Options granted under the
Plan are exercisable for a period of not more than ten years from the date of
grant. Selection of participants, allotment of shares, determination of
exercise price and other conditions of the granting of options is determined
by the Company. Additionally, the 1990 Plan provides that no options may be
issued at an exercise price which is less than the fair market value of the
Company's common stock on the date of grant. In June 1997, the Company
initiated a stock option rejuvenation program in which options with an
exercise price considerably higher than current market value could be
exchanged for a lesser number of shares at an exercise price that was
reflective of current market value. The effective date of the cancellation of
the existing options and the issuance of the new options was June 20, 1997.
The Company has outstanding stock options under the 1990 Plan
as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
Options Share ($) Share ($)
------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994........... 181,500 1.67-16.29 12.02
Options granted....................... 154,000 11.69-16.13 12.70
Options exercised..................... (7,000) 3.75 3.75
------- ----------- -----
Outstanding at June 30, 1995........... 328,500 1.67-16.29 12.61
Options granted....................... 383,200 9.31-15.50 10.79
Options exercised..................... (10,000) 1.67-3.75 2.92
Options cancelled..................... (28,500) 10.44-15.94 12.64
------- ----------- -----
Outstanding at June 30, 1996........... 673,200 1.67-16.29 11.72
Options granted....................... 797,350 3.16-11.75 3.42
Options exercised..................... (8,000) 1.67-3.65 3.39
Options cancelled..................... (645,300) 5.06-16.29 10.94
-------- ----------- -----
Outstanding at June 30, 1997........... 817,250 3.16-15.50 4.31
======== =========== =====
</TABLE>
At June 30, 1997, 762,750 options were exercisable with an
average remaining term of 9.32 years. The weighted average exercise price of
such options is $4.45. At June 30, 1997, 3,750 options remained available for
grant.
In April 1991, the Company adopted the Stock Performance Based
Stock Option Plan (as amended, the "1991 Plan") authorizing the issuance of
options covering 250,000 shares of the Company's common stock. Executive
management in place at the time of the adoption of the 1991 Plan, was eligible
to participate in the 1991 Plan and to receive non-qualified options pursuant
to the 1991 Plan at an exercise price of $0.01 per share. Options granted under
the 1991 Plan became exercisable at any time after the second anniversary of
the effective date of the initial public offering of the Company's common
stock upon the Company's common stock meeting certain performance levels.
The Company had outstanding stock options under the 1991 Plan
as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
Options Share ($) Share ($)
-------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994.................. 195,000 0.01 0.01
Options exercised............................ (15,000) 0.01 0.01
-------- ---- ----
Outstanding at June 30, 1995.................. 180,000 0.01 0.01
Options exercised............................ (20,000) 0.01 0.01
Options cancelled............................ (160,000) 0.01 0.01
-------- ---- ----
Outstanding at June 30, 1996 and 1997......... -- -- --
======== ==== ====
</TABLE>
In December 1994, the Company adopted the 1994 Non-Employee
Director Non-Qualified Stock Option Plan (as amended, the "1994 Plan")
authorizing the issuance of options covering 45,000 shares of the Company's
common stock. Non-employee directors of the Company are eligible to participate
in the 1994 Plan. Each non-employee director is granted 3,000 options on the day
of his or her initial appointment and annually thereafter on the day of his or
her reelection. The exercise price per share for each option granted is the fair
market value of the Company's common stock on the date of grant. Each option is
exercisable one year from the date of grant and expires no later than ten years
from the date of grant.
The Company has outstanding stock options under the 1994 Plan
as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
Options Share ($) Share ($)
------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994........... -- -- --
Options granted....................... 9,000 13.19-13.69 13.35
------ ----------- -----
Outstanding at June 30, 1995........... 9,000 13.19-13.69 13.35
Options granted....................... 9,000 13.13 13.13
------ ----------- -----
Outstanding at June 30, 1996........... 18,000 13.13-13.69 13.24
Options granted....................... 15,000 3.50-6.25 5.44
------ ----------- -----
Outstanding at June 30, 1997........... 33,000 3.50-13.69 9.69
====== =========== =====
</TABLE>
At June 30, 1997, 18,000 options were exercisable with an
average remaining term of 8.7 years. The weighted average exercise price of
such options is $13.24. At June 30, 1997, 12,000 options remained available
for grant.
In June 1997, the Company adopted the 1997 Incentive Stock Option
Plan (as amended, the "1997 Plan") authorizing the issuance of options and other
awards covering 650,000 shares of the Company's common stock, and the 1997 Value
Incentive Bonus Program (as amended, the "1997 Incentive Program"). Any officer,
key employee, directors who are also officers and consultants are eligible to
participate in the 1997 Plan and receive non-qualified or, to the extent
allowable, incentive stock options pursuant to the 1997 Plan. Options granted
under the 1997 Plan are exercisable for a period of not more than ten years from
the date of the grant. With the exception of grants to two officers/directors,
of which a portion is immediately exercisable, grants which have been made are
exercisable one year from the date of the grant. The exercise price per share
for each option granted is the fair market value of the Company's common stock
on the date of the grant. The 1997 Plan is subject to approval by the Company's
shareholders.
The Company has outstanding stock options under the 1997 Plan
as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
Options Share ($) Share ($)
------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at July 1, 1996............ -- -- --
Options granted....................... 370,000 3.16 3.16
------- ---- ----
370,000 3.16 3.16
======= ==== ====
</TABLE>
At June 30, 1997, 45,000 options were exercisable with an
average remaining term of 10 years. The weighted average exercise price of
such options is $3.16. At June 30, 1997, 280,000 options are available for
grant.
The Company has outstanding SARs under the 1997 Incentive
Program as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
SARs Share ($) Share ($)
------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at July 1,1996............. -- -- --
SARs granted.......................... 255,000 3.16 3.16
------- ---- ----
Outstanding at June 30, 1997........... 255,000 3.16 3.16
======= ==== ====
</TABLE>
These SARs are subject to cancellation upon approval of the
1997 Plan by the Company's shareholders on or prior to December 31, 1997.
The Company's other various options/warrants, not under any
form of a plan, covering shares of the Company's common stock are as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per Exercise Price Per
Options/Warrants Share ($) Share ($)
---------------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding at June 30, 1994................ 5,000 3.75 3.75
Options exercised.......................... (4,000) 3.75 3.75
------- ---------- -----
Outstanding at June 30, 1995 and 1996....... 1,000 3.75 3.75
Warrants Issued............................ 560,209 3.62-13.00 10.96
Options Exercised.......................... (1,000) 3.75 3.75
------- ---------- -----
Outstanding at June 30, 1997................ 560,209 3.62-13.00 10.96
======= ========== =====
</TABLE>
The remaining warrants outstanding at June 30, 1997 covering
560,209 shares of common stock were exercisable with a weighted average
remaining term of 4.0 years. The weighted average exercise price of such
warrants is $10.96.
Pro forma information regarding net income (loss) and earnings
(loss) per share is required by SFAS 123, and has been determined as if the
Company had accounted for its employees' stock options and SARs under the fair
value method provided by that Statement. The fair value of the stock options
and SARs was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for vested and non-vested options
and SARs:
<TABLE>
<CAPTION>
Assumptions
----------- June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Risk-Free Interest Rate............................................................ 6.82% 5.56%
Dividend Yield..................................................................... 0% 0%
Volatility factor of the expected market price of the Company's Common Stock....... 0.678 0.431
Average Life....................................................................... 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options and SARs.
For purposes of pro forma disclosures, the estimated fair value
of the options under SFAS 123 is amortized to expense over the options'
vesting period. For the year ended June 30, 1997, pro forma net loss and pro
forma net loss per share would have increased under SFAS 123 by approximately
$3,248,000 and $0.49, respectively. For the year ended June 30, 1996, pro
forma net loss and pro forma net loss per share would have increased under
SFAS 123 by approximately $1,548,000 and $0.25, respectively.
9. 401(k) AND PROFIT SHARING PLAN
Effective as of January 1, 1994, the Company adopted a combined
401(k) Savings and Profit Sharing Plan (as amended, the "Retirement Plan").
The Retirement Plan provides for immediate eligibility for all employees of the
Company as of January 1, 1994 and eligibility after completion of six months
of service for all employees of the Company employed after January 1, 1994.
The 401(k) Savings portion of the Retirement Plan provides for an employer
match which is determined on an annual basis. The Profit Sharing portion of
the Retirement Plan provides for an employer discretionary contribution which
is determined on an annual basis and which is reduced by any 401(k) employer
match already received. Amounts expensed under the Retirement Plan were
approximately $85,000, $72,000 and $70,000 for the fiscal years ended June 30,
1997, 1996 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
Legal fees incurred to one of the Company's law firms, where a
principal of that law firm is the Corporate Secretary and Director of the
Company, were $195,040, $121,157 and $135,140 for the fiscal years ended June
30, 1997, 1996 and 1995, respectively.
Consulting fees incurred to one of the Company's consulting
firms, where a principal of that firm is a director of the Company were $5,000
and $13,054 for the fiscal years ended June 30, 1997 and 1996, respectively.
In addition, that consulting firm, in October 1995, was granted stock options
covering 13,400 shares of the Company's common stock, exercisable at $12.25
per share and expiring in October 2000.
11. INCOME TAXES
The following table illustrates the sources and status of the
Company's major deferred tax asset and (liability) items at June 30, 1997 and
1996:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Tax benefit of net operating loss carryforward............... $ 6,534,068 $ 2,349,000
Royalty revenue not yet collected............................ (229,347) (154,000)
Excess of tax over book depreciation......................... (158,989) (73,000)
Other........................................................ 62,952 48,000
----------- -----------
Net deferred tax asset....................................... 6,208,684 2,170,000
Valuation allowance.......................................... (6,208,684) (2,170,000)
----------- -----------
Net deferred tax asset recorded.............................. $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes differs from the amount computed
by applying the statutory Federal income tax rate to income (loss) before
provision for income taxes and minority interest as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1997 1996 1995
----------- ----------- --------
<S> <C> <C> <C>
Income tax provision (benefit) computed
at the statutory rate.................................... $(3,528,000) $(1,265,000) $450,000
Income tax benefit of disqualifying dispositions.......... -- (110,000) (127,000)
Net tax effect of other permanent differences............. 20,000 34,000 (39,000)
Tax effect of temporary differences....................... -- 33,000 (369,000)
Income tax benefit not recognized......................... 3,508,000 1,308,000 85,000
Provision for state income taxes.......................... 19,500 87,900 38,000
----------- ----------- --------
Income tax provision...................................... $ 19,500 $ 87,900 $ 38,000
=========== =========== ========
</TABLE>
The Company has net operating loss carryforwards for tax
purposes totaling approximately $14,850,000 at June 30, 1997 that expire in
the years 2006 to 2012.
Certain of the Company's subsidiaries file state income tax
returns on an unconsolidated basis, and as such, losses may not be available
to offset income in all states.
12. WRITE-DOWNS RELATED TO PROJECTS AND RESTRUCTURING
The write-down of film and program costs amounted to
approximately $5.5 million and $2.5 million in fiscal 1997 and 1996,
respectively, of which approximately $2.1 million and $2.5 million relates to
The Puzzle Place for fiscal 1997 and 1996, respectively, and approximately $3.3
million relates to Backyard Safari for fiscal 1997. Such write-down reflects the
Company's revision of its estimated future net royalty stream with respect to
The Puzzle Place and the Company's revision of its anticipated production
funding sources and its estimated future net royalty stream with respect to
Backyard Safari. As part of the fiscal 1997 charge, the Company accrued for
estimated remaining costs on these projects.
Also, in fiscal 1996, the Company recorded a restructuring
charge of $150,000 which included severance and other benefits paid to
terminated employees due to reduced production activity.
13. SUBSEQUENT EVENT
In October 1997, the Company entered into an agreement with
Arlene J. Scanian, pursuant to which the Company acquired the remaining 15% of
the outstanding shares of the capital stock of Strategy held by her.
Additionally, Ms. Scanlan's employment with Strategy and the Company was
terminated. In consideration of the foregoing, the Company paid Ms. Scanlan
an aggregate of $30,788 and has released Ms. Scanlan from certain restrictions
contained in a covenant not to compete with respect to specified properties
and entities.
14. PENDING ACQUISITION BY RCN CORPORATION
(Unaudited)
The Company has entered into an Agreement and Plan of Merger,
dated as of February 27, 1998, as amended on April 6, 1998 (the "Merger
Agreement"), between RCN Corporation ("RCN"), LME Acquisition Corporation
("LME") and the Company pursuant to which LME will be merged with and into the
Company and the Company will be the surviving corporation and a wholly owned
subsidiary of RCN. A special meeting of the Company's shareholders is
currently anticipated to occur in late May or June 1998 to vote on the Merger
Agreement. In the opinion of management, if the Merger Agreement and the
transactions contemplated thereby are not approved by the Company's
shareholders, it is unlikely that the Company would be able to sustain its
operations, whether in order to pursue an alternative transaction or
otherwise, for any significant period beyond the date of such meeting, absent
a source of additional funding which does not currently exist.
Report of Independent Auditors
The Board of Directors and Stockholders
Lancit Media Entertainment, Ltd.
We have audited the consolidated financial statements of Lancit
Media Entertainment, Ltd. and Subsidiaries as of June 30, 1997 and for the
year then ended, and have issued our report thereon dated October 13, 1997
(included elsewhere in this Proxy Statement--Prospectus). Our audit also
included the financial statement schedule listed in this Proxy
Statement--Prospectus. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein for the periods stated above.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
New York, New York
October 13, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Lancit Media Productions, Ltd.
We have audited the consolidated financial statements of
Lancit Media Entertainment, Ltd. and Subsidiaries for the years ended June
30, 1996 and June 30, 1995 and have issued our report thereon dated August
28, 1996 (included elsewhere in this Proxy Statement--Prospectus). Our audit
also included the financial statement schedule listed in this
Proxy Statement--Prospectus. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein for the periods stated above.
/s/ FELDMAN SHERB EHRLICH & CO., P.C.
-------------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
(Formerly Feldman Radin & Co., P.C.)
New York, New York
August 28, 1996
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to
Beginning of Costs and (a) Balance at
Description Period Expenses Deductions End of period
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1995
Allowances deducted from assets to which they apply:
Allowance for doubtful accounts....................... $111,182 $128,869 $ 94,483 $145,568
Year ended June 30, 1996
Allowances deducted from assets to which they apply:
Allowance for doubtful accounts....................... $145,568 $411,787 $109,180 $448,175
Year ended June 30, 1997
Allowances deducted from assets to which they apply:
Allowance for doubtful accounts....................... $448,175 $143,112 $ 61,235 $530,052
(a) Uncollectible receivables written off
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 3,219,462 $ 4,461,627
Accounts receivable, net 510,291 1,698,250
Film and program costs, net 2,010,625 1,718,526
Prepaid expenses 96,944 270,215
----------- -----------
TOTAL CURRENT ASSETS 5,837,322 8,148,618
ACCOUNTS RECEIVABLE - NON-CURRENT 171,500 211,500
FIXED ASSETS, NET 378,627 525,530
GOODWILL, NET 255,076 263,302
DEPOSITS 50,363 50,363
----------- -----------
TOTAL ASSETS $6,692,888 $9,199,313
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,977,267 $ 2,116,028
Participation payable 1,151,243 1,342,702
1,646,396 1,009,413
Deferred revenue
----------- -----------
TOTAL CURRENT LIABILITIES 4,774,906 4,468,143
PARTICIPATION PAYABLE - NON-CURRENT 59,644 88,009
DEFERRED REVENUE - NON-CURRENT 24,832 317,620
MINORITY INTEREST 239,078 195,360
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, authorized 15,000,000
shares; issued and outstanding 6,634,750 shares at
December 31, 1997 and June 30, 1997 6,635 6,635
Additional paid-in capital 17,604,536 17,504,536
Retained earnings (accumulated deficit) (16,016,743) (13,380,990)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,594,428 4,130,181
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,692,888 $ 9,199,313
=========== ===========
</TABLE>
See notes to consolidated financial statements.
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------------
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Production and royalties $ 381,732 $ 746,008
Licensing agent fees 450,788 643,875
----------- -----------
832,520 1,389,883
----------- -----------
OPERATING EXPENSES:
Production and royalties 1,120,320 978,991
Licensing agent - direct costs 275,277 440,248
General and administrative 2,111,400 1,500,770
----------- -----------
3,506,997 2,920,009
----------- -----------
LOSS FROM OPERATIONS (2,674,477) (1,530,126)
INTEREST INCOME - NET 82,441 113,813
----------- -----------
LOSS BEFORE MINORITY INTEREST (2,592,036) (1,416,313)
MINORITY INTEREST 43,717 51,601
----------- -----------
NET LOSS $(2,635,753) $(1,467,914)
=========== ===========
Basic income (loss) per common share......................... $ (0.40) $ (0.23)
=========== ===========
Basic weighted average shares used in computation............ 6,634,750 6,443,952
=========== ===========
Diluted income (loss) per common share....................... $ (0.40) $ (0.23)
=========== ===========
Diluted weighted average shares used in computation.......... 6,634,750 6,443,952
=========== ==========
See notes to consolidated financial statements.
</TABLE>
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(2,635,753) $(1,467,914)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of film and program costs 320,833 207,231
Depreciation and other amortization 178,691 197,644
Minority interest 43,717 51,601
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net - current 1,187,959 596,728
(Increase) decrease in accounts receivable - non-current 40,000 478,661
Additions to film and program costs (612,932) (1,053,943)
(Increase) decrease in prepaid expenses 173,271 77,465
(Increase) decrease in deposits receivable -- 12,421
Increase (decrease) in accounts payable and accrued expenses (138,761) 296,015
Increase (decrease) in participations payable - current (191,459) (55,528)
Increase (decrease) in participations payable - non-current (28,365) (59,320)
Increase (decrease) in deferred revenue - current 636,983 (349,436)
Increase (decrease) in deferred revenue - non-current (292,788) (269,088)
----------- -----------
CASH USED IN OPERATING ACTIVITIES (1,318,604) (1,337,463)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (23,561) (8,409)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (23,561) (8,409)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 100,000 4,701,001
----------- -----------
CASH PROVIDED FROM FINANCING ACTIVITIES 100,000 4,701,001
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,242,165) 3,355,129
CASH AND CASH EQUIVALENTS - beginning of period 4,461,627 3,358,230
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 3,219,462 $ 6,713,359
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
Reference is made to the Company's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1997.
The accompanying financial statements reflect all adjustments
which, in the opinion of management, are necessary for a fair presentation of
the financial position and results of operations for the interim periods
presented. All such adjustments are of a normal and recurring nature. The
results of operations for any interim period are not necessarily indicative of
the results for a full fiscal year.
2. NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(Statement 128). Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
3. STRATEGY LICENSING COMPANY MINORITY INTEREST
In October 1997, the Company entered into an agreement with
Arlene J. Scanlan, pursuant to which the Company acquired the remaining 15% of
the outstanding shares of the capital stock of Strategy held by her.
Additionally, Ms. Scanlan's employment with Strategy and the Company was
terminated. In consideration of the foregoing, the Company paid Ms. Scanlan
an aggregate of approximately $31,000 and has released Ms. Scanlan from
certain restrictions contained in a covenant not to compete with respect to
specified properties and entities.
INDEX OF DEFINED TERMS
Page
10% Senior Notes.........................................................11
11 1/8% Senior Discount Notes............................................11
1992 Act.................................................................23
1996 Act.................................................................19
1997 Notes...............................................................11
1997 Notes Offering......................................................11
1998 Notes...............................................................11
9.80% Senior Discount Notes..............................................11
Acquisition Proposal......................................................5
Acquisition Proposals....................................................51
Adjusted Purchase Price..................................................43
Affiliates...............................................................45
Agency Agreement.........................................................86
Agreement Period.........................................................53
Amendment................................................................38
America Online...........................................................20
Assigned Agreements......................................................87
Assignment of Benefits Agreement.........................................86
Average Closing Price....................................................ii
Bartholdi Cable..........................................................22
BECO.....................................................................17
BECO Operating Agreement.................................................84
BECOCOM..................................................................18
BOCs.....................................................................21
Boston Joint Venture Agreement...........................................84
Boston Market............................................................84
Boston Services..........................................................84
C-SPAN..................................................................119
C-TEC.....................................................................3
C-TEC ESPP..............................................................122
Cable Michigan............................................................3
Cable Michigan Group.....................................................92
Cable Michigan Indemnitees...............................................92
Cable Michigan Liabilities...............................................93
CDA......................................................................26
CEDI....................................................................120
Certificate of Merger.....................................................4
Children's Trust..........................................................1
CLECs....................................................................19
Code......................................................................7
Commission...............................................................46
Commonwealth Telephone....................................................3
Commonwealth Telephone Group.............................................92
Commonwealth Telephone
Indemnitees...........................................................92
Commonwealth Telephone
Liabilities...........................................................93
Communications Act.......................................................90
Company..................................................................80
Comparable Companies.....................................................43
Construction Group......................................................126
Contribution Agreement...................................................86
CPB.....................................................................111
Credit Agreement.....................................................11, 70
curtailed plan...........................................................66
DBS......................................................................19
DCI......................................................................33
DGCL.....................................................................28
Distribution..............................................................3
Distribution Agreement...................................................64
Distribution Documents...................................................92
DTV.....................................................................102
EBIT.....................................................................43
Effective Time...........................................................ii
ENET.....................................................................88
Enterprise Value.........................................................43
EPS......................................................................43
Equity Cost..............................................................43
Erols....................................................................11
Erols Acquisition........................................................11
Erols Escrow Agreement...................................................88
Erols Merger.............................................................88
Erols Merger Agreement...................................................88
Erols Registration Rights
Agreement.............................................................88
ESMRS....................................................................96
ESOP.....................................................................26
ESPP....................................................................123
Excess Transaction Expenses..............................................48
Exchange Act..............................................................5
Exchange Agent..........................................................130
Exchange Agreement.......................................................84
Extensions...............................................................84
FCC......................................................................20
February 27 Opinion.......................................................i
Fiber Agreements.........................................................84
Fiber Optic Facilities...................................................84
Fiber Use Agreement......................................................86
Frame...................................................................109
Freedom...................................................................9
Freedom Acquisition......................................................65
Gold & Appel.............................................................88
GPN.....................................................................111
HSDs.....................................................................96
Hybrid Fiber/Coaxial.....................................................63
IBM......................................................................25
IDLC....................................................................105
Indemnification Agreement................................................89
Indentures...............................................................18
Initial Decision.........................................................22
IRS......................................................................46
IRU Agreement............................................................84
ISPs.....................................................................17
IXCs.....................................................................19
Joint Investment Agreement...............................................84
KCET......................................................................3
Lancit....................................................................i
Lancit Audited Financial Statements......................................12
Lancit Board..............................................................i
Lancit Bylaws.............................................................7
Lancit Certificate of Incorporation.......................................7
Lancit Common Stock.......................................................i
Lancit Financial Statements..............................................12
Lancit Shareholders......................................................ii
Lancit Stock Option......................................................45
Lancit Unaudited Financial Statements....................................12
Lancit Waiver............................................................39
Lancit Warrant...........................................................45
LCC.....................................................................109
LCI......................................................................14
LECs.....................................................................19
Letter of Intent.........................................................19
Level 3 Telecom..........................................................85
Liberty Cable............................................................64
LMDS.....................................................................19
LME.......................................................................i
Losses...................................................................92
LTM......................................................................43
Management Agreement.....................................................84
May 7 Opinion.............................................................i
MCM......................................................................92
MDUs.....................................................................83
Megacable...........................................................,.....3
Merger....................................................................i
Merger Agreement..........................................................i
Merger Consideration.....................................................ii
Merger Shares...........................................................iii
MFS/WorldCom.............................................................17
MMDS.....................................................................92
Named Executive Officers................................................121
NASDAQ...................................................................ii
Netscape................................................................107
Network..................................................................84
New PKS.................................................................126
Non-competition Agreement................................................86
Notes....................................................................16
NSF.....................................................................111
NYBCL.....................................................................5
Old PKS.................................................................126
Other Operations.........................................................63
OVS......................................................................21
PBS.......................................................................3
PCI......................................................................85
PCS......................................................................96
PEPCO....................................................................16
Pepco Communications.....................................................16
PKS Split-Off...........................................................126
POP......................................................................25
PPMC....................................................................109
PUCs.....................................................................20
RBOCs....................................................................20
RCN.......................................................................i
RCN Board...............................................................iii
RCN Bylaws................................................................7
RCN Cable................................................................64
RCN Certificate of Incorporation..........................................7
RCN Class B Stock........................................................14
RCN Common Equity........................................................14
RCN Common Stock.........................................................ii
RCN Financial Statements..................................................9
RCN Group................................................................93
RCN Indemnitees..........................................................93
RCN Liabilities..........................................................93
RCN Massachusetts........................................................18
RCN Preferred Stock......................................................14
RCN Stock Dividend......................................................iii
RCN Washington...........................................................18
RCN-BECOCOM..............................................................84
Record Date..............................................................ii
Registration Statement...................................................49
Relevant Business........................................................86
Revolving Credit Facility................................................70
Risk Factors..............................................................8
SBC Decision.............................................................21
Schroders.................................................................i
Schroders' Opinion........................................................i
Second Bidder............................................................35
Section 203.............................................................132
Securities Act............................................................5
Senior Secured Notes.....................................................10
Service Areas............................................................84
Shared Liability.........................................................93
SMATV....................................................................96
Solomon Agreements.......................................................39
SONET...................................................................104
Special Meeting...........................................................i
Starpower................................................................16
Starpower Closing........................................................86
Starpower Operating Agreement............................................18
Stock Exchange Ratio.....................................................ii
Strategy.................................................................74
Support Services Agreement...............................................86
Surviving Corporation.....................................................2
Tax Sharing Agreement....................................................92
TCP/IP...................................................................25
Term Credit Facility.....................................................70
Third Party...............................................................5
Transaction Expenses.....................................................48
Transaction Expenses
Adjustment........................................................ii, 48
True Cable Michigan Liabilities..........................................93
True Commonwealth Telephone
Liabilities...........................................................93
True RCN Liabilities.....................................................93
Truett Waiver............................................................39
Twin County...............................................................9
U.S. GAAP................................................................11
Ultranet.................................................................17
Ultranet Merger Agreement................................................88
Ultranet Registration Rights Agreeement..................................89
VDT......................................................................22
Voting Agreement..........................................................1
VPPs.....................................................................22
Washington, D.C. Market..................................................86
Wireless Video...........................................................63
WNED....................................................................111
WorldCom.................................................................17
Annex I
AGREEMENT AND PLAN OF MERGER
Dated as of February 27, 1998
between
RCN CORPORATION,
LME ACQUISITION CORPORATION
and
LANCIT MEDIA ENTERTAINMENT, LTD.
TABLE OF CONTENTS
----------------------
PAGE
----
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger......................................................2
SECTION 1.02. Effect of the Merger............................................2
SECTION 1.03. Certificate of Incorporation and By-laws of Surviving
Corporation...................................................2
SECTION 1.04. Merger Subsidiary Common Stock..................................3
SECTION 1.05. Conversion of Lancit Shares.....................................3
SECTION 1.06. Exchange of Certificates; Fractional Shares.....................4
SECTION 1.07. Stock Transfer Books............................................7
SECTION 1.08. Treatment of Lancit Common Stock Options........................7
SECTION 1.09. Closing.........................................................7
SECTION 1.10. Dissenting Shares...............................................8
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF LANCIT
SECTION 2.01. Due Incorporation and Qualification of Lancit...................8
SECTION 2.02. Capitalization..................................................9
SECTION 2.03. Subsidiaries....................................................9
SECTION 2.04. Authority, Due Authorization; Valid Obligation; Fairness
Opinion......................................................10
SECTION 2.05. No Conflicts or Defaults.......................................11
SECTION 2.06. Copies of Charter Documents and Stock Records..................12
SECTION 2.07. Authorizations.................................................12
SECTION 2.08. SEC Filings; Financial Statements..............................12
SECTION 2.09. Compliance with Law and Court Orders...........................14
SECTION 2.10. Taxes..........................................................14
SECTION 2.11. Employee Benefits..............................................15
SECTION 2.12. Litigation.....................................................19
SECTION 2.13. Agreements and Commitments.....................................19
SECTION 2.14. Intellectual Property..........................................21
SECTION 2.15. Lancit Brokers; Transaction Expenses...........................23
SECTION 2.16. Miscellaneous..................................................23
SECTION 2.17. Disclosure Documents...........................................24
SECTION 2.18. Absence of Certain Changes.....................................24
SECTION 2.19. Environmental Matters..........................................26
SECTION 2.20. Properties.....................................................28
SECTION 2.21. Insurance Coverage.............................................28
SECTION 2.22. Licenses and Permits...........................................29
SECTION 2.23. Employees......................................................29
SECTION 2.24. Labor Matters..................................................30
SECTION 2.25. Books and Records..............................................30
SECTION 2.26. Interested Party Transactions..................................30
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Due Incorporation and Qualification............................30
SECTION 3.02. Authority; Due Authorization; Valid Obligation.................31
SECTION 3.03. No Conflicts or Defaults.......................................31
SECTION 3.04. Authorizations.................................................31
SECTION 3.05. Litigation.....................................................32
SECTION 3.06. SEC Documents..................................................32
SECTION 3.07. Company Brokers................................................33
SECTION 3.08. No Material Adverse Change.....................................33
SECTION 3.09. Disclosure Documents...........................................33
SECTION 3.10. Company Common Stock...........................................33
SECTION 3.11. Miscellaneous..................................................34
ARTICLE 4
CERTAIN AGREEMENTS
SECTION 4.01. Conduct of Lancit's Business...................................34
SECTION 4.02. Preserve Accuracy of Representations and Warranties;
Updates......................................................36
SECTION 4.03. Further Investigation and Information..........................36
SECTION 4.04. Consents, Waivers and Filings..................................37
SECTION 4.05. Subsequent Filings.............................................37
SECTION 4.06. Preparation of Registration Statement and Proxy................37
SECTION 4.07. Accountants' Letters...........................................38
SECTION 4.08. Shareholders Meeting...........................................38
SECTION 4.09. No Solicitation................................................38
SECTION 4.10. Directors and Officers Insurance...............................41
SECTION 4.11. Notices of Certain Events......................................41
SECTION 4.12. Certain Rights.................................................41
SECTION 4.13. Interim Financing..............................................41
ARTICLE 5
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND MERGER SUBSIDIARY
SECTION 5.01. Due Performance: Accuracy of Representations and
Warranties..................................................42
SECTION 5.02. Corporate Action; Documents...................................42
SECTION 5.03. Legal Opinions................................................43
SECTION 5.04. Registration Statement; Listing...............................43
SECTION 5.05. No Prohibition................................................43
SECTION 5.06. Consents; Approvals...........................................43
SECTION 5.07. Governmental Action...........................................44
SECTION 5.08. Appraisal Rights..............................................44
SECTION 5.09. Rule 145(c)...................................................44
ARTICLE 6
CONDITIONS TO THE OBLIGATIONS OF LANCIT
SECTION 6.01. Due Performance; Accuracy of Representations and
Warranties..................................................45
SECTION 6.02. Corporate Action..............................................45
SECTION 6.03. Legal Opinions................................................45
SECTION 6.04. Registration Statement; Listing...............................46
SECTION 6.05. Governmental Action; No Prohibition...........................46
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER
SECTION 7.01. Termination...................................................46
SECTION 7.02. Effect of Termination; Representations and Warranties.........48
SECTION 7.03. Amendment; Extension; Waiver..................................48
ARTICLE 8
FURTHER ASSURANCES
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Entire Agreement..............................................49
SECTION 9.02. Communications................................................49
SECTION 9.03. No Assignment; Successors and Assigns; No Third Party
Beneficiaries...............................................50
SECTION 9.04. Public Announcements..........................................51
SECTION 9.05. Survival of Representations, Warranties and Agreements........51
SECTION 9.06. Expenses......................................................51
SECTION 9.07. Governing Law; Consent to Jurisdiction........................51
SECTION 9.08. WAIVER OF JURY TRIAL..........................................52
SECTION 9.09. Savings Clause................................................52
SECTION 9.10. Counterparts..................................................52
SECTION 9.11. Construction..................................................52
SECTION 9.12. Schedules.....................................................52
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER, dated as of February 27, 1998, between
RCN CORPORATION, a Delaware corporation (the "Company"), LME ACQUISITION
CORPORATION, a New York corporation (the "Merger Subsidiary"), and LANCIT MEDIA
ENTERTAINMENT, LTD., a New York corporation ("Lancit").
W I T N E S S E T H :
-------------------
WHEREAS, the respective Boards of Directors of the Company, Merger
Subsidiary and Lancit have approved this Agreement and the merger of Merger
Subsidiary with and into Lancit pursuant to the terms and conditions of this
Agreement; and
WHEREAS, the parties intend that the Merger (as such term is defined in
Section 1.01) qualify as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, certain
beneficial and record shareholders of Lancit enter into a Voting Agreement
providing for certain actions relating to certain of the shares of common stock
of Lancit owned by them; and
WHEREAS, the Company is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Laurence A.
Lancit executes a Waiver to an Employment Agreement dated as of October 1, 1995
between Lancit and Laurence A. Lancit, waiving his right thereunder to terminate
his employment upon a change of control of Lancit resulting from the Merger or
any other actions or transactions contemplated by this Agreement; and
WHEREAS, the Company is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Cecily
Truett executes a Waiver to an Employment Agreement dated as of October 1, 1995
between Lancit and Cecily Truett, waiving her right thereunder to terminate her
employment upon a change of control of Lancit resulting from the Merger or any
other actions or transacions contemplated by this Agreement; and
WHEREAS, the Company is unwilling to enter into this Agreement unless,
contemporaneously with the execution and delivery of this Agreement, Susan L.
Solomon enters into an agreement regarding certain matters under the Employment
Agreement dated as of March 31, 1997, as amended, between Susan L. Solomon and
Lancit; and
WHEREAS, Lancit is engaged in the business of developing, producing and
marketing children's, family and other television programs and movies and
related merchandising and licensing activities (the "Business");
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger. On the Closing Date (as such term is defined
in Section 1.09), and subject to the terms and conditions of this Agreement, the
parties shall file a certificate of merger substantially in the form of Exhibit
A (the "Certificate of Merger") with the Secretary of State of the State of New
York under the Business Corporation Law of the State of New York, as amended
(the "BCL"), and make all other filings or recordings required by BCL in
connection with the Merger (as defined below). Effective as of the filing of the
Certificate of Merger or at such other time as is set forth therein (the
"Effective Time"), Merger Subsidiary shall be merged with and into Lancit (the
"Merger"). Upon and following the Merger, the separate existence of Merger
Subsidiary shall cease and Lancit shall continue as the surviving corporation
(the "Surviving Corporation").
SECTION 1.02. Effect of the Merger. The separate corporate existence of
Lancit, as the Surviving Corporation, with all its purposes, objects, rights,
privileges, powers, certificates and franchises, shall continue unimpaired by
the Merger. The Surviving Corporation shall succeed, insofar as permitted by
law, to all rights, assets, liabilities and obligations of Merger Subsidiary in
accordance with the BCL.
SECTION 1.03. Certificate of Incorporation and By-laws of Surviving
Corporation. (a) From and after the Effective Time until further amended in
accordance with the BCL, the certificate of incorporation of Merger Subsidiary,
as in effect at the Effective Time, shall be the certificate of incorporation of
the Surviving Corporation.
(b) From and after the Effective Time until further amended in
accordance with the BCL, the By-laws of Merger Subsidiary, as in effect at the
Effective Time, shall be the By-laws of the Surviving Corporation until altered,
amended or repealed in accordance with law.
(c) From and after the Effective Time, until successors are duly
elected or appointed and qualified in accordance with applicable law, the
directors and officers of Merger Subsidiary as of the Effective Time shall be
the directors and officers, respectively, of the Surviving Corporation.
SECTION 1.04. Merger Subsidiary Common Stock. At the Effective Time,
each issued and outstanding share of common stock, par value $.01 per share, of
Merger Subsidiary ("Merger Subsidiary Common Stock") shall remain outstanding as
one validly issued, fully paid and non-assessable share of common stock, par
value $.01 per share, of the Surviving Corporation and shall constitute the only
outstanding shares of capital stock of the Surviving Corporation.
SECTION 1.05. Conversion of Lancit Shares. (a) At the Effective Time,
by virtue of the Merger and without any action on the part of the holders
thereof,
(i) each share of common stock, par value $.001 per share, of Lancit
(each, a "Lancit Share" and, collectively, the "Lancit Shares") held by
Lancit as treasury stock or owned by the Company or any subsidiary of
the Company immediately prior to the Effective Time shall be canceled
and no payment shall be made with respect thereto; and
(ii) each Lancit Share issued and outstanding immediately prior to the
Effective Time shall, except as otherwise provided in clause 1.05(a)(i)
above or as provided in Section 1.10 with respect to Lancit Shares as
to which appraisal rights have been exercised, be converted into the
right to receive a fraction of a share of the Company's common stock
(the "Company Common Stock"), par value $1.00 per share, equal to the
Stock Exchange Ratio (as defined below) (including any cash paid in
lieu of fractional shares in accordance with Section 1.05(c), the
"Merger Consideration").
As used herein, the term "Stock Exchange Ratio" means a fraction, the numerator
of which is 1.20 (the "Transaction Value") and the denominator of which is the
average closing price (last sale) (the "ACP") of the Company Common Stock on The
Nasdaq Stock Market, Inc. ("NASDAQ") for the 5 trading day period ending one
trading day prior to the Effective Time; provided that if the ACP is greater
than $58.00, the Stock Exchange Ratio will be calculated as if the ACP were
$58.00, and if the ACP is less than $48.00, the Stock Exchange Ratio will be
calculated as if the ACP were $48.00. If the Lancit Transaction Expenses (as
defined below) exceed $602,000, then for purposes of calculating the Stock
Exchange Ratio, the Transaction Value shall be reduced by an amount equal to
such excess divided by the number of outstanding Lancit Shares immediately prior
to the Effective Time.
(b) As of the Effective Time, and except as set forth in Section 1.10
with respect to Lancit shares as to which dissenters rights have been validly
exercised, each holder of a certificate representing any Lancit Shares shall
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration (and cash in lieu of any fractional share) upon surrender
of such certificate in accordance with Section 1.06.
(c) No certificates or scrip representing fractional shares of Company
Common Stock shall be issued upon the surrender for exchange of certificates
representing Lancit Shares, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a shareholder of the Surviving
Corporation. Notwithstanding any other provision of this Agreement, each holder
of Shares exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of Company Common Stock (after taking
into account all Lancit Shares delivered by such holder) shall receive, in lieu
thereof, a cash payment (without interest) equal to such fraction multiplied by
the ACP of Company Common Stock on the NASDAQ for each of the five trading days
immediately prior to the Effective Time.
(d) If, between the date of this Agreement and the Effective Time, the
outstanding Lancit Shares or shares of Company Common Stock shall have been
changed into a different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, distribution or a stock dividend thereon shall be declared with a
record date within said period, such that the amount of the Merger Consideration
as calculated in accordance with Section 1.05(a) would be affected thereby, the
Merger Consideration shall be correspondingly adjusted.
SECTION 1.06. Exchange of Certificates; Fractional Shares. (a) After
the Effective Time, each holder of a certificate(s) formerly evidencing Lancit
Shares which have been converted into the right to receive the Merger
Consideration pursuant to Section 1.05(a), upon surrender of the same to First
Union National Bank or another exchange agent appointed by the Company (the
"Exchange Agent") as provided in Section 1.06(d), shall be entitled to receive
the Merger Consideration payable in respect of such Lancit Shares.
(b) Until surrendered to the Exchange Agent pursuant to Section
1.06(a), each certificate formerly evidencing Lancit Shares which have been
converted pursuant to Section 1.05(a) will be deemed for all corporate purposes
of the Company to evidence ownership of the number of whole shares of Company
Common Stock into which Lancit Shares formerly evidenced by such certificate
were converted and the right to receive cash for fractional shares, as provided
in Section 1.05; provided, however, that until such certificate is so
surrendered, no dividend payable to holders of record of Company Common Stock as
of any date subsequent to the Effective Time shall be paid to the holder of such
certificate in respect of the shares of Company Common Stock evidenced thereby
and such holder shall not be entitled to vote such shares of Company Common
Stock. Upon surrender of a certificate formerly evidencing Lancit Shares which
have been so converted, there shall be paid to the record holder of any
certificates of Company Common Stock issued in exchange therefor, without
interest thereon, any dividends and other distributions which between the
Effective Time and the time of such surrender shall have become payable with
respect to the number of whole shares of Company Common Stock represented
thereby.
(c) The Company shall deposit with the Exchange Agent, as promptly as
practicable and in no event later than three business days following the
Effective Time, the number of shares of Company Common Stock (and, as and when
requested by the Exchange Agent, the cash (in immediately available funds) to be
paid in lieu of fractional shares) to which holders of Lancit Shares shall be
entitled at the Effective Time pursuant to Section 1.05. Any interest on the
amount so deposited shall be payable to the Company.
(d) Promptly after the Effective Time, the Exchange Agent shall send a
notice and a transmittal form (which shall specify that the delivery shall be
effected, and risk of loss and title shall pass, only upon proper delivery of
the certificates formerly representing Lancit Shares to the Exchange Agent
(subject to Section 1.06(f))) to each holder of certificates formerly evidencing
Lancit Shares (other than certificates formerly evidencing Lancit Shares to be
canceled pursuant to Section 1.05(a)(i)) advising such holder of the
effectiveness of the Merger and the procedure for surrendering to the Exchange
Agent such certificates for exchange into the Merger Consideration as
contemplated by Section 1.05(a). The notice and transmittal form provided for in
this Section 1.06(d) shall be sent by the Exchange Agent to the address for each
holder of Lancit Shares contained in the stock record books of Lancit promptly
after the Effective Time. Each holder of certificates formerly evidencing Lancit
Shares, upon proper surrender thereof to the Exchange Agent together and in
accordance with such transmittal form, shall be entitled to receive in exchange
therefor the Merger Consideration payable in respect of such Lancit Shares.
Notwithstanding the foregoing, neither the Exchange Agent nor any party shall be
liable to a holder of certificates formerly evidencing Lancit Shares for any
amount which may be required to be paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(e) If any portion of the Merger Consideration is to be delivered to a
Person other than the Person in whose name the certificates surrendered in
exchange therefor are registered, it shall be a condition to such payment that
the certificates so surrendered shall be properly endorsed or accompanied by
appropriate stock powers and otherwise in proper form for transfer, that such
transfer otherwise be proper and that the Person requesting such transfer shall
pay to the Exchange Agent any transfer or other taxes payable by reason of the
foregoing or establish to the satisfaction of the Exchange Agent that such taxes
have been paid or are not required to be paid. For purposes of this Agreement,
"Person" means an individual, a corporation, a limited liability company, a
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
(f) In the event any certificate theretofore representing Lancit
Shares shall have been lost, stolen or destroyed, upon the making of an
appropriate affidavit of that fact by the Lancit shareholder claiming such
certificate to be lost, stolen or destroyed, such Lancit shareholder shall be
paid the Merger Consideration in respect of such Lancit Shares; provided that
when the Merger Consideration is paid to such Lancit shareholder, the Board of
Directors of the Company may, in its discretion and as a condition precedent to
the issuance thereof, require the claiming Person to give the Company a bond or
indemnification in such form and sum as the Company may reasonably direct as
indemnity against any claim that may be made against the Company with respect to
the certificate alleged to have been lost, stolen or destroyed.
(g) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.06(c) that remains unclaimed by the holders
of Lancit Shares entitled thereto six months after the Effective Time shall be
returned to the Company and any such holder who has not exchanged his Lancit
Shares for the Merger Consideration in accordance with this Section 1.06 prior
to that time shall thereafter look only to the Company for payment of the Merger
Consideration in respect of his Lancit Shares. Notwithstanding the foregoing,
the Company shall not be liable to any holder of Lancit Shares for any amount
paid to a public official pursuant to applicable abandoned property, escheat or
similar laws. Any amounts remaining unclaimed by holders of Lancit Shares two
years after the Effective Time (or such earlier date immediately prior to such
time as such amounts would otherwise escheat to or become property of any
governmental entity) shall, to the extent permitted by applicable law, become
the property of the Company free and clear of any claims or interest of any
Person previously entitled thereto.
(h) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.06(c) to pay for Lancit Shares for which
appraisal rights have been perfected shall be returned to the Company, upon
demand.
SECTION 1.07. Stock Transfer Books. There shall be no further
registration or transfers of Lancit Shares on the stock transfer books of Lancit
after the Effective Time. If, after the Effective Time, certificates
representing Lancit Shares are presented to the Surviving Corporation, they
shall be canceled and exchanged for the consideration provided for, and in
accordance with the procedures set forth, in this Article 1.
SECTION 1.08. Treatment of Lancit Common Stock Options.
(a) Except for the Lancit Warrants (as defined below), each option to
purchase shares of Lancit common stock outstanding under any option plan of
Lancit or any Subsidiary or any employment contract or other arrangement
granting such options, whether or not vested, shall be canceled as of the
Effective Time.
(b) Prior to the Effective Time, Lancit shall give any required
notices to (and, if necessary, obtain any required consents from) affected
optionees and, if necessary, shall revise such stock option plans or
arrangements to give effect to the cancellation of such options as provided in
Section 1.08(a).
(c) The warrants held be Discovery Communications, Inc. ("DCI"),
Robinson Lerer Montgomery, LLC and Allen & Company Incorporated to purchase
660,209 Lancit Shares in the aggregate (collectively, the "Lancit Warrants")
shall be converted into warrants to purchase Company Common Stock in accordance
with their respective terms, as set forth on Schedule 1.08(c) hereto.
SECTION 1.09. Closing. Subject to Section 7.01, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
10:00 a.m. on a date to be specified by the parties (the "Closing Date"), which
shall be not more than five business days after all of the conditions precedent
set forth in Articles 5 and 6 to be satisfied prior to the Closing have been
satisfied or waived, at the offices of Davis Polk & Wardwell, 450 Lexington
Avenue, New York, New York, or such other date, time and place as is agreed to
by the parties (including any postponement or adjournment of a previously
scheduled date). At the Closing, Lancit shall execute and deliver the
certificates, documents and instruments contemplated to be delivered by Lancit
pursuant to Article 5, and the Company shall execute and deliver the
certificates, documents and instruments contemplated to be delivered by it
pursuant to Article 6. The Certificate of Merger shall be filed with the
Secretary of State of the State of New York on the Closing Date.
SECTION 1.10. Dissenting Shares. Notwithstanding Section 1.05, if the
Lancit Shares are not designated as a National Market System security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. on the record date for the Lancit Shareholders Meeting (as such term is
defined in Section 4.08), Lancit Shares outstanding immediately prior to the
Effective Time and held by a holder who has not voted in favor of the Merger or
consented thereto in writing and who has demanded appraisal for such Lancit
Shares in accordance with BCL shall not be converted into a right to receive the
Merger Consideration, unless such holder fails to perfect or withdraws or
otherwise loses his right to appraisal. If after the Effective Time such holder
fails to perfect or withdraws or loses his right to appraisal, such Lancit
Shares shall be treated as if they had been converted as of the Effective Time
into a right to receive the Merger Consideration. Lancit shall give the Company
prompt notice of any demands received by Lancit for appraisal of Lancit Shares,
and the Company shall have the right to participate in all negotiations and
proceedings with respect to such demands. Lancit shall not, except with the
prior written consent of the Company, make any payment with respect to, or
settle or offer to settle, any such demands.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF LANCIT
Lancit represents and warrants to the Company as of the date hereof
and, except as to representations made as of a specific date, immediately prior
to the Effective Time that:
SECTION 2.01. Due Incorporation and Qualification of Lancit. (a) Lancit
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of New York, with full corporate power and authority
required to own, lease and operate its properties and to carry on its business
in the place and in the manner as currently conducted.
(b) Set forth in Item 2.01(b) of the Disclosure Schedule attached
hereto and made a part hereof (the "Disclosure Schedule") is a list of all
jurisdictions in which Lancit is qualified to do business and is in good
standing as a foreign corporation, which are the only jurisdictions where the
character of the property owned or leased by Lancit or the nature of Lancit's
activities makes such qualification necessary, except for jurisdictions where
the failure to so qualify could not, individually or in the aggregate, have a
material adverse effect on the business, assets, condition (financial or
otherwise) or results of operations of Lancit and its consolidated Subsidiaries
(as such term is defined in Section 2.03(a)), considered as a whole (such a
material adverse effect with respect to Lancit and its Subsidiaries being
hereinafter referred to as a "Material Adverse Effect").
SECTION 2.02. Capitalization. The authorized capital stock of Lancit
consists of 15,000,000 shares of Common Stock, $.001 per value. As of the date
hereof, there are outstanding (i) 6,634,750 Lancit Shares, (ii) stock options
issued to present and former employees, directors and consultants to purchase an
aggregate of 1,235,250 Lancit Shares ("Lancit Options") with an average exercise
price of $4.081 per Lancit Share, as detailed in Item 2.02 of the Disclosure
Schedule, (iii) warrants to purchase an aggregate of 660,209 Lancit Shares with
the respective exercise prices shown on Schedule 1.08(c) (defined above as the
"Lancit Warrants"). All outstanding Lancit Shares have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of any preemptive rights. Except as set forth in this Section 2.02 or
in Item 2.02 of the Disclosure Schedule, there are outstanding (i) no shares of
capital stock or other securities of Lancit, (ii) no securities of Lancit or any
Subsidiary convertible into or exchangeable for shares of capital stock or
voting securities of Lancit, and (iii) no options, warrants or other rights to
acquire from Lancit or any Subsidiary, and no obligation of Lancit or any
Subsidiary to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of
Lancit (collectively, "Lancit Securities"). There are no outstanding obligations
of Lancit or any Subsidiary to repurchase, redeem or otherwise acquire any
Lancit Securities.
SECTION 2.03. Subsidiaries. (a) Set forth in Item 2.03(a) of the
Disclosure Schedule is a list of all direct and indirect subsidiaries of Lancit
and any other entities which Lancit otherwise controls or in which it has an
investment or ownership interest (collectively, the "Subsidiaries"), showing the
date and jurisdiction of incorporation of each thereof and Lancit's percentage
beneficial interest therein (and, if less than 100%, the holders of the
remaining interests). Each of the Subsidiaries is a corporation, or other entity
as reflected in Item 2.03(a) of the Disclosure Schedule, duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization, with full corporate or other power and authority required to own,
lease and operate its properties and to carry on its business in the places and
in the manner as currently conducted. Except as set forth in Item 2.03(a) of the
Disclosure Schedule, each Subsidiary is duly qualified to do business as a
foreign corporation in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities make such qualification
necessary, except for those jurisdictions where failure to be so qualified could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(b) Except as set forth in Item 2.03(a), all of the outstanding capital
stock of, or other ownership interests in, each Subsidiary, is validly issued,
fully paid and nonassessable, and is owned by Lancit, directly or indirectly,
free and clear of any Lien (as defined below) and free of any other limitation
or restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There are
no outstanding (i) securities of Lancit or any Subsidiary convertible into or
exchangeable for capital stock or other ownership interests in any Subsidiary,
(ii) options, warrants or other rights to acquire from Lancit or any Subsidiary,
and no other obligation of Lancit or any Subsidiary to issue, any capital stock
of or other ownership interests in, or any securities convertible into or
exchangeable for any capital stock of or ownership interests in, any Subsidiary,
or (iii) securities of any Subsidiary other than capital stock of such
Subsidiary owned by Lancit (collectively, "Subsidiary Securities"). There are no
outstanding obligations of Lancit or any Subsidiary to repurchase, redeem or
otherwise acquire any outstanding Subsidiary Securities.
SECTION 2.04. Authority, Due Authorization; Valid Obligation; Fairness
Opinion. (a) Lancit has all requisite corporate power and authority to execute,
deliver and perform this Agreement and the further agreements contemplated by
this agreement (the "Additional Agreements") to be executed and delivered by it
and to consummate the transactions contemplated hereby and thereby. The Board of
Directors of Lancit has unanimously approved the Merger and this Agreement. At a
meeting duly called and held, the Board of Directors of Lancit has (i)
unanimously determined that this Agreement and the Additional Agreements and the
transactions contemplated hereby and thereby, including the Merger, are fair to
and in the best interest of Lancit's shareholders, (ii) unanimously approved
this Agreement and the Additional Agreements and the transactions contemplated
hereby and thereby, including the Merger, which approval satisfies in full the
requirements of the BCL regarding approval by a board of directors, and (iii)
unanimously resolved to recommend approval and adoption of this Agreement and
the Merger by the Lancit shareholders. The execution, delivery and performance
by Lancit of this Agreement and the Additional Agreements and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action, except for any required approval by Lancit's
shareholders in connection with the consummation of the Merger (by a two-thirds
majority of the shares entitled to vote thereon). In addition, the Board of
Directors has taken all requisite action such that the freezeout, special
shareholder voting and other requirements imposed by Section 912 of the BCL are
not applicable to the Merger.
(b) This Agreement constitutes a valid and binding agreement of
Lancit, enforceable against Lancit in accordance with its terms. When executed
and delivered by Lancit, the Additional Agreements to which it is a party will
constitute valid and binding agreements of Lancit, enforceable against Lancit in
accordance with their respective terms.
(c) The Board of Directors of Lancit has received an opinion dated
February 27, 1998 of its financial advisor, Schroder & Co. Inc., that, as of
such date, the consideration to be received by the holders of Lancit Shares in
the Merger was fair to such holders from a financial point of view (copies of
which have been delivered to the Company), and such opinion has not been
withdrawn, revoked or modified in any material respect.
SECTION 2.05. No Conflicts or Defaults. The execution, delivery and
performance of this Agreement and the Additional Agreements and the consummation
of the transactions contemplated hereby and thereby do not and will not as of
the Effective Time (a) contravene the Certificate of Incorporation or By-laws
(or other organizational or governing documents), of Lancit or any Subsidiary;
(b) assuming compliance with the matters referred to in Section 2.07, violate
any applicable law, rule, regulation, judgment, order or decree binding upon
Lancit or any Subsidiary or (c) except as set forth in Item 2.05 of the
Disclosure Schedule, (i) require notice, violate or conflict with, result in a
breach of, or a default under, or give rise to a right of termination,
cancellation or acceleration of any right or obligation of Lancit or any
Subsidiary or to a loss of any material benefit to which Lancit or any
Subsidiary is entitled under, (x) any provision of any agreement, mortgage,
indenture, lease, instrument, permit, license or other instrument to which
Lancit or any Subsidiary is a party or by which it or any of its assets is bound
which is required to be disclosed pursuant to Section 2.13, 2.14 or 2.22 (or, to
the knowledge of Lancit, any provision of any other agreement, mortgage,
indenture, lease, instrument, permit, license or other instrument), (y) any
judgment, order or decree, to which it or any of its assets is subject, or (z)
any license, franchise, permit or other similar authorization held by Lancit or
any Subsidiary, or (ii) result in the creation or imposition of, or give any
party the right to create or impose, any liens, mortgages, pledges, charges,
security interests, equities, restrictions, adverse interests, claims or
encumbrances of any kind (collectively, "Liens") upon Lancit, any Subsidiary or
any of their respective assets, except any such violation, conflict, breach,
default, lien, termination or failure of performance referred to in this clause
2.05(c)(ii) as could not, individually or in the aggregate, (x) have a Material
Adverse Effect or (y) materially adversely affect the consummation of the
transactions contemplated by this Agreement.
SECTION 2.06. Copies of Charter Documents and Stock Records. Correct
and complete copies of the Certificate of Incorporation and By-laws and other
organizational or governing instruments of Lancit and each Subsidiary as
currently in effect and all documents filed with any state authority with
respect to any merger, or consolidation or reincorporation in which Lancit or
any Subsidiary has been a participant, have been delivered to the Company by
Lancit. Lancit has made available to the Company correct and complete copies of
the minute books and stock ledgers of Lancit and each Subsidiary.
SECTION 2.07. Authorizations. No authorization, approval, order,
license, permit, consent or other action of, or filing or registration with, any
federal, state, foreign, provincial or local court or governmental body, agency,
official or authority, or consent of any other party, is required in connection
with the execution, delivery and performance by Lancit of this Agreement, the
Additional Agreements and/or the Merger, except (a) as set forth in Item 2.07 of
the Disclosure Schedule, (b) the filing of the Certificate of Merger with the
Secretary of State of the State of New York, (c) compliance with any applicable
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder (the "Exchange Act"); (d) compliance with
the applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"); (e) compliance with any applicable foreign or state
securities or Blue Sky laws and (f) approval and adoption of this Agreement and
the Merger by Lancit's shareholders.
SECTION 2.08. SEC Filings; Financial Statements. (a) Lancit has
furnished to the Company true and complete copies of (i) its annual reports on
Form 10-K, as amended, for each of the three fiscal years ended June 30, 1995,
1996 and 1997 as filed with the Securities and Exchange Commission (the "SEC")
and annual reports to shareholders for each of the two fiscal years ended June
30, 1995 and 1996, (ii) its quarterly reports on Form 10-Q for the fiscal
quarters ended September 30, 1997 and December 31, 1997, as filed with the SEC,
(iii) its proxy or information statements relating to the meetings of, or
actions taken without a meeting by, Lancit's shareholders held since December 6,
1995 and (iv) all of its other reports, statements, schedules and registration
statements (in the form in which it became effective) filed with the SEC since
July 1, 1994 (as amended, collectively, the "Lancit SEC Documents"). Lancit has
made all required filings since July 1, 1994 with the SEC when due in accordance
with the rules and regulations promulgated under the Exchange Act and the
Securities Act. As of their respective dates, all of the Lancit SEC Documents
complied in all material respects with the Exchange Act or the Securities Act,
as applicable, and the applicable rules and regulations of the SEC thereunder.
As of its filing date, each such report or statement filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Each such registration statement, as amended or supplemented, if applicable,
filed pursuant to the Securities Act of 1933 as of the date such statement or
amendment became effective did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. All material
agreements, contracts and other documents required to be filed as exhibits to
any of the Lancit SEC Documents have been so filed.
(b) The audited consolidated financial statements and unaudited interim
financial statements of Lancit included in the Lancit SEC Documents or otherwise
delivered to the Company by Lancit (collectively, the "Financial Statements")
were prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis, are reconcilable to the books and
records of Lancit and present fairly the consolidated financial position of
Lancit and its Subsidiaries as of the dates thereof and their consolidated
results of operations, cash flows and changes in financial position for the
periods then ended, except, in the case of such unaudited financial statements,
for the omission of footnote information and for normal year end audit
adjustments which are not, singly or in the aggregate, material. For the
purposes of this Agreement, "Interim Balance Sheet" means the unaudited
consolidated balance sheet of Lancit and the Subsidiaries as of December 31,
1997 included in Lancit's quarterly report on Form 10-Q for the quarter ended on
such date and the notes thereto and "Interim Balance Sheet Date" means December
31, 1997.
(c) Neither Lancit nor any Subsidiary has any liabilities of any
nature, whether accrued, absolute, contingent (to the extent known), determined,
determinable or otherwise, and whether due or to become due ("Liabilities"),
other than (i) liabilities disclosed or provided for in the Interim Balance
Sheet, (ii) liabilities incurred in the ordinary course of business consistent
with past practice since the Interim Balance Sheet Date which individually or in
the aggregate are not material to Lancit and the Subsidiaries, taken as a whole,
(iii) liabilities disclosed or arising pursuant to agreements disclosed in any
Item of the Disclosure Schedule, (iv) the Lancit Transaction Expenses (as
defined below), (v) other liabilities that could not reasonably be expected to
exceed $50,000 in the aggregate and (vi) liabilities incurred with the express
written consent of the Company. All such Liabilities since the Interim Balance
Sheet Date required by GAAP to be reflected on a month-end balance sheet are
fully reflected or reserved on the books and records of Lancit or the applicable
Subsidiaries, as the case may be.
(d) Since December 31, 1996, except as set forth in Item 2.08(d) of
the Disclosure Schedule, neither Lancit nor any of the Subsidiaries has entered
into any off balance sheet financial arrangements, including any transaction
involving a hedge or derivative financial instrument.
SECTION 2.09. Compliance with Law and Court Orders. Neither Lancit nor
any Subsidiary nor the Business is in material violation of, or has materially
violated, or, to the knowledge of Lancit, is under investigation with respect to
or has been threatened to be charged with or given notice of any material
violation of, any applicable law, rule, regulation, judgment, injunction, order
or decree.
SECTION 2.10. Taxes. All federal, state, county, local, foreign,
income, property, transfer, excise, sales, use, recording, payroll, withholding
and other taxes and assessments of any kind, including interest and penalties
(collectively, "Taxes"), which are due and payable by Lancit have been paid or
adequate provision has been made for the payment thereof. There are no Liens on
Lancit or any Subsidiary or any of their respective assets in respect of Taxes,
other than any Permitted Liens (as such term is defined in Section 2.20). The
liabilities for Taxes reflected on the Interim Balance Sheet represent adequate
provision, in accordance with GAAP, for the payment of all accrued and unpaid
Taxes for all periods ended on or prior to the Interim Balance Sheet Date,
whether or not disputed and whether or not asserted prior to the date hereof.
All returns and reports of any nature for Taxes ("Tax Returns") required to be
filed prior to the date hereof by Lancit have been duly filed. All Taxes shown
on such Tax Returns and on assessments received have been paid to the extent
that such Taxes have become due. The Company has been furnished with access to
true and complete copies of all Tax Returns required to be filed by Lancit for
each of the three taxable years ending on or before June 30, 1996. Except as set
forth in Item 2.10 of the Disclosure Schedule, no claims have been asserted
against Lancit which are currently unresolved for Taxes, including interest or
penalties. The federal income tax returns of Lancit have been closed by
applicable statute for all taxable years prior to and including the taxable year
ended June 30, 1994. Except as set forth in Item 2.10 of the Disclosure
Schedule, none of the Tax Returns of Lancit has ever been audited, there has
been no extension of any applicable statute of limitations and, to the knowledge
of Lancit, none of the Tax Returns of Lancit is currently under examination.
Lancit has not waived any statute of limitations relating to the assessment or
collection of Taxes with respect to any taxable year for any audits or years
that are not closed. All Taxes or other assessments with respect to Taxes which
Lancit is required by law to withhold or collect have been duly withheld and
collected and have been paid over to the proper governmental authorities or are
properly held by Lancit for such payment. Neither Lancit nor any Subsidiary has
made or has any obligations to make a payment that is or will not be deductible
under Section 280G of the Code. Neither Lancit nor any Subsidiary has filed a
consent under Section 341(f) of the Code concerning collapsible corporations.
Neither Lancit nor any Subsidiary has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Neither
Lancit nor any Subsidiary has (A) been a member of an affiliated group as
defined under Section 1504 of the Code (other than an affiliated group of which
the common parent was Lancit) and (B) any liability for Taxes of another Person
(other than Lancit or another Subsidiary) under Treas. Reg. Section 1.1502-6 (or
any similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
SECTION 2.11. Employee Benefits. (a) The Lancit Media Entertainment,
Ltd. & Affiliates Retirement Plan, as amended (the "401(k) Plan") is the only
"employee pension benefit plan" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) currently
maintained by Lancit or any Subsidiary or to which Lancit or any Subsidiary has
any liability or obligation. For purposes of this Section 2.11, "Subsidiary"
means any entity that with Lancit is a member of a controlled group of
corporations, within the meaning of section 414(b) of the Code, or is a trade or
business under common control within the meaning of section 414(c) of the Code,
or is a member of the same affiliated service group, within the meaning of
section 414(m) of the Code. Lancit (formerly Lancit Media Productions, Ltd.)
previously maintained the Lancit Media Productions, Ltd. Defined Benefit Pension
Plan (the "Defined Plan") and the Lancit Media Profit Sharing Plan (together,
the "Prior Plans"). Neither Lancit nor any Subsidiary has any liability or
obligation remaining under the Prior Plans.
The 401(k) Plan, the Prior Plans, and each bonus, pension, retirement,
profit sharing, deferred compensation, stock ownership, stock bonus, stock
option, phantom stock, retirement, vacation, disability, death benefit,
unemployment, hospitalization, medical, severance, or other plan, or agreement,
including individual employment agreements, providing benefits to any current or
former employees, officers or directors of Lancit or any Subsidiary or to which
Lancit or any Subsidiary has or had any liability or obligation (collectively,
the "Lancit Benefit Plans"), and any related trust, complies currently, and has
complied at all times in the past with respect to the 401(k) Plan and the Prior
Plans and since July 1, 1994, with respect to all other Lancit Benefit Plans,
both as to form and operation, in all material respects with the terms of such
Lancit Benefit Plan and with the applicable provisions of ERISA, the Code and
other applicable United States laws. All Lancit Benefit Plans are set forth in
Item 2.11(a) of the Disclosure Schedule, as well as the Employee Policy and
Procedures Manual and any other employment policies. Lancit has provided the
Company copies of all such documents set forth in Item 2.11(a).
(b) Collectively Bargained Agreements and Plans. (i) Item 2.11(b) of
the Disclosure Schedule sets forth all union retirement, pension or welfare
plans to which Lancit or any Subsidiary is obligated to contribute, including
each multiemployer pension benefit plan (as defined in section 3(37) of ERISA)
to which Lancit or any Subsidiary contributes or is required to contribute, and,
with respect to each such plan for the plan year in which the Effective Time
occurs, (A) the amount of any payment made and the approximate amount of any
payment to be made; (B) the number of contribution base units (as defined in
section 4001(a)(11) of ERISA) for which Lancit or any Subsidiary has an
obligation to contribute to such plan; and any conditions to such contribution.
(ii) Neither Lancit nor any Subsidiary has any unfulfilled current or past due
obligation to contribute to any multiemployer plan (as defined in section 3(37)
of ERISA) or collectively-bargained welfare plan listed on Item 2.11(b). (iii)
Neither Lancit nor any Subsidiary would have incurred any withdrawal liability
pursuant to Title IV of ERISA if it had withdrawn from the AFTRA Retirement Fund
as of November 30, 1996 or from any other multiemployer pension benefit plan to
which it is obligated to contribute as of December 31, 1996, and neither Lancit
nor any Subsidiary knows or has any reason to know of any change since said
November 30, 1996 or December 31, 1996 dates such that it would incur withdrawal
liability upon a complete withdrawal from any of said multiemployer pension
benefit plans effective as of the date of this Agreement. (iv) Neither Lancit
nor any Subsidiary is a party to any collective bargaining agreement, except as
disclosed on Item 2.11(b) of the Disclosure Schedule.
(c) COBRA. Item 2.11(c) lists each employee or former employee of
Lancit or any Subsidiary eligible for continuation coverage under Title X of the
Consolidated Omnibus Reconciliation Act of 1986, as amended ("COBRA"), the date
on which they were given the notice of their COBRA eligibility, whether they
elected COBRA coverage, and the last date on which a premium was received from
the employee or former employee for COBRA coverage.
(d) Leaves of Absence. Item 2.11(d) of the Disclosure Schedule lists
all employees for whom Lancit or any Subsidiary has approved any type of leave
of absence (paid or unpaid) extending until or after the Effective Time and a
description of the terms of the leave.
(e) Claims. Item 2.11(e) of the Disclosure Schedule lists for each
Lancit Benefit Plan any pending or threatened litigation, claims, lawsuits,
administrative proceedings, or pending appeals for benefits that have been
denied, and any similar action or claim that may result in liability to Lancit
or any Subsidiary.
(f) Prohibited Transactions. To Lancit's knowledge, no fiduciary,
party in interest, or disqualified person of any plan set forth in Items 2.11
(a) or (b) has engaged in any transaction described in section 406(a) or (b) of
ERISA or in any transaction described in section 4975 of the Code.
(g) Tax Qualification. With respect to each Lancit Benefit Plan that is
an employee pension benefit plan under section 3(2) of ERISA, including any such
plan that is frozen, terminated or partially terminated: (i) there is no
accumulated funding deficiency, as defined in section 302(a)(2) of ERISA or
section 412 of the Code; (ii) there has not been issued a waiver of the minimum
funding standard under section 412 of the Code; (iii) there is no liability for
tax imposed by section 4971 of the Code; (iv) the contribution and benefit
limitations of section 415 of the Code have not been exceeded; (v) there is no
unfulfilled obligation to contribute; (vi) there has been issued a favorable
determination by the Internal Revenue Service with respect to the qualified
status of the Plan under section 401(a) of the Code as amended to the Effective
Time except as set forth on Item 2.11(g) of the Disclosure Schedule; (vii) the
Internal Revenue Service has not revoked a prior favorable determination of the
Plan's qualified status or issued technical advice regarding the Plan's
qualified status; and (viii) to Lancit's knowledge, no event has occurred in the
operation or administration of the Plan which could form a basis for revocation
of the Plan's qualified status by the Internal Revenue Service.
(h) Defined Benefit Plans. Except with respect to the Defined Plan,
neither Lancit nor any Subsidiary sponsor or have sponsored, maintained or
contributed to a defined benefit pension plan that is or was subject to Title IV
of ERISA. Neither Lancit nor any Subsidiary is liable to the Pension Benefit
Guaranty Corporation with respect to the Lancit Media Productions, Ltd. Defined
Benefit Pension Plan or any plan sponsored or maintained by any other party,
including any predecessor of Lancit or any Subsidiary, former employer of
employees of Lancit or any Subsidiary, or any party which, with Lancit and any
Subsidiary, forms a controlled group of corporations, a group of trades or
businesses under common control, or an affiliated service group, all within the
meaning of section 414 of the Code. There does not exist any lien under section
412(n) of the Code upon any property belonging to Lancit or any Subsidiary or
any entity which is a member of a controlled group (within the meaning of
section 412(n)(6)) of which Lancit or any Subsidiary is a member.
(i) Reporting and Disclosure. To Lancit's knowledge, (i) Each party in
interest described in section 3(14)(A) and (B) of ERISA has complied with, and
neither Lancit nor any Subsidiary will knowingly permit at any time through the
Effective Time any such party in interest to fail to comply with, all material
requirements of ERISA and (ii) Lancit and each Subsidiary have caused to be
filed on a timely basis each and every return, report and notice required to be
furnished to any governmental agency with respect to each employee benefit plan
sponsored or maintained by Lancit or any Subsidiary and have furnished to plan
participants and beneficiaries the information required to be furnished to them.
Lancit shall deliver to Company at the Effective Time all records as are
requested by Company.
(j) General ERISA Compliance. To Lancit's knowledge, (i) each party in
interest described in section 3(14)(A) and (B) of ERISA has complied, and
neither Lancit or any Subsidiary will knowingly permit at any time through the
Effective Time any such party in interest to fail to comply, with all material
requirements of ERISA and (ii) each Lancit Benefit Plan which otherwise provides
benefits or compensation for services to any employee, his dependents or
beneficiaries has been maintained and administered at all times in full
compliance with applicable state and federal law, including without limitation
the Age Discrimination in Employment Act, as amended, Title VII of the Civil
Rights Act of 1964, as amended, and Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1986, as amended and the Health Insurance Portability and
Accountability Act of 1996.
(k) Severance. Except as specifically provided in written contracts
with employees or Lancit Benefit Plans listed in Item 2.11(a), or as otherwise
reflected in Item 2.11(k) of the Disclosure Schedule, no employee of Lancit or
any Subsidiary is entitled to severance pay for a voluntary or an involuntary
termination of employment with Lancit or any Subsidiary.
(l) Post-retirement Welfare Benefits. No employee is receiving or
entitled to any postretirement compensation or benefits other than benefits to
which he or she is entitled under the Lancit Benefit Plans listed in Items
2.11(a) or 2.11(b).
(m) Non-conforming Group Health Plans. To Lancit's knowledge, neither
Lancit nor any Subsidiary has contributed to a non-conforming group health plan
(as that term is defined in Code section 5000(c)) or incurred any tax liability
under Code section 5000(a).
(n) Leased Employees. To Lancit's knowledge, any leased employees, as
defined in section 414(n) of the Code, of Lancit or any Subsidiary have been
covered under the terms of the applicable Lancit Benefit Plans, or, if excluded,
all applicable coverage requirements have been satisfied with such leased
employees taken into consideration. No individual who has provided services to
Lancit or any Subsidiary and who has not been treated by Lancit or any
Subsidiary as an employee of Lancit or any Subsidiary has any right to benefits
under any Lancit Benefit Plan.
SECTION 2.12. Litigation. Except as described in Item 2.12 of the
Disclosure Schedule, as of the date of this Agreement, there is no claim,
action, suit, proceeding, investigation or criminal proceeding, at law or in
equity, pending against, or to the knowledge of Lancit, threatened against or
affecting, Lancit or any Subsidiary or any of their respective properties before
any national, state or provincial, local or other governmental authority,
agency, court, official, arbitration tribunal or other forum, (collectively,
"Proceedings"), (i) which, if adversely determined, could reasonably be expected
to, individually or in the aggregate, have a Material Adverse Effect or (ii)
which in any manner challenges or seeks to prevent, enjoin, alter or materially
delay the Merger. Except as described in Item 2.12 of the Disclosure Schedule,
there is no Proceeding pending (or to Lancit's knowledge, threatened) against
Lancit or any Subsidiary or any of their respective properties, (i) which has a
significant possibility of success on the merits and could reasonably be
expected to, individually or in the aggregate, have a Material Adverse Effect or
(ii) which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the Merger and has a significant possibility of success on the
merits in respect of such challenge or such relief. There is no material
outstanding and unsatisfied judgment, order, writ, ruling, injunction,
stipulation or decree of any court, arbitrator or governmental authority against
or relating to Lancit, any Subsidiary or any of its or their respective assets.
SECTION 2.13. Agreements and Commitments. (a) Except as disclosed in
Item 2.13(a) of the Disclosure Schedule, neither Lancit nor any Subsidiary is a
party to or bound by, and none of the assets of Lancit or any Subsidiary is
covered by or subject to, any of the following (whether oral or written):
(i) any lease (a) for real property or (b) for personal property
providing for annual rentals for such personal property lease of $5,000
or more or aggregate payments (per lease) for such personal property
lease of $10,000 or more;
(ii) any agreement for the purchase of materials, software,
supplies, goods, services, equipment or other assets providing for
either (A) annual payments by Lancit and the Subsidiaries of $5,000 or
more or (B) aggregate payments (per agreement) by Lancit and the
Subsidiaries of $10,000 or more;
(iii) any funding, agency, licensing, development, production,
co-production, output, air commitment, distribution, rights sharing or
back-end agreement or any agreement similar to any of the foregoing;
(iv) any partnership, joint venture or other similar agreement or
arrangement;
(v) any agreement relating to the acquisition or disposition of
any business (whether by merger, sale of stock, sale of assets or
otherwise);
(vi) any agreement relating to indebtedness for borrowed money or
the deferred purchase price of property (in either case, whether
incurred, assumed, guaranteed or secured by any asset);
(vii) any option, license, franchise or similar agreement;
(viii) any agency, dealer, sales representative, marketing,
merchandising, licensing or other similar agreement;
(ix) any agreement that limits the freedom of Lancit or any
Subsidiary to compete in any line of business or with any Person or in
any area or which would so limit the freedom of the Surviving
Corporation or any Subsidiary after the Effective Time;
(x) any agreement pursuant to which Lancit or any Subsidiary has
hired or retained a consultant;
(xi) any agreement pursuant to which Lancit or any Subsidiary is
subject to confidentiality or non-disclosure obligations;
(xii) any union or collective bargaining contracts with respect to
any employees of Lancit or any Subsidiary;
(xiii) any employment or talent agreement; or
(xiv) any other agreement, commitment, arrangement or plan that is
material.
In lieu of a list, certain types of agreements and other instruments which are
not individually material to Lancit are identified in Item 2.13(a) by category,
together with a representative sample. Documents in each such category do not
differ from the representative sample in any material respect.
(b) Each agreement, contract, plan, lease, arrangement or commitment
disclosed in the Disclosure Schedule or required to be disclosed in the
Disclosure Schedule is a valid and binding agreement of Lancit or a Subsidiary,
as the case may be, and is in full force and effect, and none of Lancit, any
Subsidiary or, to the knowledge of Lancit, any other party thereto is in default
or breach in any material respect under the terms of any such agreement,
contract, plan, lease, arrangement or commitment, and, to the knowledge of
Lancit, no event or circumstance has occurred that, with notice or lapse of time
or both, would constitute an event of default thereunder, other than any
breaches or defaults which, singly or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect. True and complete copies of each
such agreement, contract, plan, lease, arrangement or commitment have been
delivered or made available to the Company.
(c) A complete list (except as to the categories referred to in the
last two sentences of Section 2.13(a)) of all funding, agency, licensing,
production, employee, talent, distribution and other contracts or other
arrangements between the Company or any Subsidiary and any third party in
connection with the development, preparation, production and distribution of new
episodes of Reading Rainbow, Outward Bound and The Puzzle Place for the 1998
season in effect as of the date hereof is set forth in Item 2.13(c) of the
Disclosure Schedule. Such contracts and arrangements are all of the contracts
and arrangements that will be necessary for the development preparation,
production and distribution of such episodes, other than contracts and
agreements to be entered into in the ordinary course of production consistent
with past practice, and Lancit has no reason to believe that there will be any
difficulties encountered in connection with entering into such ordinary course
contracts and arrangements.
(d) Except as set forth in Item 2.13(d) of the Disclosure Schedule, to
Lancit's knowledge, its relationships with the parties to the contracts required
to be disclosed under Sections 2.13(a) (i), (ii), (iii), (iv), (vii), (viii),
(x) and (xiii) are good and no such party has threatened to terminate or fail to
renew any such contract, agreement or relationship, which termination or failure
would, singly or in the aggregate, have a Material Adverse Effect.
SECTION 2.14. Intellectual Property. Lancit or one of its Subsidiaries
owns or has valid and enforceable rights with respect to all trademarks, trade
names, service marks and copyrights (whether or not registered) and any
registrations or applications for the registration of any thereof, all trade
secrets, and all rights of similar or equivalent effect however or wherever
arising (together, the "Intellectual Property") which are necessary and
sufficient in all material respects to conduct the Business as currently
conducted or proposed to be conducted, and all such Intellectual Property which
is not owned is licensed to Lancit or one of its Subsidiaries pursuant to
license agreements listed in Item 2.14 of the Disclosure Schedule. Item 2.14
identifies all Intellectual Property owned by or licensed to Subsidiaries that
are not wholly owned by Lancit. Neither Lancit nor any of the Subsidiaries nor,
to the knowledge of Lancit, any other party is in breach of or default under any
such license agreement and each such license or other agreement is valid and in
full force and effect. Lancit and its Subsidiaries hold the Intellectual
Property owned by them free of any Liens or contractual or other restrictions
other than the rights of licensees pursuant to the license agreements set forth
in Item 2.14 of the Disclosure Schedule. Except as set forth in Item 2.14 of the
Disclosure Schedule, Lancit has not received any claims, and Lancit does not
believe, that it or its Subsidiaries or its or their Intellectual Property has
infringed, diluted or otherwise violated any third party's marks, copyrights,
trade secrets, patents, right of publicity, right of privacy, moral rights, or
other proprietary rights, libeled any third party, or engaged in false
advertising or unfair competition. Except as set forth in Item 2.14 of the
Disclosure Schedule, since January 1, 1996, neither Lancit nor any of its
Subsidiaries has made any claims that a third party has infringed, diluted, or
otherwise violated any of its or their Intellectual Property or engaged in false
advertising or unfair competition. No order, holding, decision or judgment has
been rendered by any governmental authority, and except as set forth in Item
2.14 no agreement, consent or stipulation exists, which would limit Lancit's or
its Subsidiaries' use of any Intellectual Property or any advertising or
promotional claim or campaign. Item 2.14 of the Disclosure Schedule contains a
complete and accurate list of all U.S. and foreign trademark and copyright
registrations and applications for registration held or filed by Lancit or any
of its Subsidiaries. All such registrations are in full force, are held of
record in Lancit's or Lancit Copyright Corporation's name (either alone or
jointly with Community Television of Southern California or KCET Music
Publishing), and are not the subject of any cancellation proceeding, and all
such applications are pending in Lancit's or Lancit Copyright Corporation's name
alone or in Lancit's name together with Community Television of Southern
California or KCET Music Publishing, and are not the subject of any final
refusal to register or any opposition proceeding. Registrations have been issued
for, or applications are pending to register, all trademarks and service marks
in all jurisdictions where the failure to obtain such a registration could have
a Material Adverse Effect or could result in a breach of Lancit's obligations
under any material license or distribution agreement. Except as set forth in
Item 2.14, each individual who would be considered an author or co-author under
U.S. copyright law of any episode of The Puzzle Place or Backyard Safari has
either (1) made his or her contribution to that episode as a work for hire under
U.S. copyright law for Lancit or, in the case of The Puzzle Place, for Lancit
and Community Television of Southern California, or (2) executed a written
assignment and transfer of his or her copyright interest in the episode to
Lancit or, in the case of The Puzzle Place, to Lancit and Community Television
of Southern California. To Lancit's knowledge, none of Lancit's or its
Subsidiaries' trade secrets, know-how or other confidential or proprietary
information, the unauthorized use of which could reasonably be expected to have
a Material Adverse Effect, has been disclosed to any person unless such
disclosure was made pursuant to an appropriate confidentiality agreement. Except
as reflected in Item 2.14 of the Disclosure Schedule, to Lancit's knowledge, its
relationships with the parties to the licenses identified in Item 2.14 of the
Disclosure Schedule, the loss or absence of which could reasonably be expected
to have a Material Adverse Effect, are good and no such party has threatened to
terminate or fail to renew any such license or relationship. Except for software
which is "off-the-shelf," all software that is material to the operations of
Lancit or its Subsidiaries is year 2000 compliant.
SECTION 2.15. Lancit Brokers; Transaction Expenses. (a) Except as set
forth in Item 2.15(a) of the Disclosure Schedule, no broker, investment banker,
financial advisor or other intermediary which has been retained by, or is
authorized to act on behalf of, Lancit or any Subsidiary who might be entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission upon consummation of the transactions contemplated by this Agreement.
(b) Set forth in Item 2.15(b) is Lancit's estimate of the maximum
aggregate amount of the fees and expenses (including printing costs, filing fees
and the fees and expenses of brokers, investment bankers, financial advisors,
other intermediaries, attorneys and accountants) that Lancit expects to incur in
connection with the transactions contemplated hereby ("Lancit Transaction
Expenses").
SECTION 2.16. Miscellaneous. To Lancit's knowledge, and subject to the
last sentence of this Section 2.16, none of the documents or information
delivered or provided by Lancit to the Company in connection with the
transactions contemplated by this Agreement (as updated by any more recent
versions thereof delivered prior to the date hereof) contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements contained therein not misleading. There is no fact or
information relating to Lancit or its Subsidiaries, other than publicly
available information, that is known to Lancit, that could reasonably be
expected to be material to Lancit and its Subsidiaries taken as a whole and that
has not been disclosed to the Company. The cash flow projections for the six
months ending June 30, 1998 relating to Lancit and the Subsidiaries delivered to
the Company constitute Lancit's reasonable estimate of the amounts of the
sources and uses of its funds for such period and the timing thereof (except in
the case of the timing as to the items previously identified by Lancit). Except
as set forth in the preceding sentence, Lancit makes no representation or
warranty as to any projections or estimates that it may have furnished to the
Company.
SECTION 2.17. Disclosure Documents. (a) Each document required to be
filed by Lancit with the SEC in connection with the transactions contemplated by
this Agreement (the "Lancit Disclosure Documents"), including, without
limitation, the proxy or information statement of Lancit (the "Lancit Proxy
Statement"), if any, to be filed with the SEC in connection with the Merger, and
any amendments or supplements thereto will, when filed, comply as to form in all
material respects with the applicable requirements of the Exchange Act.
(b) At the time Lancit Proxy Statement or any amendment or supplement
thereto is first mailed to shareholders of Lancit, at the time such shareholders
vote on adoption of this Agreement and at the Effective Time, the Lancit Proxy
Statement, as supplemented or amended, if applicable, will not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. At the time of the filing of any
Lancit Disclosure Document other than Lancit Proxy Statement and at the time of
any distribution thereof, such Lancit Disclosure Document will not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. The representations and warranties
contained in this Section 2.17 will not apply to statements or omissions in
Lancit Disclosure Documents based upon information furnished by the Company
specifically for use therein.
(c) The information with respect to Lancit or any Subsidiary that
Lancit furnishes specifically for use in (or incorporation by reference in) the
Company Disclosure Documents (as defined in Section 3.09) will not, at the time
of the filing thereof, at the time of any distribution thereof and at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading.
SECTION 2.18. Absence of Certain Changes. Except as disclosed in Item
2.18 of the Disclosure Schedule, since the Interim Balance Sheet Date, Lancit
and the Subsidiaries have conducted their business in the ordinary course
consistent with past practice and, except as disclosed in Item 2.18 of the
Disclosure Schedule, there has not been:
(a) any event, occurrence or development of a state of circumstances
or facts which has had or could, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of Lancit or any
Subsidiary, or, any repurchase, redemption or other acquisition by Lancit or any
Subsidiary of any outstanding shares of capital stock or other securities of, or
other ownership interests in, Lancit or any Subsidiary;
(c) any amendment of any material term of any outstanding security of
Lancit or any Subsidiary;
(d) any incurrence, assumption or guarantee by Lancit or any
Subsidiary of any indebtedness for borrowed money;
(e) any creation or assumption by Lancit or any Subsidiary of any Lien
(other than Permitted Liens) on any asset;
(f) any making of any loan or capital contributions to or investment
in any Person other than loans or capital contributions to or investments in
wholly owned Subsidiaries made in the ordinary course of business consistent
with past practices;
(g) any condemnation, seizure, damage, destruction or other casualty
loss (whether or not covered by insurance) materially affecting the business or
assets of Lancit or any Subsidiary;
(h) any transaction or commitment made, or any contract or agreement
entered into, amended or terminated by Lancit or any Subsidiary or any
relinquishment by Lancit or any Subsidiary of any contract or other right, in
either case, material to Lancit and its consolidated Subsidiaries taken as a
whole, other than those contemplated by this Agreement;
(i) any change in any method of accounting or accounting practice by
Lancit or any Subsidiary, except for any such change required by reason of a
concurrent change in generally accepted accounting principles;
(j) any (i) grant of any severance or termination pay to any director,
officer or employee of Lancit or any Subsidiary except pursuant to agreements or
Lancit's standard employment policies in effect on the Interim Balance Sheet
Date, (ii) entering into or renewal of any employment, deferred compensation,
severance, retirement or other similar agreement (or any amendment to any such
existing agreement) with any director, officer or employee of Lancit or any
Subsidiary, (iii) increase in benefits payable under any existing severance or
termination pay policies or employment agreements or (iv) increase in
compensation, bonus or other benefits payable to directors, officers or
employees of Lancit or any Subsidiary other than standard annual merit increases
not in excess of $50,000 in the aggregate on a annual basis;
(k) any labor dispute, other than routine individual grievances, or
any activity or proceeding by a labor union or representative thereof to
organize any employees of Lancit or any Subsidiary, or any lockouts, strikes,
slowdowns, work stoppages or threats thereof by or with respect to such
employees;
(l) any capital expenditure, or commitment for a capital expenditure,
for additions or improvements to property, plant and equipment in excess of
$25,000, individually or in the aggregate; or
(m) except for capital expenditures and commitments referred to in
subsection 2.18(l) above, any acquisition or disposition of any assets or
Intellectual Property in one or more transactions, or any commitment in respect
thereof, that, individually or in the aggregate, involved or involve payments of
$10,000 or more.
SECTION 2.19. Environmental Matters. (a) Except as disclosed in Item
2.19(a) of the Disclosure Schedule,
(i) no notice, notification, demand, request for information,
citation, summons, complaint or order has been received by, or, to the
knowledge of Lancit or any Subsidiary, is pending or threatened by any
Person against, Lancit or any Subsidiary, nor has any material penalty
been assessed against Lancit or any Subsidiary, with respect to any
alleged violation of any Environmental Law or liability thereunder,
alleged failure to have any Environmental Permits, generation,
treatment, storage, recycling, transportation or disposal of any
Hazardous Substance or discharge, emission or release of any Hazardous
Substance;
(ii) to Lancit's knowledge, no Hazardous Substance has been
discharged, emitted, released or is present at any property now or
previously owned, leased or operated by Lancit or any Subsidiary, which
circumstance, individually or in the aggregate, could reasonably be
expected to result in a Material Adverse Effect; and
(iii) there are no Environmental Liabilities that have had or may,
individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(b) There has been no environmental investigation, study, audit, test,
review or other analysis conducted of which Lancit has knowledge in relation to
the current or prior business of Lancit or any Subsidiary or any property or
facility now or previously owned or leased by Lancit or any Subsidiary which has
not been delivered to the Company at least five days prior to the date hereof.
(c) Except as set forth in Item 2.19(c) of the Disclosure Schedule,
neither Lancit nor any Subsidiary owns or leases or has owned or leased any real
property, or conducts or has conducted any operations, in New Jersey or
Connecticut that trigger filing or other obligations under environmental
transfer acts in those states in connection with the transactions contemplated
hereby.
(d) For purposes of this Section 2.19, the following terms shall have
the meanings set forth below:
(i) "Lancit" and "Subsidiary" shall include any entity which is,
in whole or in part, a predecessor of Lancit or any Subsidiary;
(ii) "Environmental Laws" means any and all federal, state, local
and foreign statutes, laws, judicial decisions, regulations,
ordinances, rules, judgments, orders, decrees, codes, plans,
injunctions, permits, concessions, grants, franchises, licenses,
agreements and governmental restrictions, relating to human health, the
environment or to emissions, discharges or releases of pollutants,
contaminants or other hazardous substances or wastes into the
environment, including without limitation ambient air, surface water,
ground water or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of pollutants, contaminants or other hazardous substances
or wastes or the clean-up or other remediation thereof;
(iii) "Environmental Permits" means all permits, licenses,
franchises, certificates, approvals and other similar authorizations of
governmental authorities relating to or required by Environmental Laws
and affecting, or relating in any way to, the business of Lancit or any
Subsidiary as currently conducted;
(iv) "Hazardous Substances" means any pollutant, contaminant,
waste or chemical or any toxic, radioactive, ignitable, corrosive,
reactive or otherwise hazardous substance, waste or material, or any
substance, waste or material having any constituent elements displaying
any of the foregoing characteristics, including, without limitation,
petroleum, its derivatives, by-products and other hydrocarbons, and any
substance, waste or material regulated under any Environmental Law.
SECTION 2.20. Properties. (a) Lancit and the Subsidiaries have good and
marketable, indefeasible, fee simple title to, or in the case of leased property
and assets have valid leasehold interests in, all material property and assets
(whether real, personal, tangible or intangible) reflected on the Interim
Balance Sheet or acquired after the Interim Balance Sheet Date or otherwise
necessary for the operation of the business of Lancit and the Subsidiaries,
except for properties and assets sold since the Interim Balance Sheet Date in
the ordinary course of business consistent with past practice. None of such
property or assets is subject to any Lien, except:
(i) Liens disclosed on the Interim Balance Sheet or Item 2.20(a)
of the Disclosure Schedule;
(ii) Liens for Taxes not yet due or being contested in good faith
(and for which adequate accruals or reserves have been established on
the Interim Balance Sheet);
(iii) Liens which do not materially detract from the value or
materially interfere with any present or intended use of such property
or assets (Liens referred to in clauses (i)-(iii) of this Section
2.20(a) are, collectively, the "Permitted Liens").
(b) Since December 31, 1997, there are no developments affecting any
such material property or assets pending or, to the knowledge of Lancit
threatened, which might materially detract from the value, materially interfere
with any present or intended use or materially adversely affect the
marketability of any such property or assets except for normal wear and tear on
such property or assets.
(c) Neither Lancit nor any Subsidiary owns any real property. The
equipment owned or used by Lancit or any Subsidiary is adequate and suitable for
its present and intended uses.
(d) The property and equipment owned or leased by Lancit or any
Subsidiary constitute all of the property and equipment used or held for use in
connection with the business of Lancit and its Subsidiaries and all of the
property and equipment necessary to conduct such business as currently conducted
by Lancit.
SECTION 2.21. Insurance Coverage. Set forth in Item 2.21 of the
Disclosure Schedule is a list of all insurance policies and fidelity bonds
relating to the assets, business, operations, employees, officers or directors
of Lancit and the Subsidiaries (the "Lancit Policies"), and Lancit has provided
the Company with or with access to true and complete copies of all such policies
and bonds to the extent available to Lancit; otherwise, Lancit has provided the
Company with access to true and complete copies of all binders or equivalent
documents. Except as disclosed in Item 2.21 of the Disclosure Schedule, there is
no claim by Lancit or any Subsidiary pending under any of such policies or bonds
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds or in respect of which such underwriters have reserved
their rights. All premiums payable under all such policies and bonds have been
timely paid and Lancit and the Subsidiaries have otherwise complied in all
material respects with the terms and conditions of all such policies and bonds.
Item 2.21 indicates the dates since which such policies of insurance and bonds
(or other policies and bonds providing substantially similar insurance coverage)
have been in effect. To Lancit's knowledge, such policies and bonds are of the
type and in amounts customarily carried by Persons conducting businesses similar
to those of Lancit and the Subsidiaries. Except as set forth in Item 2.21 of the
Disclosure Schedule, Lancit does not know of any threatened termination of,
material premium increase with respect to, or material alteration of coverage
under, any of such policies or bonds. The Surviving Corporation and the
Subsidiaries shall after the Effective Time continue to have coverage under such
policies and bonds with respect to events occurring prior to the Effective Time.
Set forth in Item 2.21 is the amount of the premium payable for the current year
for Lancit's directors and officers insurance policy.
SECTION 2.22. Licenses and Permits. Lancit and the Subsidiaries have
all material governmental licenses, authorizations, consents and approvals
required to carry on the business of Lancit and its Subsidiaries as now
conducted. Item 2.22 of the Disclosure Schedule correctly sets forth a list of
each material license, franchise, permit, certificate, approval or other similar
authorization affecting, or relating in any way to, the assets or business of
Lancit and its Subsidiaries (collectively, the "Permits"), and each pending
application for any Permit, together with the name of the government agency or
entity issuing such Permit or with which such application is pending. Except as
set forth in Item 2.22, (i) the Permits are valid and in full force and effect,
(ii) neither Lancit nor any Subsidiary is in default under, and no condition
exists that with notice or lapse of time or both would constitute a default
under, the Permits and (iii) none of the Permits will be terminated or impaired
or become terminable, in whole or in part, as a result of the transactions
contemplated hereby.
SECTION 2.23. Employees. Item 2.23(a) of the Disclosure Schedule sets
forth a true and complete list of the names, titles, annual salaries and other
compensation of all officers of Lancit and its Subsidiaries and of all other
employees of Lancit and its Subsidiaries and the wage rates for non-salaried
employees of Lancit and the Subsidiaries (by classification). To the knowledge
of Lancit as of the date of this Agreement and except as reflected in Item 2.02
or Item 2.23 of the Disclosure Schedule, (i) none of the employees identified in
Item 2.23(b) has notified Lancit that he or she intends to resign or retire as a
result of the transactions contemplated by this Agreement or otherwise within
one year after the Effective Time and (ii) no Person (other than as set forth in
Items 2.02 or 2.23(a)) is entitled to any employee benefits from Lancit. The
foregoing shall not be deemed a waiver of, or to impair or derogate from, the
obligations of the Company to certain employees upon the occurrence of a change
in control pursuant to employment agreements listed in Item 2.05 of the
Disclosure Schedule.
SECTION 2.24. Labor Matters. Lancit and the Subsidiaries are in
compliance in all material respects with all currently applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and are not engaged in any unfair labor
practice, failure to comply with which or engagement in which, as the case may
be, could, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect. There is no unfair labor practice complaint pending or,
to Lancit's knowledge, threatened against Lancit or any Subsidiary before the
National Labor Relations Board.
SECTION 2.25. Books and Records. Since July 1, 1994, Lancit has
maintained adequate business records with respect to the operation of its
business, and Lancit is not aware of any material deficiencies in such business
records.
SECTION 2.26. Interested Party Transactions. Except as set forth in
Item 2.26 of the Disclosure Schedule or in the Lancit SEC Documents, since June
30, 1997, no event has occurred that would be required to be reported as a
Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation
S-K promulgated by the SEC.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Lancit as of the date hereof and
immediately prior to the Effective Time that:
SECTION 3.01. Due Incorporation and Qualification. Each of the Company
and Merger Subsidiary is a corporation duly incorporated, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has all
corporate powers required to carry on its business as now conducted.
SECTION 3.02. Authority; Due Authorization; Valid Obligation. Each of
the Company and Merger Subsidiary has all requisite corporate power and
authority to execute, deliver and perform this Agreement and the Additional
Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by the
Company and Merger Subsidiary of this Agreement and such Additional Agreements
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action. This Agreement
constitutes, and such Additional Agreements, when executed and delivered, will
constitute, the valid and binding obligations of each of the Company and Merger
Subsidiary.
SECTION 3.03. No Conflicts or Defaults. The execution, delivery and
performance by the Company and Merger Subsidiary of this Agreement and the
Additional Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby do not and will not as of the
Effective Time (a) violate the Certificate of Incorporation or By-Laws of the
Company or Merger Subsidiary; (b) assuming compliance with the matters referred
to in Sections 3.04, violate any applicable law, rule, regulation, judgment,
order or decree binding upon the Company or Merger Subsidiary; or (c) with such
exceptions as could not, individually or in the aggregate, reasonably be
expected to materially adversely affect the transactions contemplated hereby or
have a Company MAE (as defined below), require notice, violate or conflict with,
result in a breach of, or a default under, or give rise to a right of
termination, cancellation or acceleration of any right or obligation of the
Company or to a loss of any benefit to which the Company is entitled under any
agreement, contract or other instrument binding upon the Company. For purposes
of this Agreement, the term the "Company MAE" means a material adverse effect on
the condition (financial or otherwise), business, assets or results of
operations of the Company and its subsidiaries taken as a whole.
SECTION 3.04. Authorizations. No authorization, approval, order,
license, permit or consent of, or filing or registration with, any federal,
state, foreign, provincial or local court or governmental authority, or consent
of any other party, is required in connection with the execution, delivery and
performance by the Company and Merger Subsidiary of this Agreement and the
Additional Agreements to which it is a party, except for (a) the filing of the
Certificate of Merger with the Secretary of State of the State of New York, (b)
compliance with any applicable requirements of the Exchange Act; (c) compliance
with the applicable requirements of the Securities Act; (d) compliance with any
applicable foreign or state securities or Blue Sky laws and (e) approval and
adoption of this Agreement and the Merger by Lancit's shareholders.
SECTION 3.05. Litigation. Except as set forth in Schedule 3.05, as of
the date hereof, there are no Proceedings pending against the Company or Merger
Subsidiary, and the Company has not received notice of any threatened
Proceedings against it or Merger Subsidiary which, if adversely determined,
would, individually or in the aggregate, have a Company MAE, or which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the
Merger or any of the other transactions contemplated hereby. Except as set forth
in Item 3.05 of the Disclosure Schedule, there are no Proceedings pending
against the Company or Merger Subsidiary, and the Company has not received
notice of any threatened Proceedings against it or Merger Subsidiary which (i)
has a significant possibility of success on the merits and could reasonably be
expected to, individually or in the aggregate, have a Company MAE, or (ii) in
any manner challenges or seeks to prevent, enjoin, alter or materially delay the
Merger and has a significant possibility of success on the merits of such
challenge or such relief.
SECTION 3.06. SEC Documents. The Company has furnished to Lancit true
and complete copies of each report, registration statement (in the form in which
it became effective) and definitive proxy statement filed by the Company with
the SEC since September 1, 1997 (the "Company SEC Documents"), which are all of
the documents that the Company was required to file with the SEC since such
date. As of their respective dates, the Company SEC Documents complied in all
material respects with the requirements of the Securities Act or the Exchange
Act, as applicable, and the applicable rules and regulations of the SEC
thereunder. As of its filing date, each such report or statement filed pursuant
to the Exchange Act did not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the Securities Act as of the date such statement
or amendment became effective did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. All material
agreements, contracts and other documents required to be filed as exhibits to
any of the Company SEC documents have been so filed. The consolidated financial
statements of the Company contained in the Company SEC Documents were prepared
in accordance with GAAP applied on a consistent basis during the periods
involved and fairly present the consolidated financial position of the Company
and its consolidated subsidiaries as at the dates indicated and the consolidated
results of operations and consolidated cash flows of the Company and its
consolidated subsidiaries for the periods then ended, except as indicated in the
notes thereto, and except, in the case of unaudited interim financial
statements, for the omission of footnote information and normal year-end audit
adjustments which are not, singly or in the aggregate, material.
SECTION 3.07. Company Brokers. No broker, investment banker, financial
advisor or other Person is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
described in this Agreement based upon arrangements made by or on behalf of the
Company.
SECTION 3.08. No Material Adverse Change. To the Company's
knowledge, from September 30, 1997 through the date of this Agreement, there
has not been any Company MAE.
SECTION 3.09. Disclosure Documents. (a) Each document required to be
filed by the Company with the SEC in connection with the transactions
contemplated by this Agreement (the "Company Disclosure Documents"), including,
without limitation, the registration statement on Form S-4 to register the
shares of Company Common Stock to be delivered in the Merger (the "Registration
Statement"), and any supplements or amendments thereto, will, when filed, comply
as to form in all material respects with the applicable requirements of the
Exchange Act.
(b) At the time the Registration Statement or any amendment or
supplement thereto becomes effective and at the Effective Time, the Registration
Statement, as amended or supplemented, if applicable, shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements contained therein
not misleading. The foregoing representations and warranties will not apply to
statements or omissions included in the Registration Statement or any amendment
or supplement thereto based upon information furnished to the Company or Merger
Subsidiary by Lancit for use therein.
(c) The information with respect to the Company or any subsidiary of
the Company that the Company furnishes to Lancit for use in the Lancit
Disclosure Documents will not, at the time of the filing thereof, at the time of
any distribution thereof and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in the light
of the circumstances under which they were made, not misleading.
SECTION 3.10. Company Common Stock. The Company Common Stock to be
issued pursuant to the Merger has been duly authorized and upon issuance in
accordance with this Agreement will be duly authorized and validly issued, will
be fully paid and non-assessable and will not be issued in violation of any
preemptive rights.
SECTION 3.11. Miscellaneous. To the Company's knowledge, none of the
documents or information delivered by the Company to Lancit in connection with
the transactions contemplated by this Agreement contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements contained therein not misleading. There is no fact or information
relating to the Company or its subsidiaries, other than publicly available
information, that is known to the Company, that could reasonably be expected to
be material to the Company and its subsidiaries taken as a whole and that has
not been disclosed to Lancit.
ARTICLE 4
CERTAIN AGREEMENTS
SECTION 4.01. Conduct of Lancit's Business. Between the date of this
Agreement and the Effective Time (or the termination of this Agreement pursuant
to Section 7.01, if earlier), Lancit and the Subsidiaries shall, except for
actions to be taken pursuant to this Agreement and except as set forth in
Schedule 4.01 of the Disclosure Schedule, use their reasonable best efforts to
preserve intact their business organizations and relationships with third
parties and to keep available the services of their present officers and
employees and conduct their business only in the ordinary course consistent with
past practice. Without limiting the generality of the foregoing, from the date
hereof until the Effective Time, except in accordance with this Agreement,
Lancit shall not, and shall not permit any Subsidiary to, without the prior
written consent of the Company in each instance,
(a) except pursuant to Lancit Options or Lancit Warrants in effect on
the date hereof, issue, sell, purchase, repurchase, redeem or otherwise acquire
any Lancit Securities or Subsidiary Securities;
(b) declare, set aside, or pay any dividend or make any distribution
with respect to any Lancit Shares or other capital stock of Lancit or any
Subsidiaries, except from any Subsidiary to Lancit;
(c) directly or indirectly redeem, purchase or otherwise acquire or
commit to acquire any capital stock or ownership interest of any Person;
(d) effect a split or reclassification of its capital stock, or a
recapitalization;
(e) amend its certificate of incorporation or by-laws;
(f) except as required by law, (A) grant or make any change in
control, severance or termination payments to any officer or employee except
pursuant to plans or agreements in existence on the date hereof, (B) enter into
any option, employment, deferred compensation or other similar agreement (or
enter into any amendment to any such existing agreement) with any officer,
director, employee or consultant, (C) increase benefits payable under any
existing severance or termination pay policies or agreements, or (D) except as
contemplated by Section 2.18(j)(iv), grant or provide for any increase in (or
commit, orally or in writing, to increase) the rate or terms (including, without
limitation, any acceleration of the right to receive payment) of compensation
payable to or to become payable to, or any bonus, insurance, pension or other
employee benefit plan benefitting any director, officer, employee or consultant;
(g) merge or consolidate with any other Person or acquire a material
amount of assets of any other Person;
(h) enter into any material transaction, contract or commitment;
(i) assume or guarantee any debt for borrowed money;
(j) sell, lease, license, encumber or otherwise dispose of any
material properties or assets;
(k) make any reevaluation of the assets of Lancit or any of its
Subsidiaries;
(l) except as required by GAAP, change any of its accounting methods,
principles or practices;
(m) make any Tax election that would have an adverse effect on Lancit
or any of the Subsidiaries;
(n) agree or commit to do any of the foregoing; or
(o) (i) intentionally take or agree or commit to take any action that
would make any representation and warranty of Lancit hereunder inaccurate in any
material respect at, or as of any time prior to, the Effective Time or (ii)
intentionally omit or agree or commit to omit to take any action necessary to
prevent any such representation or warranty from being inaccurate in any
material respect at any such time.
Lancit shall (i) use its reasonable best efforts to maintain in full
force and effect insurance policies providing coverage and amounts of coverage
comparable to the coverage and amounts of coverage provided under the policies
of insurance now in effect for Lancit, (ii) timely file all tax returns due on
or before the Effective Time and pay (or reserve for) all Taxes due and payable
with respect to periods ending on or before or including the Effective Time and
(iii) notify the Company promptly of the occurrence of any matter, event or
change in circumstances known to it after the date hereof that would have been
required to be disclosed by it hereunder if it had occurred on or prior to the
date hereof or which constitutes a breach of any of the representations,
warranties or covenants or agreements hereunder by Lancit.
SECTION 4.02. Preserve Accuracy of Representations and Warranties;
Updates. Between the date of this Agreement and the Effective Time, the Company
shall refrain from taking, without the prior written consent in each instance of
Lancit, any action which would render any of the representations and warranties
set forth in Article 3, inaccurate in any material respect as of the Effective
Time, and shall notify Lancit promptly of the occurrence of any matter, event or
change in circumstances known to it after the date hereof that would have been
required to be disclosed by it hereunder if it had occurred on or prior to the
date hereof or which constitutes a breach of any of the representations,
warranties or covenants or agreements hereunder by the Company or Merger
Subsidiary.
SECTION 4.03. Further Investigation and Information. Between the date
of this Agreement and the Effective Time, Lancit shall give the Company and its
representatives full access during normal business hours, on reasonable prior
notice, to the premises, properties, files, books, records and employees of
Lancit and the Subsidiaries and shall cause their officers, employees and
representatives to furnish or make available to the Company and its
representatives such financial, operating and other data and information as such
Persons may from time to time reasonably request and will instruct Lancit's
employees, counsel and financial advisors to cooperate with the Company in its
investigation of the business of Lancit and the Subsidiaries; provided that no
investigation pursuant to this Section or other information received by the
Company shall operate as a waiver or otherwise affect any representation,
warranty or agreement given by Lancit to the Company hereunder; provided,
further, that any such inquiry shall be conducted in such manner as not to
interfere unreasonably with the operation of Lancit's business. Any information
obtained in the course of such inquiry shall be subject to the confidentiality
agreements entered into or to be entered into between Lancit and the Company.
SECTION 4.04. Consents, Waivers and Filings. Upon the terms and subject
to the conditions set forth in this Agreement, Lancit and the Company shall use
their respective best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things, reasonably necessary or desirable to consummate in an
expeditious manner the Merger and the other transactions contemplated by this
Agreement. Without limiting the foregoing, the parties shall cooperate to obtain
from all relevant third parties and governmental authorities, including any
trade unions, all consents and waivers to, and permits, authorizations and
licenses for, the transactions contemplated by this Agreement that may be
required under any agreement, lease, financing arrangement, license, permit or
other instrument or under any applicable law, rule or regulation, and to attempt
to remove or vacate any legal prohibition or impediment to the consummation of
the transactions contemplated hereby. Nothing herein shall require the
expenditure or payment of any monies (other than in respect of normal and usual
filing fees) or the giving of any other consideration by the Company or Lancit
in order to obtain any of such consents and Lancit shall not make any such
payment or expenditure without the consent of the Company. The Company shall not
be required to agree to any consent decree or order in connection with any
objections of the Department of Justice or the Federal Trade Commission to the
transactions contemplated by this Agreement.
SECTION 4.05. Subsequent Filings. Prior to the Effective Time, Lancit
shall timely and properly file with the SEC all Lancit SEC Documents, and the
Company shall timely and properly file with the SEC all Company SEC Documents,
required to be filed by it under the Exchange Act and the rules and regulations
promulgated thereunder and will promptly deliver to the other copies of each
such report filed with the SEC.
SECTION 4.06. Preparation of Registration Statement and Proxy. The
Company and Lancit shall promptly prepare and file with the SEC the Registration
Statement (which shall include the Proxy Statement as a part thereof) and shall
use all reasonable efforts to have the Registration Statement declared effective
under the Securities Act and the Proxy Statement cleared under the Exchange Act
promptly after filing. Each of the Company and Lancit shall also take any action
(other than (A) qualifying to do business in any jurisdiction in which it is not
now so qualified, (B) consenting to general service of process in any such
jurisdiction or (C) subjecting itself to taxation in any such jurisdiction)
required to be taken under any applicable state and foreign securities laws in
connection with the issuance of Company Common Stock in the Merger. The Company
and Lancit shall (i) cooperate with each other in the preparation of, and
furnish such information as may be required to be included in, the Registration
Statement (including the Proxy Statement included therein) and (ii) take such
actions as may be reasonably necessary in connection with the filing of the
Registration Statement and any related state or foreign security law and in
causing the same to become effective. The parties hereto shall execute such
customary letters of representation as shall be necessary for tax counsel to
Lancit to provide the tax opinion required to be filed as an exhibit to the
Registration Statement.
SECTION 4.07. Accountants' Letters. At the Company's request upon
reasonable notice, Lancit shall use its reasonable efforts to have its
independent auditors deliver to the Company a letter, addressed to the Company
and dated a date within two business days prior to the date that the
Registration Statement becomes effective, in form and substance reasonably
acceptable to the Company and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements such as the Registration Statement.
SECTION 4.08. Shareholders Meeting. Lancit shall cause a meeting of the
shareholders of Lancit (the "Lancit Shareholders Meeting") to be duly called and
held as soon as reasonably practicable for the purpose of voting upon the
approval and adoption of this Agreement and the Merger. The Board of Directors
of Lancit shall, subject to its fiduciary duties following consultation with
counsel, recommend approval and adoption by Lancit's shareholders of this
Agreement and the Merger. In connection with such meeting, Lancit will (i)
promptly after the Proxy Statement is cleared by the SEC furnish to its
shareholders as promptly as practicable the Proxy Statement and all other proxy
materials for such meeting in accordance with the proxy rules under the Exchange
Act, (ii) use its reasonable best efforts to cause the shareholders to approve
and adopt the Merger, this Agreement and the transactions contemplated hereby as
required under Section 903 of the BCL and (iii) otherwise comply with all legal
requirements applicable to such meeting.
SECTION 4.09. No Solicitation. (a) Following the date of this Agreement
and prior to the Effective Time (or, if earlier, termination of this Agreement
pursuant to Section 7.01), neither Lancit nor any of its Subsidiaries shall
(whether directly or indirectly through advisors, agents or other
intermediaries), nor shall Lancit or any of its Subsidiaries authorize or permit
any of its or their officers, directors, agents, representatives, advisors or
Subsidiaries to (i) solicit, initiate or take any action knowingly to facilitate
the submission of inquiries, proposals or offers from any Third Party (as
defined below) (other than the Company or Merger Subsidiary) relating to (A) any
acquisition or purchase of 20% or more of the consolidated assets of Lancit and
its Subsidiaries or of over 20% of any class of equity securities of Lancit or
any of its Subsidiaries, (B) any tender offer (including a self tender offer) or
exchange offer that if consummated would result in any Third Party beneficially
owning 20% or more of any class of equity securities of Lancit or any of its
Subsidiaries, (C) any merger, consolidation, business combination, sale of
substantially all assets, recapitalization, liquidation, dissolution or similar
transaction involving Lancit or any of its Subsidiaries whose assets,
individually or in the aggregate, constitute more than 20% of the consolidated
assets of Lancit other than the transactions contemplated by this Agreement, or
(D) any other transaction the consummation of which would or could reasonably be
expected to impede, interfere with, prevent or materially delay the Merger or
which would or could reasonably be expected to materially dilute the benefits to
the Company of the transactions contemplated hereby (collectively, "Acquisition
Proposals"), or agree to or endorse any Acquisition Proposal, (ii) enter into or
participate in any discussions or negotiations regarding any of the foregoing,
or furnish to any Third Party any information with respect to its business,
properties or assets or any of the foregoing, or otherwise cooperate in any way
with, or knowingly assist or participate in, facilitate or encourage, any effort
or attempt by any Third Party (other than the Company) to do or seek any of the
foregoing, or (iii) grant any waiver or release under any standstill or similar
agreement with respect to any class of equity securities of Lancit or any of its
Subsidiaries; provided, however, that the foregoing shall not prohibit Lancit
(either directly or indirectly through advisors, agents or other intermediaries)
from (i) furnishing information pursuant to an appropriate confidentiality
letter (which letter shall not be less favorable to Lancit in any material
respect than the Confidentiality Agreement dated as of December 10, 1997 between
the Company and Lancit, and a copy of which shall be provided for informational
purposes only to the Company) concerning Lancit and its businesses, properties
or assets to a Third Party who has made a bona fide Acquisition Proposal, (ii)
engaging in discussions or negotiations with such a Third Party who has made a
bona fide Acquisition Proposal, (iii) following receipt of a bona fide
Acquisition Proposal, taking and disclosing to its shareholders a position
contemplated by Rule 14e-2(a) under the Exchange Act or otherwise making
disclosure to its shareholders, (iv) following receipt of a bona fide
Acquisition Proposal, failing to make or withdrawing or modifying its
recommendation referred to in Section 4.08 and/or (v) taking any non-appealable,
final action ordered to be taken by Lancit by any court of competent
jurisdiction, but in each case referred to in the foregoing clauses (i) through
(iv) only to the extent that the Board of Directors of Lancit shall have
concluded, following consultation with outside counsel, that failure to take
such action would result in a breach of the Board of Directors' fiduciary duties
to the shareholders of Lancit; provided, further, that the Board of Directors of
Lancit shall promptly notify the Company of the taking of any of the foregoing
actions referred to in clauses (i) through (iv) and, in addition, if the Board
of Directors of Lancit receives an Acquisition Proposal, then Lancit shall
promptly notify and inform Merger Subsidiary of the material terms and
conditions of such proposal and the identity of the person making it and
thereafter promptly advise the Company of any material change in the status or
terms and conditions thereof. Lancit will immediately cease and cause its
advisors, agents and other intermediaries to cease any and all existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing, and shall request that any such parties in
possession of confidential information about Lancit that was furnished by or on
behalf of Lancit return or destroy all such information in the possession of any
such party or in the possession of any agent or advisor of any such party. As
used in this Agreement, the term "Third Party" means any Person or "group," as
defined in Section 13(d) of the Exchange Act, other than the Company or any of
its affiliates.
(b) If a Payment Event (as hereinafter defined) occurs, Lancit shall
pay to Merger Subsidiary, within two business days following such Payment Event,
a fee of $500,000.
(c) "Payment Event" means (w) the termination of this Agreement
pursuant to Section 7.01(e); (x) the termination of this Agreement pursuant to
Section 7.01(f) in contemplation of a merger agreement or a tender or exchange
offer or any transaction of the type listed in clause (z) below; (y) the
termination of this Agreement by the Company pursuant to Section 7.01(c) if the
breach referred to in Section 7.01(c) is willful; or (z) the occurrence of any
of the following events within 12 months of the termination of this Agreement
pursuant to Section 7.01(g) whereby shareholders of Lancit receive, pursuant to
such event, cash, securities or other consideration having an aggregate value,
when taken together with the value of any securities of Lancit or its
Subsidiaries otherwise held by the shareholders of Lancit after such event, in
excess of $1.20 per Lancit Share: Lancit is acquired by merger or otherwise by a
Third Party; a Third Party acquires more than 50% of the total assets of Lancit
and its Subsidiaries, taken as a whole; a Third Party acquires more than 50% of
the outstanding Shares or Lancit adopts and implements a plan of liquidation,
recapitalization or share repurchase relating to more than 50% of the
outstanding Lancit Shares or an extraordinary dividend relating to more than 50%
of the outstanding Lancit Shares or 50% of the assets of Lancit and its
Subsidiaries, taken as a whole.
(d) Lancit acknowledges that the agreements contained in this Section
4.09 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, the Company would not enter into this
Agreement; accordingly, if Lancit fails to promptly pay any amount due pursuant
to this Section 4.09, and, in order to obtain such payment, the Company
commences a suit which results in a judgment against Lancit for the fee set
forth in this Section 4.09, Lancit shall also pay to the Company its costs and
expenses incurred in connection with such litigation.
(e) This Section 4.09 shall survive any termination of this Agreement
however caused other than termination pursuant to any of Sections 7.01(a),
7.01(b) or 7.01(d) or by Lancit pursuant to Section 7.01(c).
SECTION 4.10. Directors and Officers Insurance. For a period of 6 years
after the Effective Time, the Company shall cause the Surviving Corporation to
use its best efforts to provide directors' and officers' liability insurance in
respect of acts or omissions occurring prior to the Effective Time covering each
Lancit officer or director currently covered by Lancit's officers' and
directors' liability insurance policy on terms with respect to coverage and
amount no less advantageous to such officers and directors (including, without
limitation, not less than the same policy limits) than those of such policy in
effect on the date hereof; provided that in satisfying its obligation under this
Section, the Company shall not be obligated to cause the Surviving Corporation
to pay an aggregate premium in excess of 300% of the amount per annum Lancit
paid for its current year of coverage (i.e., May 1, 1997 to April 30, 1998),
("Coverage Amount") which amount is set forth in Item 2.21 of the Disclosure
Schedule; provided that if the aggregate premium would exceed 300% of the
Coverage Amount, the Surviving Corporation shall use its best efforts to
purchase equivalent coverage for the longest period (up to 6 years) that may be
obtained for 300% of such amount. This Section 4.10 is for the benefit of such
officers and directors only. Any officer or director who wishes to obtain the
benefits of this Section shall provide such reasonable cooperation as the
Company may request in connection with any matter in respect of which a claim is
made under the foregoing insurance.
SECTION 4.11. Notices of Certain Events. Lancit shall promptly notify
the Company of the following, which notice shall provide reasonable detail
regarding the relevant event and if applicable a copy of any related
correspondence:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement; and
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement.
SECTION 4.12. Certain Rights. Lancit shall use its reasonable best
efforts to obtain for the Company the right to show re-runs of episodes of The
Puzzle Place and Reading Rainbow on terms satisfactory to the Company.
SECTION 4.13. Interim Financing. The Company agrees that it will
cooperate with Lancit in connection with Lancit obtaining interim financing or
otherwise maintaining adequate available cash for the period between the date
hereof and June 30, 1998 (or the Effective Time if sooner). Lancit agrees that
it will take such reasonable actions as the Company may request following
consultation with Lancit in order to obtain such financing or otherwise maintain
adequate available cash and that any such financing or other arrangements will
be on terms reasonably satisfactory to the Company. The Company agrees that such
actions or terms shall not include the non-payment or deferral of, or render
Lancit unable to timely pay, its obligations to its officers, employees,
advisors, consultants and attorneys, in view of the importance of their
continuing services to Lancit, provided that such payments for any given month
do not in the aggregate exceed the aggregate amount thereof for such month set
forth in the cash flow projections referred to in Section 2.16.
ARTICLE 5
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND MERGER SUBSIDIARY
The obligations of the Company and Merger Subsidiary to consummate the
Merger are subject to the satisfaction, at or prior to the Effective Time, of
the following conditions:
SECTION 5.01. Due Performance: Accuracy of Representations and
Warranties. Lancit shall have performed in all material respects all of its
obligations required by this Agreement to be performed by it at or prior to the
Effective Time. All representations and warranties of Lancit set forth in this
Agreement and in any certificate or other writing delivered by Lancit pursuant
hereto shall be true and correct at and as of the Effective Time (provided that
representations made as of a specific date shall be required to be true as of
such date only) as if made at and as of such time, except to the extent that any
such incorrect representations or warranties relate to matters which, singly or
in the aggregate, did not have and could not reasonably be expected to have a
Material Adverse Effect (disregarding for purposes of such determination any
exceptions for materiality or Material Adverse Effect contained therein so as
not to "double-count"). The Company and Merger Subsidiary shall have received a
certificate executed on behalf of Lancit by the Chief Executive Officer of
Lancit, to the foregoing effect.
SECTION 5.02. Corporate Action; Documents. The Merger and this
Agreement shall have been approved and adopted by the vote required by Section
903 of the BCL. The Company shall have received copies, certified by the
secretary of Lancit, of the resolutions of (i) the Board of Directors of Lancit
authorizing and approving the Merger and the execution and delivery of this
Agreement and the Additional Agreements and the consummation of the transactions
contemplated hereby and thereby and (ii) holders of the requisite two-thirds
majority, under applicable law, of the Lancit Shares approving and adopting this
Agreement. The Company shall have received all other documents it may reasonably
request relating to the existence of Lancit and the Subsidiaries and the
authority of Lancit for this Agreement, all in form and substance satisfactory
to the Company.
SECTION 5.03. Legal Opinions. The Company shall have received an
opinion of Christy & Viener, counsel for Lancit, dated the Effective Time,
reasonably satisfactory in form and substance to counsel for the Company and
covering the matters set forth in Sections 2.01, 2.02, 2.03, 2.04, 2.05 and
2.07. It is understood that in-house counsel may render the opinion with respect
to the matters referred to in Section 2.05 insofar as it applies to contracts
and agreements that Lancit and the Company reasonably agree are not material.
SECTION 5.04. Registration Statement; Listing. (a) The Registration
Statement shall have become effective under the Securities Act and shall not be
the subject of any stop order or proceedings seeking a stop order.
(b) The shares of Company Common Stock issuable to Lancit shareholders
pursuant to the Merger shall have been approved for listing on the NASDAQ,
subject to official notice of issuance.
SECTION 5.05. No Prohibition. No provision of any applicable law,
regulation, judgment, order, decree or injunction shall prohibit or restrain the
consummation of the Merger.
SECTION 5.06. Consents; Approvals. All actions by or in respect of or
filings with and all consents, approvals and licenses of any governmental or
other regulatory body and all consents from third parties, in each case required
(i) in connection with the execution, delivery and performance of this
Agreement, (ii) for the consummation of the Merger, or (iii) for the Surviving
Corporation and the Subsidiaries to conduct the Business in substantially the
manner now conducted (but in the case of this clause (iii), such actions,
filings, consents, approvals and licenses shall, with respect to third parties,
only include those arising under or in connection with any agreement or
contract), including, without limitation, those consents set forth in Schedule
5.06, shall have been obtained in form and substance reasonably satisfactory to
the Company and no such consent, authorization or approval shall have been
revoked.
SECTION 5.07. Governmental Action. There shall not be instituted or
pending any action or proceeding by (a) any government or governmental authority
or agency, or (b) any other Person (which, in the case of any action or
proceeding by any other Person, has a significant possibility of success on the
merits), before any court or governmental authority or agency, (i) challenging
or seeking to make illegal, to delay materially or otherwise directly or
indirectly to restrain or prohibit the consummation of the Merger or seeking to
obtain damages which, individually or in the aggregate, would have a Material
Adverse Effect or a Company MAE or, in the case of an action or proceeding by
any government or governmental authority or agency, otherwise directly or
indirectly relating to the transactions contemplated by this Agreement, (ii)
seeking to restrain or prohibit the Company's (including its subsidiaries and
affiliates) ownership or operation of all or any material portion of the
business or assets of Lancit and its Subsidiaries, taken as a whole, or to
compel the Company or any of its subsidiaries or affiliates to dispose of or
hold separate all or any material portion of the business or assets of Lancit
and its Subsidiaries, taken as a whole, (iii) seeking to impose or confirm
material limitations on the ability of the Company or any of its subsidiaries or
affiliates to effectively control the business or operations of Lancit and its
Subsidiaries, taken as a whole, or effectively to exercise full rights of
ownership of the Surviving Corporation, or (iv) seeking to require divestiture
by the Company or any of its subsidiaries or affiliates of any shares of stock
of the Surviving Corporation, and no court, arbitrator or governmental body,
agency or official shall have issued any judgment, order, decree or injunction,
and there shall not be any statute, rule or regulation, that, in the reasonable
judgment of the Company is likely, directly or indirectly, to result in any of
the consequences referred to in the preceding clauses (i) through (iv).
SECTION 5.08. Appraisal Rights. If the holders of the Lancit Shares are
entitled to appraisal rights under the BCL, the holders of not more than 5% of
the outstanding Lancit Shares shall have properly filed demands for appraisal of
their Lancit Shares in accordance with the BCL.
SECTION 5.09. Rule 145(c). The Company shall have received undertakings
in writing from each person, if any, who might reasonably be considered
"affiliates" of the Company within the meaning of Rule 145(c) of the SEC
pursuant to the Securities Act (each, an "Affiliate"), in each case in form and
substance satisfactory to counsel for the Company providing (i) such Affiliate
will agree to procedures to place an appropriate legend on the shares of Company
Common Stock to be received by such Affiliate in the Merger, (ii) such Affiliate
will notify the Company in writing before offering for sale or selling or
otherwise disposing of any shares of Company Common Stock owned by such
Affiliate and (iii) no such sale or other disposition shall be made unless and
until the Affiliate has supplied to the Company an opinion of counsel for the
Affiliate (which opinion and counsel shall be reasonably satisfactory to the
Company) to the effect that such transfer is not in violation of the Securities
Act.
ARTICLE 6
CONDITIONS TO THE OBLIGATIONS OF LANCIT
The obligations of Lancit to consummate the Merger are subject to the
satisfaction, at or prior to the Effective Time, of the following conditions:
SECTION 6.01. Due Performance; Accuracy of Representations and
Warranties. The Company shall have performed in all material respects all
obligations required by this Agreement to be performed by it at or prior to the
Effective Time. All representations and warranties of the Company set forth in
this Agreement and in any certificate or other writing delivered by the Company
pursuant hereto shall be true and correct at and as of the Effective Time
(provided that representations made as of a specific date shall be required to
be true as of such date only) as if made at and as of such time except to the
extent that any such incorrect representations or warranties relate to that
which, singly or in the aggregate, did not have and could not reasonably be
expected to have a Company MAE (disregarding for purposes of such determination
any exceptions for materiality or Company MAE contained therein so as not to
"double-count"). Lancit shall have received a certificate executed on behalf of
the Company by a duly authorized officer of the Company to the foregoing effect.
SECTION 6.02. Corporate Action. The Merger and this Agreement shall
have been approved and adopted by the vote required by Section 903 of the BCL.
Lancit shall have received copies of the resolutions, certified by the Secretary
of the Company and Merger Subsidiary, respectively, of the Boards of Directors
or Executive Committee of the Company and Merger Subsidiary, authorizing and
approving the execution and delivery of this Agreement and the Additional
Agreements and the consummation of the transactions contemplated hereby and
thereby.
SECTION 6.03. Legal Opinions. Lancit shall have received an opinion of
counsel for the Company, dated the Effective Time, reasonably satisfactory in
form and substance to counsel for Lancit and covering the matters set forth in
Sections 3.01, 3.02, 3.03, 3.04 and 3.10.
SECTION 6.04. Registration Statement; Listing. (a) The Registration
Statement shall have become effective under the Securities Act and shall not be
the subject of any stop order or proceedings seeking a stop order.
(b) The shares of Company Common Stock issuable to Lancit shareholders
pursuant to the Merger shall have been approved for listing on the NASDAQ,
subject to official notice of issuance.
SECTION 6.05. Governmental Action; No Prohibition. No provision of any
applicable law, regulation, judgment, order, decree or injunction shall prohibit
or restrain the consummation of the Merger.
ARTICLE 7
TERMINATION; AMENDMENT; WAIVER
SECTION 7.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time (except in the
case of Section 7.01(f), notwithstanding any approval of this Agreement by the
shareholders of Lancit):
(a) by mutual written consent of Lancit on the one hand and the
Company on the other hand;
(b) by either Lancit or the Company, if the Merger has not been
consummated by June 30, 1998, provided that (i) the party seeking to exercise
such right is not then in breach in any material respect of any of its
obligations under this Agreement and (ii) if the Merger has not been consummated
by June 30, 1998 because of a delay caused by the Company (even if such delay
does not constitute a material breach by the Company of its obligations under
this Agreement), the Company shall not be permitted to terminate this Agreement
under this Section 7.01(b) prior to August 1, 1998;
(c) by either Lancit or the Company, if the Company (in the case of
termination by Lancit), or Lancit (in the case of termination by the Company)
shall have breached in any material respect any of its obligations under this
Agreement or any representation and warranty of the Company (in the case of
termination by Lancit) or Lancit (in the case of termination by the Company)
shall have been incorrect in any material respect when made or, except as to
representations made as of a specific date, at any time prior to the Closing,
except to the extent that any such incorrect representations or warranties
relate to matters which, singly or in the aggregate (disregarding for purposes
of such determination any exceptions for materiality, Material Adverse Effect or
Company MAE contained therein so as not to "double-count"), did not have and
could not reasonably be expected to have a Company MAE or Material Adverse
Effect, as the case may be; provided, that prior to exercising any termination
right pursuant to this Section 7.01(c), the party seeking to terminate shall
give written notice of its intention to terminate to the other party, and the
other party shall have 15 business days to cure the breach or failure of
compliance giving rise to such right to terminate;
(d) by either Lancit or the Company, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise prohibited
or if any judgment, injunction, order or decree enjoining the Company or Lancit
from consummating the Merger is entered and such judgment, injunction, order or
decree shall become final and nonappealable;
(e) by the Company if the Board of Directors of Lancit shall have
withdrawn or modified or amended, in a manner adverse to the Company, its
approval or recommendation of this Agreement and the Merger or its
recommendation that the shareholders of Lancit adopt and approve this Agreement
and the Merger, or approved, recommended or endorsed any Acquisition Proposal
for a transaction other than the Merger (including a tender or exchange offer
for Lancit Shares) or if Lancit has failed promptly to call Lancit Shareholders
Meeting or failed as promptly as practicable after the Registration Statement is
declared effective to mail the Proxy Statement to its shareholders or failed to
include in such statement the recommendation referred to above;
(f) prior to approval of the Merger by Lancit shareholders, by Lancit
on 48 hours prior notice if prior to the Effective Time, and based on a good
faith determination (following consultation with outside counsel) that failure
to take such action would result in a breach of the Board of Directors'
fiduciary duties, the Board of Directors of Lancit shall have withdrawn or
modified or amended, in a manner adverse to the Company, its approval or
recommendation of this Agreement and the Merger or its recommendation that
shareholders of Lancit adopt and approve this Agreement and the Merger in order
to permit Lancit to execute a definitive agreement providing for the acquisition
of Lancit or in order to approve a tender or exchange offer for any or all of
the Shares, in either case, that is determined by the Board of Directors of
Lancit to be on financial terms more favorable to Lancit's shareholders than the
Merger; provided that Lancit shall be in compliance with Section 4.09; and
(g) by either Lancit or the Company if, at a duly held shareholders
meeting of Lancit or any adjournment thereof at which this Agreement and the
Merger is voted upon, the requisite shareholder adoption and approval shall not
have been obtained.
The party desiring to terminate this Agreement pursuant to Sections
7.01(b)-7.01(g) shall give written notice of such termination to the other party
in accordance with Section 9.02.
SECTION 7.02. Effect of Termination; Representations and Warranties. In
the event of termination of this Agreement in accordance with Section 7.01, no
party or parties hereto shall have any liability or further obligation to the
other party or parties to this Agreement and Plan of Merger, except as provided
in Sections 4.09 and 9.06, and except that the foregoing shall not relieve any
party of liability for damages in the event of the breach by such party of its
obligations under this Agreement.
SECTION 7.03. Amendment; Extension; Waiver. This Agreement (including
the Exhibits hereto) may be amended by the parties at any time before or after
any required approval of matters presented in connection with the Merger by
Lancit's shareholders, except as precluded by the BCL. Any such amendment shall
be in writing signed on behalf of each of the parties. At any time prior to the
Effective Time, either Lancit or the Company may (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties of the other party
contained in this Agreement or in any document delivered pursuant to this
Agreement or (iii) waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
any instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
ARTICLE 8
FURTHER ASSURANCES
At and after the Effective Time, the officers and directors of the
Surviving Corporation will be authorized to execute and deliver, in the name and
on behalf of Lancit or Merger Subsidiary, any deeds, bills of sale, assignments
or assurances and to take and do, in the name and on behalf of Lancit or Merger
Subsidiary, any other actions and things to vest, perfect or confirm of record
or otherwise in the Surviving Corporation any and all right, title and interest
in, to and under any of the rights, properties or assets of Lancit acquired or
to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Entire Agreement. This Agreement, together with the
schedules hereto, the Disclosure Schedule and the exhibits thereto, sets forth
the entire understanding of the parties with respect to its subject matter,
merges and supersedes all prior and contemporaneous understandings of the
parties hereto with respect to its subject matter, except any confidentiality
agreements executed by Lancit and the Company. Failure of any party to enforce
any provision of this Agreement shall not be construed as a waiver of its rights
under such or any other provision.
SECTION 9.02. Communications. All notices, consents and other
communications given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered by hand or by Federal Express
or a similar overnight courier to, (b) five days after being deposited in any
United States post office enclosed in a postage prepaid registered or certified
envelope addressed to, or (c) when successfully transmitted by telecopier (with
a confirming copy of such communication to be sent as provided in (a) or (b)
above) to, the party for whom intended, at the address or telecopier number for
such party set forth below, or to such other address or telecopier number as may
be furnished by such party by notice in the manner provided herein; provided,
however, that any notice of change of address or telecopier number shall be
effective only upon receipt.
If to the Company or Merger Subsidiary:
RCN Corporation
105 Carnegie Center
Princeton, New Jersey 08540
Attention: General Counsel
Facsimile No.: (609) 734-3830
With a copy to:
Davis Polk & Wardwell
450 Lexington Ave.
New York, NY 10017
Attention: William L. Taylor
Facsimile No.: (212) 450-4800
If to Lancit:
Lancit Media Entertainment, Ltd.
601 West 50th Street
New York, New York 10019
Attention: Susan L. Solomon
Facsimile No.: (212) 977-9164
and (212) 245-2541
With a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attention: Anthony J. Carroll
Facsimile No.: (212) 632-5555
SECTION 9.03. No Assignment; Successors and Assigns; No Third Party
Beneficiaries. This Agreement shall be binding on, enforceable against and inure
to the benefit of the parties hereto and their respective successors and
assigns, and nothing herein is intended to confer any right, remedy or benefit
upon any other Person. Neither Lancit nor the Company may assign its rights or
delegate its obligations under this Agreement without the express written
consent of the other. Except as set forth in Section 4.10, no provision of this
Agreement is intended to confer upon any Person other than the parties hereto
any rights or remedies hereunder.
SECTION 9.04. Public Announcements. Each party will consult with the
others before issuing any press release or making any public statement or
disclosure with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable Law or any listing agreement
with NASDAQ, will not issue any such press release or make any such public
statement prior to such consultation. Following the execution hereof, the
Company and Lancit shall issue press releases in the forms previously agreed
upon.
SECTION 9.05. Survival of Representations, Warranties and Agreements.
None of the representations and warranties made by Lancit or the Company in this
Agreement, the Disclosure Schedule, the schedules to this Agreement or any
document or certificate delivered pursuant hereto shall survive the Effective
Time. This Section 9.05 shall not limit any covenant or agreement which by its
terms contemplates performance after the Effective Time.
SECTION 9.06. Expenses. All printing and filing fees shall be paid
one-half by Lancit and one-half by the Company. In the event the Merger occurs,
the Company shall bear and pay all costs, expenses and fees incurred by Lancit
in respect of the transactions contemplated herein. Except as otherwise provided
in this Section 9.06 and in Section 4.09, each party hereto shall bear its own
costs and expenses in connection with this Agreement and the transactions
contemplated hereby.
SECTION 9.07. Governing Law; Consent to Jurisdiction. This Agreement
shall in all respects be governed by and construed in accordance with the laws
of the State of New York. Except as otherwise expressly provided in this
Agreement, the parties hereto agree that any suit, action or proceeding seeking
to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby shall be
brought in the United States District Court, Southern District of New York or
any competent court of the State of New York sitting in Manhattan, New York and
each of the parties hereby consents to the jurisdiction of such courts (and of
the appropriate appellate courts therefrom) in any such suit, action or
proceeding and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding in any such court or that any such suit, action
or proceeding which is brought in any such court has been brought in an
inconvenient forum. Each party hereby waives the right to any other jurisdiction
or venue to which any of them may be entitled by reason of its present or future
domicile. The parties agree that service of process may be made by U.S.
registered mail, return receipt requested, to a party at its address set forth
in Section 9.02 shall be deemed effective.
SECTION 9.08. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 9.09. Savings Clause. If any provision of this Agreement is
held to be invalid or unenforceable by any court or tribunal of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby, and
such provision shall be carried out as nearly as possible according to its
original terms and intent to eliminate such invalidity or unenforceability.
SECTION 9.10. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 9.11. Construction. Headings contained in this Agreement are
for convenience only and shall not be used in the interpretation of this
Agreement. References herein to the Agreement shall be deemed to include all
Schedules (including the Disclosure Schedule) and Exhibits hereto, and
references herein to Sections, Schedules and Exhibits are to the sections,
schedules and exhibits of this Agreement. As used herein, the singular includes
the plural, and the masculine, feminine and neuter gender each includes the
others where the context so indicates.
SECTION 9.12. Schedules. Any matter disclosed on any Item of the
Disclosure Schedule shall be deemed to be disclosed in all other Items of the
Disclosure Schedule to the extent it would reasonably be expected to relate
thereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
LANCIT MEDIA ENTERTAINMENT, LTD.
By: /s/ Susan L. Solomon
---------------------------------------------
Susan L. Solomon
Chairman of the Board and Chief
Executive Officer
RCN CORPORATION
By: /s/ Paul Sigmund
---------------------------------------------
Name: Paul Sigmund
Title: Executive Vice President
LME ACQUISITION CORPORATION
By: /s/ Paul Sigmund
---------------------------------------------
Name: Paul Sigmund
Title: Executive Vice President
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
----------------------------
AMENDMENT NO. 1 dated as of April 6, 1998 between RCN
CORPORATION, a Delaware corporation ("RCN"), LME ACQUISITION CORPORATION, a
New York corporation (the "Merger Subsidiary"), and LANCIT MEDIA
ENTERTAINMENT, LTD., a New York corporation ("Lancit"), to AGREEMENT AND PLAN
OF MERGER ("Merger Agreement"), dated as of February 27, 1998, between RCN,
Merger Subsidiary and Lancit.
W I T N E S S E T H :
-------------------
WHEREAS, RCN, Merger Subsidiary and Lancit entered into the
Merger Agreement on February 27, 1998; and
WHEREAS, RCN declared a one for one stock dividend (the "Stock
Dividend") on its common stock, par value $1.00 per share, on March 9, 1998
which was paid on April 3, 1998; and
WHEREAS, the parties hereto wish to amend the Merger Agreement
to correctly state the par value per share of the common stock of the Merger
Subsidiary and to adjust the formula for calculating the Stock Exchange Ratio
(as defined therein) in order to account for the Stock Dividend in accordance
with Section 1.05(d) of the Merger Agreement;
NOW, THEREFORE, the parties hereto hereby amend the Merger
Agreement as follows:
1. The reference to "$.01" as the par value per share of the
common stock of the Merger Subsidiary in Section 1.04 shall be deleted and
replaced with "$1.00";
2. The references to "$58" in Section 1.05(a) shall be deleted
and replaced with references to "$29";
3. The references to "$48" in Section 1.05(a) shall be deleted
and replaced with references to "$24";
4. This Amendment shall be in all respects governed by and
construed in accordance with the laws of the State of New York;
5. This Amendment may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument;
6. Except as expressly amended by this Amendment, the Merger
Agreement will remain in full force and effect; and
7. Capitalized terms used in this Amendment and not otherwise
defined herein are used herein as defined in the Merger Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first set forth above.
LANCIT MEDIA ENTERTAINMENT, LTD.
By: /s/ Susan L. Solomon
---------------------------------
Susan L. Solomon
Chairman of the Board and Chief
Executive Officer
RCN CORPORATION
By: /s/ Paul Sigmund
---------------------------------
Name: Paul Sigmund
Title: Executive Vice President
LME ACQUISITION CORPORATION
By: /s/ Paul Sigmund
---------------------------------
Name: Paul Sigmund
Title: Executive Vice President
VOTING AGREEMENT
In consideration of RCN Corporation, a Delaware corporation (the
"Company"), LME Acquisition Corporation, a New York corporation ("Merger
Subsidiary") and Lancit Media Entertainment, Ltd., a New York corporation
("Lancit") entering into on the date hereof an Agreement and Plan of Merger
dated as of the date hereof (the "Merger Agreement") which provides, among other
things, that Merger Subsidiary, upon the terms and subject to the conditions
thereof, will be merged with and into Lancit (the "Merger") and each outstanding
share of common stock, $0.01 par value, of Lancit (the "Lancit Common Stock")
will be converted into the right to receive the Merger Consideration (as defined
in the Merger Agreement) in accordance with the terms of such Agreement, the
undersigned holders (each, a "Shareholder") of shares of Lancit Common Stock,
severally and not jointly, agree with the Company as follows (all capitalized
terms not otherwise defined herein have the respective meanings set forth in the
Merger Agreement):
1. During the period (the "Agreement Period") beginning on the date
hereof and ending on the earlier of (i) the Effective Time (as defined in the
Merger Agreement), (ii) the date that is 1 year after the termination of the
Merger Agreement in accordance with Section 7.01(c) (in the case of a
termination by the Company for a willful breach by Lancit of its obligations
under the Merger Agreement), (e), (f) or (g) thereof (and, in the case of
termination pursuant to subsection (e) or (f), payment in full of all amounts
payable to the Company pursuant to Section 4.09 of the Merger Agreement), (iii)
the date of termination of the Merger Agreement for any other reason and (iv)
February 27, 2000, the Shareholder hereby agrees to vote all of its Shares to
approve and adopt the Merger Agreement and the Merger (provided that such
Shareholder shall not be required to vote in favor of the Merger Agreement or
the Merger if the Merger Agreement has, without the consent of such Shareholder,
been amended in any manner that is material and adverse to such Shareholder) and
any actions directly and reasonably related thereto at any meeting or meetings
of the shareholders of Lancit, and at any adjournment thereof or pursuant to
action by written consent, at or by which such Merger Agreement, or such other
actions, are submitted for the consideration and vote of the shareholders of
Lancit so long as such meeting is held (including any adjournment thereof) or
written consent adopted prior to the termination of the Agreement Period. For
purposes of this Agreement, "Shares" shall mean any and all shares of Lancit
Common Stock now owned and/or subsequently acquired by the Shareholder through
purchase, gift, stock splits, stock dividends and exercise of stock options.
2. During the Agreement Period, the Shareholder hereby agrees that it
will vote all of its Shares against the approval of any other merger,
consolidation, sale of assets, reorganization, recapitalization, liquidation or
winding up of Lancit or any other extraordinary transaction involving Lancit or
any matters related to or in connection therewith.
3. From the date hereof until the termination hereof, except in its
capacity as an officer or director of Lancit and in accordance with Section 4.09
of the Merger Agreement, the Shareholder will not, directly or indirectly, (i)
take any action to solicit, initiate or encourage any Acquisition Proposal or
(ii) engage in negotiations or discussions with, or disclose any nonpublic
information relating to Lancit or any Subsidiary or afford access to the
properties, books or records of Lancit or any Subsidiary to, or otherwise
assist, facilitate or encourage, any Third Party that may be considering making,
or has made, an Acquisition Proposal. The Shareholder will promptly notify the
Company after receipt of any Acquisition Proposal or any indication from any
Third Party that it is considering making an Acquisition Proposal or any request
for nonpublic information relating to Lancit or any Subsidiary or for access to
the properties, books or records of Lancit or any Subsidiary by any Third Party
that may be considering making, or has made, an Acquisition Proposal and will
keep the Company fully informed of the status and details of any such
Acquisition Proposal, indication or request.
4. The Shareholder agrees not to exercise any rights (including,
without limitation, under Section 910 of the BCL) to demand appraisal of any
shares of Lancit Common Stock owned by the Shareholder.
5. The Shareholder hereby represents and warrants to the Company that
as of the date hereof:
(a) the Shareholder (i) owns beneficially all of the Shares set forth
opposite the Shareholder's name in Schedule A hereto, (ii) has the full and
unrestricted legal power, authority and right to enter into, execute and deliver
this Voting Agreement without the consent or approval of any other person and
(iii) has not entered into any voting agreement with or granted any person any
proxy (revocable or irrevocable) with respect to such Shares (other than this
Voting Agreement).
(b) This Voting Agreement is the valid and binding agreement of the
Shareholder.
(c) No investment banker, broker or finder is entitled to a commission
or fee from the Shareholder or Lancit in respect of this Agreement based upon
any arrangement or agreement made by or on behalf of the Shareholder except as
disclosed pursuant to Section 2.15 of the Merger Agreement.
6. If any provision of this Voting Agreement shall be invalid or
unenforceable under applicable law, such provision shall be ineffective to the
extent of such invalidity or unenforceability only, without in any way affecting
the remaining provisions of this Voting Agreement.
7. This Voting Agreement may be executed in two or more counterparts
each of which shall be an original with the same effect as if the signatures
hereto and thereto were upon the same instrument.
8. The parties hereto agree that if for any reason any party hereto
shall have failed to perform its obligations under this Voting Agreement, then
the party seeking to enforce this Agreement against such non-performing party
shall be entitled to specific performance and injunctive and other equitable
relief, and the parties hereto further agree to waive any requirement for the
securing or posting of any bond in connection with the obtaining of any
such-injunctive or other equitable relief. This provision is without prejudice
to any other rights or remedies, whether at law or in equity, that any party
hereto may have against any other party hereto for any failure to perform its
obligations under this Voting Agreement.
9. This Voting Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
10. The Shareholder will, upon request, execute and deliver any
additional documents deemed by the Company to be necessary or desirable to
complete and effectuate the covenants contained herein.
11. This Agreement shall terminate upon the termination of the
Agreement Period.
12. This Agreement shall bind each Shareholder only in such
Shareholder's capacity as a shareholder of Lancit and only with respect to the
specific matters set forth herein, and shall not prohibit the Shareholder from
acting in accordance with the Shareholder's fiduciary duties as an officer or
director of Lancit.
13. The Shareholder agrees that if it sells, transfers, assigns,
encumbers or otherwise disposes (each a "Transfer") of any Shares (whether to an
affiliate or otherwise) during the term of this Agreement, it shall require the
transferee of such Shares to execute and deliver to the Company and Lancit a
voting agreement identical in form to this Voting Agreement except for the
identity of the Shareholder prior to or concurrent with the consummation of such
Transfer. The Company and Lancit understand and acknowledge that, subject to the
preceding sentence, the Shareholder is free to Transfer any Shares at such times
and in such manner as it deems appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Voting
Agreement as of this 27th day of February, 1998.
RCN CORPORATION
By_______________________
Name:
Title:
LME ACQUISITION
CORPORATION
By ______________________
Name:
LANCIT MEDIA
ENTERTAINMENT, LTD.
By ______________________
Name:
Title:
Cecily Truett
------------------------
Name: Cecily Truett
Laurence A. Lancit
------------------------
Name: Laurence A. Lancit
THE LANCIT CHILDREN'S TRUST
By: __________________
Name: Paula J. Boze,
Title: as sole Trustee
SCHEDULE A
----------
Shares of Lancit
Shareholder Common Stock
- ----------- ------------
Cecily Truett 553,113
Laurence A. Lancit 553,113
The Lancit Children's Trust 40,080
Annex III
[LETTERHEAD OF SCHRODER & CO. INC.]
February 27, 1998
The Board of Directors
Lancit Media Entertainment, Ltd.
601 West 50th Street
New York, NY 10019
Members of the Board of Directors:
We understand that Lancit Media Entertainment Ltd. ("Lancit" or the
"Company") and RCN Corporation ("RCN") have entered into an Agreement and Plan
of Merger substantially similar to a draft agreement dated as of February 27,
1998 (the "Merger Agreement"), whereby LME Acquisition Corporation, a
wholly-owned subsidiary of RCN, will merge with Lancit (the "Transaction"). The
Merger Agreement provides, among other things, that each issued and outstanding
share of common stock, par value $.001 per share, of Lancit ("Lancit Common
Stock") be converted into the right to receive a fraction of a share of RCN
common stock, par value $1.00 per share, equal to the Stock Exchange Ratio (the
"Merger Consideration"). The Stock Exchange Ratio means a fraction, the
numerator of which is $1.20 and the denominator of which is the average closing
price of RCN common stock on The Nasdaq Stock Market, Inc. ("NASDAQ") for the
five trading day period ending one trading day prior to closing (the "ACP");
provided that if the ACP is greater than $58.00, the Stock Exchange Ratio will
be calculated as though the ACP were $58.00, and if the ACP is less than $48.00,
the Stock Exchange Ratio will be calculated as if the ACP were $48.00, subject
to certain adjustments.
You have requested our opinion, as investment bankers, as to the
fairness, from a financial point of view, of the Merger Consideration to be
received by the holders of Lancit Common Stock in the Transaction (the
"Opinion"). It is understood that the Opinion shall be used by you solely in
connection with your consideration of the fairness of the Merger Consideration
to be received by holders of Lancit Common Stock and for no other purpose, and
that Lancit will not furnish the Opinion or any other material prepared by
Schroder & Co. Inc. ("Schroders") to any other person or persons or use or refer
to the Opinion for any other purpose without Schroders' prior written approval.
Schroders understands and agrees that its Opinion may be referred to and
reproduced in full in a form S-4 to be filed with the Securities and Exchange
Commission in connection with the Transaction and in any proxy document mailed
to Lancit common shareholders or other soliciting document.
Schroders, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
In connection with our opinion set forth herein, we have, among other
things:
i. reviewed the Company's Annual Reports on Form 10-K filed with the
Securities and Exchange Commission for the fiscal years ended June 30,
1995, 1996 and 1997; its Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997 and December 31, 1997; and its Proxy Statement
dated November 14, 1996;
ii. reviewed the Report of Independent Auditors of the Company dated October
13, 1997, contained in Form 10-K for the fiscal year ended June 30, 1997,
in which the Company anticipates that additional funding will be
necessary to sustain the Company's operations through the fiscal year
ending June 30, 1998. These conditions raise substantial doubt about the
Company's ability to continue as a going concern;
iii. reviewed a certain near-term cash flow forecast dated February 16, 1998
prepared by management of the Company which relates to the six months
ended June 30, 1998;
iv. visited the principal office of the Company and conducted discussions
with the senior management of the Company concerning its historical
financial results and near-term cash flow forecast as presented and
described in (i), (ii), and (iii) above;
v. performed various financial analyses, as we deemed appropriate, of Lancit
using generally accepted analytical methodologies, including: (i) the
application to the financial results of Lancit of the public trading
multiples of companies which we deemed comparable; (ii) the application
to the financial results of Lancit of the multiples reflected in recent
mergers and acquisitions for businesses which we deemed comparable; and
(iii) a review of Lancit's near-term cash flow forecast as described in
(iii) above;
vi. reviewed the historical trading prices and volumes of Lancit Common Stock
on NASDAQ from January 1, 1996 to February 25, 1998;
vii. reviewed the draft Merger Agreement dated February 27, 1998;
viii. discussed the transaction with RCN;
ix. reviewed RCN's Amendment No. 2 to Form 10/A filed with the Securities and
Exchange Commission on September 5, 1997; its Form 10-Q for the quarter
ended September 30, 1997; its 144A offering memorandum, dated January 30,
1998, for its 9.8% Senior Discount Notes due 2008; and its Form 8-K dated
February 5, 1998.
x. reviewed the historical trading prices and volumes of RCN Common Stock on
NASDAQ from September 19, 1997 to February 25, 1998;
xi. Reviewed projections for RCN contained in research reports by Merrill
Lynch & Co., dated February 9, 1998, and by Prudential Securities
Incorporated dated February 9, 1998.
xiii. taken into account the results of the extended solicitations of interest
by the Company from persons thought likely to have a possible interest in
acquiring the Company; and
xiv. performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In our review and analysis and in formulating our opinion, we have
assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to us by Lancit or obtained by us from
other sources, and upon the assurance of Lancit's management that they are not
aware of any information or facts that would make the information provided to us
incomplete or misleading. We have not attempted to independently verify any of
such information. We have not undertaken an independent appraisal of the assets
or liabilities (contingent or otherwise) of Lancit, nor have we been furnished
with any such appraisals. In addition, we have not reviewed any information with
respect to RCN other than that referred to in items (viii), (ix), (x), and (xi)
in the preceding paragraph. Lancit has advised us that RCN has not made
available to it any projections prepared by management of RCN. With respect to
the near-term cash flow forecast for Lancit (as described in (iii) above), we
have been advised by Lancit, and we have assumed, without independent
investigation, that it has been reasonably prepared and reflects Lancit
management's reasonable estimate of the aggregate amounts of the sources and
uses of its funds for the six month period covered thereby.
Our opinion is necessarily based upon financial, economic, market and
other conditions as they exist and can be evaluated by us on the date hereof. We
disclaim any undertaking or obligation to advise any person of any change in any
fact or matter affecting our opinion which may come or be brought to our
attention after the date of the opinion unless specifically requested to do so.
Our opinion does not constitute a recommendation as to any action the
Board of Directors of the Company or any shareholder of the Company should take
in connection with the Merger Agreement or any aspect thereof or alternative
thereto. Without limitation to the foregoing, this letter does not constitute a
recommendation to any shareholder with respect to whether to vote in favor of
the Transaction, and should not be relied upon by any shareholder as such. In
rendering our opinion, we have not been engaged as an agent or fiduciary of the
Company's shareholders or of any other third party. Our opinion relates solely
to the fairness, from a financial point of view, to the shareholders of the
Company of the Merger Consideration to be received by the holders of Lancit
Common Stock. We express no opinion herein as to the structure, terms or effect
of any other aspect of the Transaction or the Merger Agreement.
Given the strategic alternatives and based upon and subject to all the
foregoing, we are of the opinion, as investment bankers, that as of the date
hereof, the Merger Consideration to be received by the holders of Lancit Common
Stock pursuant to the Merger Agreement is fair, from a financial point of view,
to such holders.
Very truly yours,
SCHRODER & CO. INC.
By: /s/ Ivan L. Lustig
-------------------------
Ivan L. Lustig
Managing Director
[Schroders Logo]
May 7, 1998
The Board of Directors
Lancit Media Entertainment, Ltd.
601 West 50th Street
New York, NY 10019
Members of the Board of Directors:
We understand that Lancit Media Entertainment Ltd. ("Lancit" or
the "Company") and RCN Corporation ("RCN") have entered into an Agreement and
Plan of Merger dated as of February 27, 1998, as amended on April 6, 1998 (the
"Merger Agreement"), whereby LME Acquisition Corporation, a wholly-owned
subsidiary of RCN, will merge with and into Lancit (the "Transaction"). The
Merger Agreement provides, among other things, that each issued and outstanding
share of common stock, par value $.001 per share, of Lancit ("Lancit Common
Stock") be converted into the right to receive a fraction of a share of RCN
common stock, par value $1.00 per share, equal to the Stock Exchange Ratio (the
"Merger Consideration"). The Stock Exchange Ratio means a fraction, the
numerator of which is $1.20 and the denominator of which is the average closing
price of RCN common stock on The Nasdaq Stock Market, Inc. ("NASDAQ") for the
five trading day period ending one trading day prior to closing (the "ACP");
provided that if the ACP is greater than $29.00, the Stock Exchange Ratio will
be calculated as though the ACP were $29.00, and if the ACP is less than
$24.00, the Stock Exchange Ratio will be calculated as if the ACP were $24.00,
subject to certain adjustments.
You have requested our opinion, as investment bankers, as to the
fairness, from a financial point of view, of the Merger Consideration to be
received by the holders of Lancit Common Stock in the Transaction (the
"Opinion"). It is understood that the Opinion shall be used by you solely in
connection with your consideration of the fairness of the Merger Consideration
to be received by holders of Lancit Common Stock and for no other purpose, and
that Lancit will not furnish the Opinion or any other material prepared by
Schroder & Co. Inc. ("Schroders") to any other person or persons or use or refer
to the Opinion for any other purpose without Schroders' prior written approval.
Schroders understands and agrees that its Opinion may be referred to and
reproduced in full in a Form S-4 to be filed with the Securities and Exchange
Commission in connection with the Transaction and in any proxy document mailed
to Lancit common shareholders or other soliciting document.
Schroders, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In connection with our opinion set forth herein, we have, among
other things:
i. reviewed the Company's Annual Reports on Form 10-K filed with the
Securities and Exchange Commission for the fiscal years ended June 30,
1995, 1996 and 1997; its Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1997 and December 31, 1997; its Proxy Statement dated
November 14, 1996 and the draft Proxy Statement - Prospectus of Lancit
and RCN dated May 5, 1998; and a draft balance sheet dated March 31,
1998, draft consolidated statement of operations for the three and nine
months ended March 31, 1998, and draft consolidated statement of cash
flows for the nine months ended March 31, 1998;
ii. reviewed the Report of Independent Auditors of the Company dated October
13, 1997, contained in Form 10-K for the fiscal year ended June 30, 1997,
in which the Company anticipates that additional funding will be
necessary to sustain the Company's operations through the fiscal year
ending June 30, 1998. These conditions raise substantial doubt about the
Company's ability to continue as a going concern;
iii. reviewed a certain near-term cash flow forecast dated February 16, 1998
prepared by management of the Company which relates to the six months
ended June 30, 1998 and an updated forecast for the six months reflecting
actual results through March 31, 1998 dated April 15, 1998;
iv. visited the principal office of the Company and conducted discussions
with the senior management of the Company concerning its historical
financial results and near-term cash flow forecast as presented and
described in (i), (ii), and (iii) above;
v. performed various financial analyses, as we deemed appropriate, of Lancit
using generally accepted analytical methodologies, including: (i) the
application to the financial results of Lancit of the public trading
multiples of companies which we deemed comparable; (ii) the application
to the financial results of Lancit of the multiples reflected in recent
mergers and acquisitions for businesses which we deemed comparable; and
(iii) a review of Lancit's near-term cash flow forecast as described in
(iii) above;
vi. reviewed the historical trading prices and volumes of Lancit Common Stock
on NASDAQ from January 1, 1996 to May 7, 1998;
vii. reviewed the Merger Agreement dated February 27, 1998 as amended April 6,
1998;
viii. discussed the transaction with RCN;
ix. reviewed RCN's Amendment No. 2 to Form 10/A filed with the Securities and
Exchange Commission on September 5, 1997; its Form 10-Q for the quarter
ended September 30, 1997; its Form 10-K for the fiscal year ended
December 31, 1997; its 144A offering memorandum, dated January 30, 1998,
for its 9.8% Senior Discount Notes due 2008; its Form 8-K dated February
5, 1998; its Form S-1 filed March 27, 1998; and its Amendment No. 1 to
Form S-4 filed May 6, 1998;
x. reviewed the historical trading prices and volumes of RCN Common Stock on
NASDAQ from September 19, 1997 to May 7, 1998;
xi. Reviewed projections for RCN contained in research reports by Merrill
Lynch & Co., dated February 9, 1998, and by Prudential Securities
Incorporated dated February 9, 1998;
xii. taken into account the results of the extended solicitations of interest
by the Company from persons thought likely to have a possible interest in
acquiring the Company prior to entering into the Transaction and the fact
that after announcement of the Transaction no interested parties made
themselves known to the Company or to Schroders; and
xiii. performed such other financial studies, analyses, inquiries and
investigations as we deemed appropriate.
In our review and analysis and in formulating our opinion, we
have assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to us by Lancit or obtained by us from
other sources, and upon the assurance of Lancit's management that they are not
aware of any information or facts that would make the information provided to
us incomplete or misleading. We have not attempted to independently verify any
of such information. We have not undertaken an independent appraisal of the
assets or liabilities (contingent or otherwise) of Lancit, nor have we been
furnished with any such appraisals. In addition, we have not reviewed any
information with respect to RCN other than that referred to in items (viii),
(ix), (x), and (xi) in the preceding paragraph. Lancit has advised us that RCN
has not made available to it any projections prepared by management of RCN.
With respect to the near-term cash flow forecast and updated forecast for
Lancit (as described in (iii) above), we have been advised by Lancit, and we
have assumed, without independent investigation, that each has been reasonably
prepared and reflects Lancit management's reasonable estimate of the aggregate
amounts of the sources and uses of its funds for the periods covered thereby.
Our opinion is necessarily based upon financial, economic,
market and other conditions as they exist and can be evaluated by us on the
date hereof. We disclaim any undertaking or obligation to advise any person of
any change in any fact or matter affecting our opinion which may come or be
brought to our attention after the date of the opinion unless specifically
requested to do so.
Our opinion does not constitute a recommendation as to any
action the Board of Directors of the Company or any shareholder of the Company
should take in connection with the Merger Agreement or any aspect thereof or
alternative thereto. Without limitation to the foregoing, this letter does not
constitute a recommendation to any shareholder with respect to whether to vote
in favor of the Transaction, and should not be relied upon by any shareholder
as such. In rendering our opinion, we have not been engaged as an agent or
fiduciary of the Company's shareholders or of any other third party. Our
opinion relates solely to the fairness, from a financial point of view, to the
shareholders of the Company of the Merger Consideration to be received by the
holders of Lancit Common Stock. We express no opinion herein as to the
structure, terms or effect of any other aspect of the Transaction or the
Merger Agreement.
Given the strategic alternatives and based upon and subject to
all the foregoing, we are of the opinion, as investment bankers, that as of
the date hereof, the Merger Consideration to be received by the holders of
Lancit Common Stock pursuant to the Merger Agreement is fair, form a financial
point of view, to such holders.
Very truly yours,
SCHRODER & CO. INC.
By: /s/ Ivan L. Lustig
-----------------------------
Ivan L. Lustig
Managing Director
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or it stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL empowers RCN Corporation ("RCN") 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 RCN may purchase
insurance on behalf of any such director, officer, employee or agent.
RCN'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 the indemnification by RCN of each director and
officer of RCN, in each case, to the fullest extent permitted by applicable
law.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and RCN
Corporation ("RCN") (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to RCN's
Information Statement on Form 10/A ("Form 10A") filed on September 5, 1997)
2.2* Agreement and Plan of Merger dated as of February 27, 1998 among RCN, LME Acquisition
Corporation and Lancit Media Entertainment, Ltd. (incorporated by reference to Exhibit 2 to RCN's
filing on Schedule 13-D ("Schedule 13-D") filed on March 6, 1998)
2.3 Amendment No. 1 dated as of April 6, 1998 between RCN, LME Acquisition Corporation and
Lancit Media Entertainment, Ltd. to Agreement and Plan of Merger dated February 27, 1998
(included as Annex I of the Prospectus)
2.4* Voting Agreement dated as of February 27, 1998 among RCN, LME Acquisition Corporation,
Lancit Media Entertainment, Ltd., Cecily Truett, Laurence A. Lancit and The Lancit Children's
Trust (incorporated by reference to Exhibit 1 to RCN's Schedule 13-D)
2.5* Agreement and Plan of Merger dated as of January 21, 1998 among Erols Internet, Inc., Erol
Onaran, Gold & Appel Transfer, S.A., RCN and ENET Holding, Inc. (incorporated by reference
to Exhibit 2.1 to RCN's Current Report on Form 8-K ("Form 8-K") filed on March 6, 1998)
2.6* 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 and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's Form 8-K)
3.1* Amended and Restated Articles of Incorporation of RCN (incorporated by reference to Exhibit 3.1
to RCN's Form 10A)
3.2* By-laws of RCN (incorporated by reference to Exhibit 3.2 to RCN's Form 10A)
4.1* Indenture dated as of February 6, 1998 between RCN, 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 RCN's Registration Statement on Form S-4 (Commission File No. 333-48487)
("1998 Form S-4") filed on March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008 (included in Exhibit 4.1) (incorporated by
reference to Exhibit 4.2 to RCN's 1998 Form S-4)
4.3* Registration Rights Agreement dated as of February 6, 1998 by and among RCN and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers (incorporated by reference to Exhibit 4.3 to RCN's 1998 Form
S-4)
4.4* Indenture dated as of October 17, 1997 between RCN, 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 RCN's Registration Statement on Form S-4 (Commission File No. 333-41081) ("1997 Form
S-4") filed on November 26, 1997)
4.5* Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to RCN's 1997 Form S-4)
4.6* Indenture dated as of October 17, 1997 between RCN, 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 RCN's 1997 Form S-4)
4.7* Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to RCN's 1997 Form S-4)
4.8* 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 RCN
(incorporated by reference to Exhibit 4.6 to RCN's 1997 Form S-4)
5.1 Opinion of Davis Polk & Wardwell
8.1 Opinion of Christy & Viener
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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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
RCN'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 RCN'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 RCN'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 RCN's Form 10A)
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"))
10.15 Agreement dated as of February 27, 1998 among Susan Solomon, RCN, Lancit Media
Entertainment, Ltd. and LME Acquisition Corporation
10.16 Waiver dated as of February 27, 1998 signed by Cecily Truett, RCN and Lancit Media
Entertainment, Ltd.
10.17 Waiver dated as of February 27, 1998 signed by Laurence A. Lancit, RCN and Lancit Media
Entertainment, Ltd.
11.1 Statement regarding Computation of Per Share Earnings of RCN (included in the Notes to the
Consolidated Financial Statements of RCN)
11.2 Statement regarding Computation of Per Share Earnings of Lancit
21.1* Subsidiaries of RCN (incorporated by reference to Exhibit 21 to RCN's 10-K)
23.1 Consent of Coopers & Lybrand L.L.P. with respect to RCN
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to Erols Internet, Inc.
23.3 Consent of Ernst & Young LLP, Independent Auditors, with respect to Lancit Media Entertainment,
Ltd.
23.4 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman, Radin & Co., P.C.), Predecessor
Independent Auditors with respect to Lancit Media Entertiament, Ltd.
23.5 Consent of Schroder & Co. Inc., Financial Advisor to Lancit
24.1 Power of Attorney (included on the signature page of the Registration Statement)
99.1 Form of Proxy
99.2 Form of Letter of Transmittal
99.3 Form of letter to holders
</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, 997, 1996 and 1995 (Schedule II)
(incorporated by reference to Item 14(a)(2) to RCN's 10-K)
Item 22. Undertakings
(a) the undersigned Registrant hereby undertakes:
(1) To file during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
prospectus any facts or arising after the effective date of the
registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of
this Registration Statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of the
applicable form.
(5) That every prospectus: (i) that is filed pursuant to
paragraph (4) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933
and is used in connection with an offering of securities subject
to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be 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 Registrant 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 Registrant will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) To respond to requests for information that is incorporated
by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(d) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the registration
statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on this 8th day of May, 1998.
RCN CORPORATION
By: /s/ Bruce C. Godrey
---------------------------------
Bruce C. Godfrey
Executive Vice President
and Chief Financial Officer
The registrant and each person whose signature appears below
constitutes and appoints Michael J. Mahoney and Bruce Godfrey his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign and file any and all amendments (including
post-effective amendments) to this registration statement, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof,
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David C. McCourt Director, Chairman and Chief May 8, 1998
- --------------------------- Executive Officer
David C. McCourt
/s/ Michael J. Mahoney Director, President and Chief May 8, 1998
- --------------------------- Operating Officer
Michael J. Mahoney
/s/ Bruce C. Godfrey Director, Executive Vice President May 8, 1998
- --------------------------- and Chief Financial Officer
Bruce C. Godfrey
/s/ Dennis Spina Director, Vice Chairman and May 8, 1998
- --------------------------- President, Internet Services
Dennis Spina
/s/ James Q. Crowe Director May 8, 1998
- ---------------------------
James Q. Crowe
/s/ Thomas May Director May 8, 1998
- ---------------------------
Thomas May
/s/ Walter Scott, Jr. Director May 8, 1998
- ---------------------------
Walter Scott, Jr.
/s/ Michael B. Yanney Director May 8, 1998
- ---------------------------
Michael B. Yanney
/s/ Alfred Fasola Director May 8, 1998
- ---------------------------
Michael B. Yanney
/s/ Thomas P. O'Neill, III Director May 8, 1998
- ---------------------------
Thomas P. O'Neill, III
/s/ Richard R. Jaros Director May 8, 1998
- ---------------------------
Richard R. Jaros
/s/ Eugene Roth Director May 8, 1998
- ---------------------------
Eugene Roth
/s/ Stuart E. Graham Director May 8, 1998
- ---------------------------
Stuart E. Graham
/s/ Ralph Hromisin Vice President and Corporate May 8, 1998
- --------------------------- Controller
Ralph Hromisin
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Document Page
- ----------- -------- ----
<S> <C> <C>
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and RCN
Corporation ("RCN") (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to RCN's
Information Statement on Form 10/A ("Form 10A") filed on September 5, 1997)
2.2* Agreement and Plan of Merger dated as of February 27, 1998 among RCN, LME Acquisition
Corporation and Lancit Media Entertainment, Ltd. (incorporated by reference to Exhibit 2 to RCN's
filing on Schedule 13-D ("Schedule 13-D") filed on March 6, 1998)
2.3 Amendment No. 1 dated as of April 6, 1998 between RCN, LME Acquisition Corporation and
Lancit Media Entertainment, Ltd. to Agreement and Plan of Merger dated February 27, 1998
(included as Annex I of the Prospectus)
2.4* Voting Agreement dated as of February 27, 1998 among RCN, LME Acquisition Corporation,
Lancit Media Entertainment, Ltd., Cecily Truett, Laurence A. Lancit and The Lancit Children's
Trust (incorporated by reference to Exhibit 1 to RCN's Schedule 13-D)
2.5* Agreement and Plan of Merger dated as of January 21, 1998 among Erols Internet, Inc., Erol
Onaran, Gold & Appel Transfer, S.A., RCN and ENET Holding, Inc. (incorporated by reference
to Exhibit 2.1 to RCN's Current Report on Form 8-K ("Form 8-K") filed on March 6, 1998)
2.6* 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 and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's Form 8-K)
3.1* Amended and Restated Articles of Incorporation of RCN (incorporated by reference to Exhibit 3.1
to RCN's Form 10A)
3.2* By-laws of RCN (incorporated by reference to Exhibit 3.2 to RCN's Form 10A)
4.1* Indenture dated as of February 6, 1998 between RCN, 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 RCN's Registration Statement on Form S-4 (Commission File No. 333-48487)
("1998 Form S-4") filed on March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008 (included in Exhibit 4.1) (incorporated by
reference to Exhibit 4.2 to RCN's 1998 Form S-4)
4.3* Registration Rights Agreement dated as of February 6, 1998 by and among RCN and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers Inc and NationsBanc Montgomery
Securities, Inc., as Initial Purchasers (incorporated by reference to Exhibit 4.3 to RCN's 1998 Form
S-4)
4.4* Indenture dated as of October 17, 1997 between RCN, 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 RCN's Registration Statement on Form S-4 (Commission File No. 333-41081) ("1997 Form
S-4") filed on November 26, 1997)
4.5* Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to RCN's 1997 Form S-4)
4.6* Indenture dated as of October 17, 1997 between RCN, 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 RCN's 1997 Form S-4)
4.7* Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to RCN's 1997 Form S-4)
4.8* 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 RCN
(incorporated by reference to Exhibit 4.6 to RCN's 1997 Form S-4)
5.1 Opinion of Davis Polk & Wardwell
8.1 Opinion of Christy & Viener
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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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 RCN'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
RCN'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 RCN'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 RCN'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 RCN's Form 10A)
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"))
10.15 Agreement dated as of February 27, 1998 among Susan Solomon, RCN, Lancit Media
Entertainment, Ltd. and LME Acquisition Corporation
10.16 Waiver dated as of February 27, 1998 signed by Cecily Truett, RCN and Lancit Media
Entertainment, Ltd.
10.17 Waiver dated as of February 27, 1998 signed by Laurence A. Lancit, RCN and Lancit Media
Entertainment, Ltd.
11.1 Statement regarding Computation of Per Share Earnings of RCN (included in the Notes to the
Consolidated Financial Statements of RCN)
11.2 Statement regarding Computation of Per Share Earnings of Lancit
21.1* Subsidiaries of RCN (incorporated by reference to Exhibit 21 to RCN's 10-K)
23.1 Consent of Coopers & Lybrand L.L.P. with respect to RCN
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to Erols Internet, Inc.
23.3 Consent of Ernst & Young LLP, Independent Auditors, with respect to Lancit Media Entertainment,
Ltd.
23.4 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman, Radin & Co., P.C.), Predecessor
Independent Auditors with respect to Lancit Media Entertiament, Ltd.
23.5 Consent of Schroder & Co. Inc., Financial Advisor to Lancit
24.1 Power of Attorney (included on the signature page of the Registration Statement)
99.1 Form of Proxy
99.2 Form of Letter of Transmittal
99.3 Form of letter to holders
</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.
Exhibit 5.1
[Letterhead of Davis Polk & Wardwell]
May 8, 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
on Form S-4 (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the registration of 331,738 shares of Common
Stock, par value $1.00 per share, of RCN (the "Common Stock"). 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 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 Common Stock is issued as described in the Registration Statement, the
Common Stock will be validly issued and fully paid and nonassessable.
We are members of the Bar of the State of New York and the
foregoing opinion is limited to the laws of the State of New York, the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
We hereby consent to the filing of this opinion as an Exhibit
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the Prospectus that is included in the Registration
Statement.
The opinions expressed herein are solely for your benefit and
may not be relied upon for any purpose except as specifically provided for
herein, or relied upon by any other person, firm or corporation for any
purpose, without our prior written consent.
Very truly yours,
/s/ Davis Polk & Wardwell
-------------------------
Exhibit 8.1
[Letterhead of Christy & Viener]
May 8, 1998
Lancit Media Entertainment, Ltd.
601 West 50th Street
New York, NY 10019
Reorganization Involving RCN Corporation
("RCN"), LME Acquisition Corporation
("Acquisition"), and Lancit Media
Entertainment, Ltd. ("Lancit")
Ladies and Gentlemen:
We have been requested to render this opinion regarding certain matters
of U.S. federal income tax law in connection with the proposed merger in which
Acquisition will be merged with and into Lancit, with Lancit being a surviving
corporation and a wholly owned subsidiary of RCN (the "Merger"). Pursuant to
the Agreement and Plan of Merger dated as of February 27, 1998 between RCN,
Acquisition and Lancit, as amended (the "Merger Agreement"), all shares of
Lancit common stock ("Lancit Common Stock") will be converted into a right to
receive a fraction of a voting common share of RCN based upon the average
closing prices for such RCN stock for the five trading day period ending one
trading day prior to the effective time of the Merger.
You have asked our opinion regarding the qualification of the Merger as a
reorganization within the meaning of section 368(a) of the Internal Revenue Code
of 1986, as amended ("Code"). In rendering the opinion expressed below, we have
examined the Merger Agreement, the Proxy Statement-Prospectus dated May 8, 1998
("Proxy Statement-Prospectus"), which is included in the Registration Statement
on Form S-4 filed on the date hereof with the Securities and Exchange
Commission, and such other documents related to the Merger as we have deemed
relevant and necessary.
Such opinion is subject, among other things, to the following conditions
and representations:
1. All original documents (including signatures) submitted to us are
authentic, all documents submitted to us as copies conform to the
original documents (which are authentic), and there has been due
execution and delivery of all documents where due execution and
delivery are prerequisites to the effectiveness thereof;
2. The documents we have reviewed are valid and enforceable under
applicable law;
3. The Merger will be effective under the applicable state law; and
4. RCN, Acquisition and Lancit will report the Merger for U.S. federal
income tax purposes in a manner consistent with the opinion set forth
below. Furthermore, we have relied on the attached Certificates of
Officers of Lancit and RCN, respectively, which set forth certain
factual representations, without undertaking any independent
verification of such facts.
Based upon the foregoing documents, assumptions, conditions,
representations, and information, and subject to the further qualifications
set forth below, we are of the opinion that the Merger will qualify as a
reorganization within the meaning of section 368(a) of the Code, that RCN,
Acquisition and Lancit each will be a party to the reorganization within the
meaning of section 368(b) of the Code, and that RCN, Acquisition and Lancit
will not recognize any gain or loss as a result of the Merger.
Our opinion set forth above is based on provisions of the Code, Treasury
Regulations, Internal Revenue Service ("IRS") rulings and pronouncements, and
judicial decisions currently applicable to the Merger, all of which are
subject to change at any time, possibly with retroactive effect. This opinion
does not address any state, local, or foreign tax consequences of the Merger.
In addition to your request for our opinion on this specific matter of
U.S. federal income tax law, you have asked us to review the discussion of U.S.
federal income tax issues contained in the Proxy Statement-Prospectus. We have
reviewed the discussion entitled "Certain Federal Income Tax Consequences"
contained in the Proxy Statement-Prospectus and believe that such information
fairly presents the current U.S. federal income tax law applicable to the Merger
and the material U.S. federal income tax consequences to RCN, Acquisition,
Lancit and the shareholders of Lancit as a result of the Merger. We hereby
consent to the filing of this opinion letter as an exhibit to the Proxy
Statement-Prospectus and to the use of our name in the Proxy
Statement-Prospectus under the caption "The Merger--Certain Federal Income Tax
Consequences."
No ruling has been or will be requested from the IRS concerning the U.S.
federal income tax consequences of the Merger. This opinion of counsel
represents only our best legal judgment and has no binding effect or official
status of any kind, and no assurance can be given that contrary positions
could not be taken by the IRS or that a court considering the issues would not
hold otherwise.
We do not undertake any obligation to update or supplement this letter
to reflect any facts or circumstances which may hereafter come to our
attention with respect to the opinion expressed above, including any changes
in applicable law which may hereafter occur.
Very truly yours,
CHRISTY & VIENER
Exhibit 10.15
AGREEMENT
Reference is made to the Employment Agreement dated as of March 31,
1997, as amended (the "Employment Agreement") between Susan Solomon
("Executive") and Lancit Media Entertainment, Ltd. ("Lancit").
Reference is made to the Agreement and Plan of Merger ("Merger
Agreement") between RCN Corporation ("RCN"), LME Acquisition Corporation
("LME") and Lancit.
Executive, Lancit, RCN, and LME (collectively, the "Parties") agree
that, contingent on the occurrence of the Effective Time, as defined in the
Merger Agreement, the following shall occur:
1. Effective upon the Effective Time, and subject to Item 2 hereof,
the Employment Agreement shall be terminated and the rights,
duties, and obligations of the Parties thereunder shall be
cancelled;
2. The Parties acknowledge that, upon and subject to the occurrence
of the Effective Time, Executive is entitled to receive $750,000
in cash pursuant to the terms of her Employment Agreement. RCN
agrees to grant and Executive agrees to accept, in lieu of such
cash amount and in complete satisfaction of any and all rights
under her Employment Agreement, as of the Effective Time, a grant
of shares of common stock of RCN registered under the Form S-8
covering RCN's 1997 Equity Incentive Plan and having a fair market
value based on RCN's closing price the day before the Effective
Time equal to $750,000 (the "Shares"). Immediately following the
Effective Time, RCN shall deliver to Executive the stock
certificates for the Shares which shall be freely transferable
subject to Rule 144, if applicable, and Rule 145 of the Securities
Act of 1933 and subject to no other terms and conditions.
Executive acknowledges that she is entering into this Agreement as an
inducement for RCN to enter into the Merger Agreement and that in the event
the Merger fails to occur, this Agreement shall be null and void.
Dated:
------------------ -----------------------------------------------
SUSAN SOLOMON
RCN CORPORATION
Dated: By:
------------------ --------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
LANCIT MEDIA ENTERTAINMENT, LTD.
Dated: By:
------------------ --------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
LME ACQUISITION CORPORATION
Dated: By:
------------------ --------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
Exhibit 10.16
Waiver
Reference is made to the Employment Agreement ("Employment Agreement")
dated as of October 1, 1995 between Cecily Truett (the "Executive") and Lancit
Media Entertainment ("Lancit").
Reference is made to the Agreement and Plan of Merger ("Merger
Agreement") among RCN Corporation ("RCN"), LME Acquisition Corporation ("LME")
and Lancit.
Pursuant to the Merger Agreement, LME, a wholly owned subsidiary of RCN,
will be merged with and into Lancit whereupon Lancit will become a wholly
owned subsidiary of RCN (the "Merger");
In consideration of RCN entering the Merger Agreement, (i) the
Executive hereby agrees that she will not exercise her right to terminate the
Employment Agreement under Paragraph 8.F(2) thereof as a result of a Change of
Control (defined in the Employment Agreement) arising pursuant to the Merger
or any other transactions contemplated by the Merger Agreement, including,
without limitation, approval of the Merger by Lancit's shareholders, and (ii)
Executive hereby waives any right to terminate the Employment Agreement under
Paragraph 8.F(2) by reason of any such Change of Control arising pursuant to
the Merger or any other transactions contemplated by the Merger Agreement,
including, without limitation, approval of the Merger by Lancit's
shareholders. For avoidance of doubt, Paragraph 8.F(3) will not apply to
termination of the Executive's employment by Executive by reason of any such
Change of Control arising pursuant to the Merger or any other transactions
contemplated by the Merger Agreement, including, without limitation, approval
of the Merger by Lancit's shareholders.
As modified hereby, the Employment Agreement remains in full force and
effect. This Waiver shall terminate in the event the Merger Agreement is
terminated pursuant to Section 7.01 thereof or the Merger is otherwise
abandoned.
-----------------------------------
CECILY TRUETT
RCN CORPORATION
By:
--------------------------------
Name:
Title:
LANCIT MEDIA ENTERTAINMENT, LTD
By:
--------------------------------
Name:
Title:
Exhibit 10.17
Waiver
Reference is made to the Employment Agreement ("Employment Agreement")
dated as of October 1, 1995 between Laurence A. Lancit (the "Executive") and
Lancit Media Entertainment ("Lancit").
Reference is made to the Agreement and Plan of Merger ("Merger
Agreement") among RCN Corporation ("RCN"), LME Acquisition Corporation ("LME")
and Lancit.
Pursuant to the Merger Agreement, LME, a wholly owned subsidiary of RCN,
will be merged with and into Lancit whereupon Lancit will become a wholly
owned subsidiary of RCN (the "Merger");
In consideration of RCN entering the Merger Agreement, (i) the
Executive hereby agrees that he will not exercise his right to terminate the
Employment Agreement under Paragraph 8.F(2) thereof as a result of a Change of
Control (defined in the Employment Agreement) arising pursuant to the Merger
or any other transactions contemplated by the Merger Agreement, including,
without limitation, approval of the Merger by Lancit's shareholders, and (ii)
Executive hereby waives any right to terminate the Employment Agreement under
Paragraph 8.F(2) by reason of any such Change of Control arising pursuant to
the Merger or any other transactions contemplated by the Merger Agreement,
including, without limitation, approval of the Merger by Lancit's
shareholders. For avoidance of doubt, Paragraph 8.F(3) will not apply to
termination of the Executive's employment by Executive by reason of any such
Change of Control arising pursuant to the Merger or any other transactions
contemplated by the Merger Agreement, including, without limitation, approval
of the Merger by Lancit's shareholders.
As modified hereby, the Employment Agreement remains in full force and
effect. This Waiver shall terminate in the event the Merger Agreement is
terminated pursuant to Section 7.01 thereof or the Merger is otherwise
abandoned.
-----------------------------------
LAURENCE A. LANCIT
RCN CORPORATION
By:
--------------------------------
Name:
Title:
LANCIT MEDIA ENTERTAINMENT, LTD
By:
--------------------------------
Name:
Title:
Exhibit 11.2
<TABLE>
<CAPTION>
Lancit Media Entertainment, Ltd.
Exhibit 11 - Computation of Earnings Per Share
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Basic
Weighted average shares outstanding 6,634,750 6,626,750 6,634,750 6,443,952
Net effect of dilutive stock options - based
on the treasury stock method using
average market price .................... -- -- -- --
----------- ----------- ----------- -----------
Total ....................................... 6,634,750 6,626,750 6,634,750 6,443,952
=========== =========== =========== ===========
Net Loss .................................... $(1,304,572) $ (885,765) $ 2,635,753) $(1,467,914)
=========== =========== =========== ===========
Per share amount ............................ $ (0.20) $ (0.13) $ (0.40) $ (0.23)
=========== =========== =========== ===========
Diluted
Weighted average shares outstanding 6,634,750 6,634,750 6,626,750 6,634,750 6,443,952
Net effect of dilutive stock options - based
on the treasury stock method using
average market price .................... -- -- -- --
----------- ----------- ----------- -----------
Total ....................................... 6,634,750 6,626,750 6,634,750 6,443,952
=========== =========== =========== ===========
Net Loss .................................... $ (1,304,572) $(885,765) $ (2,635,753) $(1,467,914)
=========== =========== =========== ===========
Per share amount ............................ $ (0.20) $ (0.13) $ (0.40) $ (0.23)
=========== =========== =========== ===========
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of RCN Corporation
on Form S-4 and the related Prospectus, of our report dated March 13, 1998, on
our audits of the consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995. We also consent to the reference to our Firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 7, 1998
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, on the financial statements of
Erols Internet, Inc. included in the Proxy Statement of RCN Corporation that
is part of the Registration Statement (Form S-4 No. 333- ) and Prospectus
of RCN Corporation for the registration of 331,738 shares of RCN Corporation's
common stock.
/s/ Ernst & Young LLP
Vienna, Virginia
May 7, 1998
Exhibit 23.3
Exhibit 23.3
Consent of Ernst & Young LLP, Independent Auditors to Lancit
We consent to the reference to our firm under the caption
"Experts" and to the use of our reports, dated October 13, 1997, relating to the
consolidated financial statements and schedule of Lancit Media Entertainment,
Ltd. in the Registration Statement (Form S-4) of RCN Corporation for the
registration of 331,738 shares of its common stock.
/s/ ERNST & YOUNG LLP
New York, New York
May 7, 1998
Exhibit 23.4
Consent of Feldman Sherb Ehrlich & Co., P.C.
Predecessor Independent Auditors to Lancit
We consent to the reference to our firm under the caption
"Experts" and to use of our reports, each dated August 28, 1996, relating to
the consolidated financial statements and schedule of Lancit Media
Entertainment, Ltd., in the Registration Statement on Form S-4 or RCN
Corporation to be filed on or about May 8, 1998.
/s/ Feldman Sherb Ehrlich & Co., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
May 8, 1998
Exhibit 23.5
Consent of Schroder & Co. Inc., Financial Advisor to Lancit
We consent to the use of our opinions, dated February 27, 1998
and May 7, 1998, to the Board of Directors of Lancit Media Entertainment, Ltd.
included as Annex III to the Proxy Statement--Prospectus which forms a part of
the Registration Statement on Form S-4 of RCN Corporation and the references to
such opinions and to our firm in such Proxy Statement--Prospectus, including the
references under the captions "Summary--Opinion of Financial Advisor", "The
Merger--Opinion of Financial Advisor", "--Background of the Merger",
and "--Reasons for the Merger--Lancit".
In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as
amended, or the rules and regulation of the Securities and Exchange Commission
thereunder.
New York, New York
May 7, 1998
By: /s/ Ivan L. Lustig
-------------------------
Ivan L. Lustig
Managing Director
Exhibit 99.1
LANCIT MEDIA ENTERTAINMENT, LTD.
PROXY--Special Meeting of Shareholders--June 11, 1998
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, a shareholder of LANCIT MEDIA ENTERTAINMENT, LTD., a
New York corporation ("Lancit"), does hereby appoint SUSAN L. SOLOMON,
LAURENCE A. LANCIT and CECILY TRUETT, and each of them, the true and lawful
attorneys and proxies, with full power of substitution, for and in the name,
place and stead of the undersigned, to vote, as designated below, all of the
shares of stock of Lancit which the undersigned would be entitled to vote if
personally present at the Special Meeting of Shareholders of Lancit to be held
at Lancit's principal executive offices at 601 West 50th Street, 6th Floor,
New York, New York 10019, on June 11, 1998, at 3:30 p.m., local time, and at
any adjournment or adjournments thereof.
[X] Please mark
votes as in
this example
UNLESS OTHERWISE DIRECTED, THIS PROXY WILL BE VOTED IN ACCORDANCE
WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS.
1. The Merger Agreement: To approve and adopt the Agreement and Plan of
Merger, dated as of February 27, 1998, as amended on April 6, 1998,
among RCN Corporation, LME Acquisition Corporation ("LME") and Lancit,
and the transactions contemplated thereby, including the merger of LME
with and into Lancit. Please check the appropriate box to indicate the
manner in which you direct the proxies to vote your shares:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL AND APOPTION.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To vote with discretionary authority with respect to all other matters
which may come before the meeting.
The undersigned hereby revokes any proxy or proxies heretofore given and
ratifies and confirms all that the proxies appointed hereby, or either one of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof. All of said proxies or their substitutes who shall be present and act
at the meeting, or if only one or two are present and acts, then that one or
two, shall have and may exercise all of the powers hereby granted to such
proxies. The undersigned hereby acknowledges receipt of a copy of the Notice of
Special Meeting, dated May 12, 1998, and the Proxy Statement--Prospectus, dated
May 8, 1998.
[ ] MARK HERE FOR ADDRESS CHANGE AND INDICATE CHANGE:
Signature: Date
----------------------------------- -----------------------
Signature: Date
----------------------------------- -----------------------
NOTE: Your signature should appear the same as your name appears hereon. In
signing as attorney, executor, administrator, trustee or guardian,
please indicate the capacity in which signing. When signing as joint
tenants, all parties in the joint tenancy must sign. When a proxy is
given by a corporation, it should be signed by an authorized officer and
the corporate seal affixed. No postage is required if returned in the
enclosed envelope and mailed in the United States.
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
Exhibit 99.2
LETTER OF TRANSMITTAL
To Accompany Certificates Of
COMMON STOCK, PAR VALUE $0.001 PER SHARE
of
LANCIT MEDIA ENTERTAINMENT, LTD.
(Please read carefully this Letter of Transmittal and the Instructions below)
FIRST UNION NATIONAL BANK
EXCHANGE AGENT
<TABLE>
<S> <C>
By first class or registered mail or by hand delivery: By overnight courier:
First Union National Bank First Union National Bank
Attn: Corporate Trust Operations/Reorg Services Attn: Corporate Trust Operations/Reorg Services
1525 West W.T. Harris Blvd, 3C3 1525 West W.T. Harris Blvd, 3C3
Charlotte, North Carolina 28288-1153 Charlotte, North Carolina 28262
</TABLE>
(This Letter of Transmittal and accompanying certificate(s) must be received by
the Exchange Agent at the above address in order to expedite the exchange)
Ladies and Gentlemen:
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement")
among Lancit Media Entertainment, Ltd. ("Lancit"), RCN Corporation ("RCN") and
LME Acquisition Corporation, a wholly owned subsidiary of RCN ("LME"), dated
as of February 27, 1998, as amended on April 6, 1998, each outstanding share
of common stock, par value $0.001 per share (the "Lancit Common Stock"), of
Lancit, has been converted into the right to receive
shares of common stock, par value $1.00 per share (the "RCN Common Stock"), of
RCN. Pursuant to the Merger Agreement, no fractional shares of RCN Common
Stock will be issued in the merger (the "Merger") of LME with and into Lancit,
with Lancit as the surviving corporation. Upon proper surrender of their
stock certificates, former Lancit stockholders will be entitled to receive (i)
a certificate representing the number of whole shares of RCN Common Stock to
which they are entitled and (ii) a check in the amount of cash due
in lieu of any fractional shares to which they would otherwise be entitled.
No dividends on RCN Common Stock issued in the Merger will be paid to
Lancit stockholders until their certificates are properly surrendered. After
surrendering Lancit stock certificates, the record holder of RCN Common Stock
issued in exchange for the surrendered Lancit certificates will be paid,
without interest, the amount of dividends, if any, then payable, with a record
date after the effective time of the Merger, on the whole shares of RCN Common
Stock, less the amount of any applicable withholding taxes.
The undersigned surrenders herewith the certificate(s) representing
shares of Lancit Common Stock for the purpose of exchanging such certificates
for a newly issued certificate representing RCN Common Stock for a number of
shares equal to multiplied by the former number of shares of Lancit
Common Stock in accordance with the terms of the Merger Agreement approved by
stockholders. The shares of Lancit Common Stock are referred to as the
"Shares." By signing and delivering this Letter of Transmittal, the
undersigned acknowledges that the undersigned has received and read the Proxy
Statement--Prospectus dated May 8, 1998.
<TABLE>
<CAPTION>
DESCRIPTION OF CERTIFICATES SUBMITTED
(If the space provided below is inadequate, the Certificate numbers and number
of Shares should be listed on a separate schedule, signed and affixed hereto)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name and address of Registered Holder Certificate Number of Shares
Number of Lancit Common Stock
Represented by
Certificate
----------------------- -------------------------
[ ] Address Change
[ ] Certificates are lost Total Shares:
- -------------------------------------------------------------------------------------------------------------
NOTE: If the name or address indicated on the label above is not correct, please make
any necessary changes thereon.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF) AND ALL OTHER
DOCUMENTS AND INSTRUMENTS REQUIRED HEREBY SHOULD BE MAILED OR DELIVERED TO FIRST
UNION NATIONAL BANK ("EXCHANGE AGENT") AT THE ADDRESS SET FORTH ABOVE. UNLESS
AND UNTIL ANY OUTSTANDING CERTIFICATE EVIDENCING SHARES OF LANCIT COMMON STOCK
IS SURRENDERED TO EXCHANGE AGENT, NO DISTRIBUTIONS OF ANY KIND PAYABLE TO
HOLDERS OF RECORD OF SHARES OF LANCIT COMMON STOCK SHALL BE PAID TO SUCH HOLDER.
NO INTEREST WILL ACCRUE ON ANY CASH PAYMENT DUE ON UNPAID DISTRIBUTIONS.
<TABLE>
<S> <C>
- ------------------------------------------------------ ---------------------------------------------------------
SPECIAL REGISTRATION AND PAYMENT SPECIAL DELIVERY
INSTRUCTIONS INSTRUCTIONS
COMPLETE ONLY if the stock certificate COMPLETE ONLY if delivery of the stock certificate
evidencing the Lancit Common Stock is to be evidencing the Lancit Common Stock, and the check
registered, and the check for any cash payment in for any cash payment in lieu of fractional shares, is to
lieu of fractional shares is to be made payable, in a be made OTHER than to the address of the registered
name OTHER than the name(s) of the registered holder(s) appearing under "DESCRIPTION OF
holder(s) appearing under "DESCRIPTION OF CERTIFICATES SUBMITTED" or, if the box
CERTIFICATES SUBMITTED." immediately to the left is filled in, OTHER than to the
address appearing therein.
Issue certificate, make check payable and mail
them to (see Instruction 2): Mail or deliver stock certificate and check, if any, to:
Name
-------------------------------------------------
------------------------------------------------- Name
------------------------------------------------------
------------------------------------------------------
Address
----------------------------------------------
Address
---------------------------------------------- ---------------------------------------------------
(Please Print) (Please Print)
----------------------------------------------
(Signature)
(See Instruction 2)
Taxpayer Identification No.
--------------------------
- ------------------------------------------------------ ---------------------------------------------------------
</TABLE>
The undersigned hereby warrants that the undersigned has full power and
authority to submit, sell, assign and transfer the Shares evidenced by the
Certificates described above, and that the Shares are free and clear of all
liens, charges and encumbrances and not subject to any adverse claim. The
undersigned will, upon request, execute any additional documents necessary or
desirable in the opinion of RCN to complete the transfer of the Shares
evidenced by the Certificates.
All authority herein conferred shall survive the death or incapacity of the
undersigned, and all obligations of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
SIGN HERE
Dated
--------------------------- ----------------------------------------
- -------------------------------- ----------------------------------------
City and State where signed (Signature(s) of Shareholder(s) or Agent)
- --------------------------------
Daytime Telephone Number
(including area code)
Signature Guarantee
(if required -- see Instructions 2&4)
Authorized Signature
----------------------
Name of Firm
------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE Social Security Number
FORM W-9 YOUR TIN IN THE BOX AT or
DEPARTMENT OF THE TREASURY THE RIGHT AND CERTIFY Employer Identification Number
INTERNAL REVENUE SERVICE BY SIGNING AND DATING
BELOW.
--------------------------------
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN")
PART 2--Certificates--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a
number to be issued to me); and
(2) I am not subject to backup withholding because either (a) I am exempt from backup withholding, (b) I have
not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified by the
IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on
your tax return. However, if after being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS that you are no longer subject to backup withholding, do not cross out
such item (2).
SIGNATURE: DATE: , 1998
--------------------- ----------------------
NAME
-------------------------------------------------------------- PART 3 --
Awaiting TIN [ ]
ADDRESS
-----------------------------------------------------------
- ------------------------------------------------------------------
(City, State and Zip Code)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY, IN CERTAIN CIRCUMSTANCES,
RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF SUBSTITUTE FORM W-9.
<TABLE>
<S> <C>
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and
either (1) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or (2) I intend to mail or deliver an
application in the near future. I understand that if I do not provide a taxpayer identification number by the time
of payment, 31% of all reportable payments made to me will be withheld.
Signature Date , 1998
---------------------------------------------------------------------------- -------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
INSTRUCTIONS:
1. Completion and Delivery of Letter of Transmittal.
This Letter of Transmittal or a photocopy or facsimile hereof should be
properly filled in, dated and signed, and delivered or sent with your
Lancit Common Stock certificate(s) to the Exchange Agent at the address
listed on the front hereof. The method of submission is at your option and
risk, but if sent by mail, registered mail, with the return receipt
requested, properly insured, is recommended. A return envelope addressed
to the Exchange Agent is enclosed for your convenience. Additional copies
of this Letter of Transmittal may be obtained from the Exchange Agent at
the address referred to above.
To receive shares of RCN Common Stock and cash in lieu of fractional shares
of RCN Common Stock in exchange for Lancit Common Stock, each holder of
Lancit Common Stock must deliver to the Exchange Agent this Letter of
Transmittal, duly completed, and certificate(s) representing shares of
Lancit Common Stock. Holders who do not execute and return this Letter of
Transmittal, together with their Lancit Common Stock certificates, will not
receive any shares of RCN Common Stock or any check in lieu of fractional
shares of RCN Common Stock
2. Signatures.
The signature (or signatures, in the case of certificates issued in the
names of two or more joint holders) on the Letter of Transmittal must
correspond exactly with the names appearing on the face of the Lancit
Common Stock certificate(s) surrendered unless the shares represented
thereby have been transferred by the registered holder, in which event the
Letter of Transmittal should be signed as directed in Instruction 4 below.
3. Issuance of RCN Common Stock Certificate in the Same Name.
If the RCN Common Stock certificate is to be issued in the name of the
record holder as inscribed on the surrendered certificate(s), the
surrendered certificate(s) need not be endorsed. For a correction in name
or changes in name not involving changes in ownership, see Instruction
4(a)(iv).
4. Issuance of Certificate in a Different Name.
(a) General Guidelines.
If the RCN Common Stock certificate is to be issued in a name different
from the name of the record holder as inscribed on the surrendered
certificate(s), please be guided by the following:
(i) Endorsement and Guarantee. The signature of the record holder on
the endorsement(s) or stock power(s) must correspond with the name as
written upon the face of the certificate(s), or upon the assignment(s)
thereof, in every particular, without alteration, enlargements, or any
change whatsoever, and must be guaranteed by a participant in a signature
guarantee program recognized by The Securities Transfer Association, Inc.
(each, an "Eligible Guarantor").
(ii) Transferee's Signature. If a certificate has been properly
transferred and the transfer has not yet been recorded on the books of the
Lancit, this Letter of Transmittal must be signed by the transferee or by
his agent in exactly the same form as the name of the last transferee
indicated on the instrument of transfer attached to or made a part of the
certificate(s). It should not be signed by the transferor. The signature
of such transferee or agent on the Letter of Transmittal must be guaranteed
by an Eligible Guarantor as defined in Instruction 4(a)(i).
(iii) Correction of or Change in Name. For a correction of name or for
a change in name which does not involve a change of ownership, proceed as
follows: For a change in name by marriage, etc., the surrendered
certificate(s) should be endorsed, e.g., "Mary Doe, now by marriage Mrs.
Mary Jones," with the signature guaranteed by an Eligible Guarantor as
described in Instruction 4(a)(i). For a correction in name, the
surrendered certificate(s) should be endorsed, e.g., "James E. Brown,
incorrectly inscribed as James S. Brown," with the signature guaranteed by
an Eligible Guarantor as described in Instruction 4(a)(i).
(b) Federal Tax Withholding.
Under federal income tax law, RCN or other paying agent is required to file
a report with the Internal Revenue Service ("IRS") disclosing any payments
made to a stockholder. Therefore, if the RCN Common Stock certificate is
to be issued in a name other than the record holder of the surrendered
stock certificate(s), such newly named stockholder (as named in Box B) must
provide the Exchange Agent with a correct Taxpayer Identification Number
("TIN") on the Substitute Form W-9 set forth on the Letter of Transmittal.
If the Exchange Agent is not provided with the correct TIN, such newly
named stockholder may be subject to a $50 penalty by the IRS and any
payments made to such newly named stockholder in the future with respect
to the RCN Common Stock may be subject to 31% backup withholding.
5. Substitute Form W-9 and Form W-8.
Under U.S. Federal income tax law, a stockholder a portion of whose shares
are sold as described in Instruction 8 below is required to provide the
Exchange Agent with such stockholder's correct TIN on Substitute Form W-9
above. If the Exchange Agent is not provided with the correct TIN, the
Internal Revenue Service may subject the stockholder or other payee to a
$50 penalty. In addition, payments that are made to such stockholder or
other payee may be subject to 31% backup withholding.
Certain stockholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, the stockholder must submit a Form W-8, signed under
penalties of perjury, attesting to that individual's exempt status. A Form
W-8 may be obtained from the Exchange Agent. See the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9"
for more instructions.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any such payments made to the stockholder or other payee. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the IRS.
6. Supporting Evidence.
In case any Letter of Transmittal, certificate endorsement or stock power
is executed by an agent, attorney, administrator, executor, guardian,
trustee or other party acting in a fiduciary or representative capacity, or
by an officer of a corporation on behalf of the corporation, there should
be submitted, with the Letter of Transmittal, surrendered certificate(s)
and stock power(s), documentary evidence of appointment and authority to
act in such capacity (including court orders, inheritance and estate tax
waivers, and corporate resolutions where necessary) as well as evidence of
the authority of the person making such execution to assign, sell or
transfer the shares. Such documentary evidence of authority must be in
form satisfactory to the Exchange Agent.
7. Lost or Destroyed Certificate(s).
If any Lancit Common Stock certificate has been lost, stolen or destroyed,
immediately notify the Exchange Agent, in writing, at the address in
Instruction 9. Your letter should be forwarded along with your properly
completed Letter of Transmittal and any other certificates you may have in
your possession. Once written notification of the loss is received by the
Exchange Agent, an affidavit of loss and indemnity agreement, along with
instructions which include the cost of replacing the certificate, will be
sent to the shareholder. The exchange cannot be processed until any
missing certificate has been replaced.
8. Fractional Shares.
No RCN Common Stock certificate representing fractional shares will be
issued. All fractional shares will be aggregated and sold by the Exchange
Agent. The proceeds of the sale will be distributed to you or the
person(s) designated as the recipient on the Letter of Transmittal.
9. Miscellaneous.
A single RCN Common Stock certificate will be issued unless written
instructions to the contrary are attached hereto. All inquiries with
respect to the exchange should be made directly to the Exchange Agent,
First Union National Bank, at Corporate Trust Operations/Reorg Services,
1525 West W.T. Harris Blvd., 3C3, Charlotte, NC 28288-1153, telephone number
1-800-829-8432. Questions may also be directed to Valerie Haertel,
Director of Investor Relations, RCN Corporation, by phone at (609) 734-3816.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payer
- -- Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Give the Give the
For this type of account SOCIAL SECURITY number of: For this type of account EMPLOYER IDENTIFICATION
number of:
1. An individual's account The individual 6. A valid trust, estate, or Legal entity (Do not furnish
pension trust the trust identifying
number of the personal
representative or trustee
unless the
legal entity itself is not
designated in the account
title).(4)
2. Two or more individuals The actual owner of the account 7. Corporate account The corporation
(joint account) or, if combined funds, the first
individual on the account(1)
3. Custodian account of a minor The minor(2) 8. Association, club, religious, The organization
(Uniform Gift to Minors Act) charitable, educational or
other tax-exempt organization
account
4. a. The usual revocable The grantor-trustee(1) 9. Partnership account The partnership
savings trust account
(grantor is also trustee)
b. So-called trust account The actual owner(1) 10. A broker or registered The broker or nominee
that is not a legal or nominee
valid trust under State
law
5. Sole proprietorship account The owner(3) 11. Account with the Department The public entity
of Agriculture in the name of
a public entity (such as a
State or local government,
school district or prison)
that receives agricultural
program payments
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</TABLE>
1 List first and circle the name of the person whose number you furnish.
2 Circle the minor's name and furnish the minor's social security number.
3 You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
employer identification number.
4 List first and circle the name of the legal trust, estate, or pension trust.
Note: if no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
How to Obtain a TIN
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments by the
Payer include the following:
o A corporation.
o A financial institution.
o An organization exempt from tax under section 501(a), or an individual
retirement plan.
o The United States or any agency or instrumentality thereof.
o A State, the District of Columbia, a possession of the United States or any
political subdivision or instrumentality thereof.
o A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
o An international organization or any agency or instrumentality thereof.
o A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under section 584(a).
o An entity registered at all times under the Investment Company Act of 1940.
o A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
o Payments to nonresident aliens subject to withholding under section 1441.
o Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
o Payments of patronage dividends where the amount received is not paid in
money.
o Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
o Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payer's trade of business and you have
not provided your correct taxpayer identification number to the payer.
o Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
o Payments described in section 6049(b)(5) to nonresident aliens.
o Payments on tax-free covenant bonds under section 1451.
o Payments made by certain foreign organizations.
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous backup withholding. FURNISH YOUR TAXPAYER IDENTIFICATION
NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM IN PART II, SIGN AND DATE THE
FORM, AND RETURN IT TO THE PAYER.
Certain payments, other than interest, dividends and patronage dividends
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045 and 6050A.
Privacy Act Notice. -- Section 6109 requires most recipients of dividend,
interest or other payments to give their correct taxpayer identification
numbers to payers who must report the payments to the IRS. The IRS uses the
numbers for identification purposes and to help verify the accuracy of tax
returns. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend and certain other payments to a payee who does not furnish
a taxpayer identification number to a payer. Certain penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number. -- If you
fail to furnish your correct taxpayer identification number to a payer, you
are subject to a penalty of $50 for each such failure unless your failure is
due to reasonable cause and not to willful neglect.
(2) Civil Penalty for False Information With Respect to Withholding. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty for Falsifying Information. -- Wilfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
Exhibit 99.3
RCN Letterhead
, 1998
Dear Stockholder:
I am pleased to inform you that Lancit Media Entertainment, Ltd. ("Lancit")
became a wholly owned subsidiary of RCN Corporation ("RCN") on ,
1998. On behalf of RCN's Board of Directors, I cordially welcome you as a
stockholder of RCN.
Each outstanding share of Lancit Common Stock has been converted into the
right to receive, and has become exchangeable for, shares of RCN Common
Stock. Because fractional shares will not be issued in connection with the
exchange, you are entitled to receive, in lieu of any fractional share (after
aggregating all RCN Common Stock to be received by you in respect of the
shares of Lancit Common Stock that you own), a cash payment (without interest)
equal to such fraction multiplied by .
Please note that, to receive your certificate for the number of whole shares
of RCN Common Stock to which you are entitled, your Lancit certificates and
the enclosed Letter of Transmittal must be delivered to our Exchange Agent,
First Union National Bank, at the address indicated in the letter. If you
choose to send these items by U.S. Mail rather than other delivery services, we
recommend that you use registered mail, properly insured, with return receipt
requested. If you have any questions, please call First Union National Bank
at 1-800-829-8432.
Please read carefully the instructions in the Letter of Transmittal and
properly complete, date and sign that letter. We ask that you surrender your
Lancit certificates as soon as possible, since you will not receive your RCN
certificates (or your cash payment in lieu of a fractional share) until you do
so. Moreover, no dividends or other distributions can be paid to you until
your Lancit certificates have been properly surrendered. In this regard,
please note that unpaid dividends will not accrue interest.
Once again, we are pleased to welcome you as a stockholder of RCN.
Sincerely,
David C. McCourt
Chairman of the Board and
Chief Executive Officer
Enclosure
