<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of September 30, 1999.
Common Stock 76,324,222
<PAGE>
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations- for the Quarters and Nine
Months Ended September 30, 1999 and 1998
Condensed Consolidated Balance Sheets-
September 30, 1999 and December 31, 1998
Condensed Consolidated Statements of
Cash Flows- for the Nine Months Ended
September 30, 1999 and 1998
Condensed Consolidated Statement of
Changes in Shareholders' Equity - for
the Nine Months Ended September 30, 1999
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 69,622 $ 58,172 $ 203,939 $ 148,118
Costs and expenses, excluding
depreciation and amortization 102,209 74,750 283,381 182,632
Depreciation and amortization 36,133 24,146 98,948 60,976
Nonrecurring acquisition costs: In-process
technology - - - 18,293
------------ ------------ ------------ -----------
Operating (loss) (68,720) (40,724) (178,390) (113,783)
Interest income 23,729 16,424 56,222 43,232
Interest expense (44,822) (31,157) (112,285) (80,811)
Gain on the sale of subsidiary - - 8,930 -
Other (expense), net (941) (1,299) (467) (1,947)
------------ ------------ ------------ -----------
(Loss) before income taxes (90,754) (56,756) (225,990) (153,309)
(Benefit) for income taxes (1,437) (30) (3,971) (9,923)
------------ ------------ ------------ -----------
(Loss) before equity in unconsolidated
entities and minority interest (89,317) (56,726) (222,019) (143,386)
Equity in (loss) of unconsolidated entities (10,198) (2,195) (20,714) (8,169)
Minority interest in loss of
consolidated entities 7,741 4,491 19,847 11,545
------------ ------------ ------------ -----------
Net (loss) before extraordinary item (91,774) (54,430) (222,886) (140,010)
Extraordinary item: Debt prepayment costs - - (424) -
------------ ------------ ------------ -----------
Net (loss) (91,774) (54,430) (223,310) (140,010)
Preferred stock dividends and accretion
requirements 4,446 - 8,529 -
------------ ------------ ------------ -----------
Net (loss) to common shareholders $ (96,220) $ (54,430) $ (231,839) $ (140,010)
============ ============ ============ ===========
Basic and Diluted (loss) per average common share:
Net (loss) before extraordinary item $ (1.26) $ (0.84) $ (3.28) $ (2.34)
============ ============ =========== ===========
Extraordinary item: Debt prepayment costs $ - $ - $ (0.01) $ -
============ ============ =========== ===========
Net (loss) to common shareholders $ (1.26) $ (0.84) $ (3.29) $ (2.34)
============ ============ =========== ===========
Weighted average shares outstanding 76,184,604 65,090,284 70,416,096 59,905,854
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 181,058 $ 120,126
Short-term investments 1,411,445 892,448
Accounts receivable from related parties 8,185 6,919
Accounts receivable, net of reserve for
doubtful accounts of $11,217 at September 30,
1999 and $5,766 at December 31, 1998 42,004 29,988
Material and supply inventory, at average cost 11,858 3,870
Prepayments and other 25,383 15,368
Deferred income taxes 793 712
Investments restricted for debt service 23,589 23,437
-------------- -------------
Total current assets 1,704,315 1,092,868
Property, plant and equipment, net of accumulated
depreciation of $206,658 at September 30, 1999 and
$153,304 at December 31, 1998 736,096 448,375
Investments restricted for debt service 10,531 19,869
Investments 192,886 129,529
Intangible assets, net of accumulated amortization
of $138,287 at September 30, 1999 and $97,313 at
December 31, 1998 151,741 169,718
Deferred charges and other assets 58,710 47,256
-------------- -------------
Total assets $ 2,854,279 $ 1,907,615
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 385 $ 4,097
Accounts payable 66,081 65,623
Accounts payable to related parties 11,027 7,153
Advance billings and customer deposits 16,324 21,679
Accrued interest 17,346 5,267
Accrued telephony cost of sales 21,858 12,000
Accrued expenses 59,511 62,250
-------------- -------------
Total current liabilities 192,532 178,069
Long-term debt 1,743,186 1,263,036
Deferred income taxes - 3,281
Other deferred credits 23,070 14,667
Minority interest 128,829 77,116
Commitments and contingencies
Preferred stock, par value $1 per share: Authorized
25,000,000 shares: Issued and outstanding
258,529 at September 30,1999; Liquidation Preference
$1,000 per share 248,807 -
Common shareholders' equity:
Common stock, par value $1 per share: Authorized
200,000,000 shares: Issued and outstanding
76,886,221 at September 30, 1999 and 65,477,493
December 31, 1998 76,886 65,477
Class B Common stock, par value $1 per share:
Authorized 400,000,000 shares: - -
Additional paid-in capital 914,447 539,770
Cumulative translation adjustments (3,001) (3,055)
Unrealized depreciation / appreciation on investments (6,689) 1,113
Treasury stock, 562,000 shares at cost at
September 30, 1999 and 557,000 shares at cost
December 31, 1998 (9,391) (9,301)
Deficit (454,397) (222,558)
-------------- -------------
Total common shareholders' equity 517,855 371,446
-------------- -------------
Total liabilities and shareholders' equity $ 2,854,279 $ 1,907,615
============== =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (89,358) $ 28,046
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (339,726) (175,657)
Investment in unconsolidated joint venture (9,455) (12,500)
Purchase of short-term investments (2,402,867) (387,804)
Sales and maturities of short-term investments 1,887,908 135,463
Acquisitions & other investments (55,137) (46,244)
Proceeds from the sale of subsidiary 23,711 -
Purchase of Preferred Stock of Intertainer, Inc (1,500) -
Other (3,198) 8,729
-------------- --------------
Net cash (used in) investing activities (898,764) (478,013)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 500,000 502,587
Redemption of long-term debt & capital lease obligation (100,691) (1,118)
Proceeds from the issuance of common stock 344,342 112,836
Proceeds from the issuance of preferred stock 239,897 -
Purchase of treasury stock (90) (4,449)
Payments made for debt financing costs (31,781) (9,851)
Contribution to minority interest partner (122) (108)
Contribution from minority interest partner 82,320 53,998
Interest paid on Senior Notes 11,250 11,125
Proceeds from the exercise of stock options 3,929 1,854
-------------- --------------
Net cash provided by financing activities 1,049,054 666,874
-------------- --------------
Net increase in cash and temporary cash investments 60,932 216,907
Cash and temporary cash investments at beginning of year 120,126 222,910
-------------- --------------
Cash and temporary cash investments at September 30 $ 181,058 $ 439,817
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 96,516 $ 73,355
============== ==============
Income taxes $ 505 $ 897
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in
Stock Stock Capital Deficit
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 - 65,477 539,770 (222,558)
Net Loss 9/30/99 (231,839)
Preferred stock offering 240,278
Preferred stock dividend 8,529
Common stock offering 9,200 335,142
Stock options & warrants 1,781 21,285
Common Stock issued in
connection with acquisitions 420 18,043
Purchase of treasury
stock
Unrealized depreciation
on investments
Cumulative translation
adjustments
Other 8 207
-------- --------- ---------- ---------
Balance, September 30, 1999 $248,807 $ 76,886 $ 914,447 $(454,397)
======== ========= ========== =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Depreciation/
Cumulative Appreciation Total
Treasury Translation on Shareholders'
Stock Adjustment Investments Equity
-------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 (9,301) (3,055) 1,113 371,446
Net Loss 9/30/99 (231,839)
Preferred stock offering 240,278
Preferred stock dividend 8,529
Common stock offering 344,342
Stock options & warrants 23,066
Common Stock issued in
connection with acquisitions 18,463
Purchase of treasury
stock (90) (90)
Unrealized depreciation
on investments (7,802) (7,802)
Cumulative translation
adjustments 54 54
Other 215
-------- ----------- -------------- -------------
Balance, September 30, 1999 $ (9,391) $ (3,001) $ (6,689) $ 766,662
======== =========== ============== =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Amounts)
1. RCN Corporation (the "Company" or "RCN") provides a wide range of
telecommunications services through high speed, high capacity advanced fiber
optic networks. RCN currently offers local and long distance telephone, video
and data services, including high-speed Internet access. We provide our
services primarily to residential customers in selected markets with high
levels of population density and favorable demographics. RCN's initial
advanced fiber optic networks have been established in selected markets in the
Boston to Washington D.C. corridor and RCN has begun developing advanced fiber
optic networks in the San Francisco to San Diego corridor.
2. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
3. As of July 31, 1999, the Company executed on a pledge of an 8.96% equity
interest in Megacable made by Mazon Corporativo, S.A. de. C.V. ("Mazon") to
secure Mazon's indebtedness to the Company, which had a book value of $18,373.
As a result, the indebtedness was cancelled, and the Company currently owns a
48.96% equity interest in Megacable. The Company previously owned a 40% equity
interest in Megacable . For the quarters ended September 30, 1999 and 1998, the
Company recorded equity in the earnings of Megacable which consists of its
proportionate share of income and amortization of excess cost over equity in
net assets of $(1,197) and $(957), respectively. For the nine months ended
September 30, 1999 and 1998, the Company recorded equity in the earnings of
Megacable which consists of its proportionate share of income and amortization
of excess cost over equity in net assets of $(1,662) and $(2,008), respectively.
Summarized information for the financial position and results of operations of
Megacable, as of and for the nine months ended September 30, 1999 and 1998, is
as follows:
(In U.S. Dollars)
1999 1998
------- -------
Assets $113,031 $86,024
Liabilities 26,985 10,756
Shareholders' equity 86,046 75,268
Sales 35,100 27,938
Cost and expenses 25,364 19,684
Foreign currency transaction losses - 2,039
Net income $ 8,306 $ 7,240
For the period October 1, 1996 through December 31, 1998, the Company considered
Megacable to operate in a highly inflationary economy. Beginning January 1,
1999, the Company discontinued highly inflationary accounting for our Megacable
investment and resumed using the Mexican Peso as the functional currency. As
a result the Company's equity will be effected by the translation from the
Mexican Peso. The Company's proportionate share of such adjustments were gains
of $54 for the nine month period ended September 30, 1999.
<PAGE>
4. During the nine months ended September 30, 1999, approximately 2,747,571
options were granted, approximately 670,458 were exercised yielding cash
proceeds of $3,929 and approximately 796,498 options were canceled. At September
30, 1999, there are approximately 10,132,757 options outstanding at exercise
prices ranging from $1.30 to $48.50 under RCN's 1997 Plan.
5. Basic earnings per share is computed based on net (loss) after preferred
stock dividend and accretion requirements divided by the weighted average
number of shares of common stock outstanding during the period.
Diluted earnings per share is computed based on net (loss) after preferred
stock dividend and accretion requirements 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 preferred stock and stock options during the
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of shares of preferred
stock and stock options which would have been assumed to be converted in the
quarter and nine months ended September 30, 1999 and have a dilutive effect if
the Company had income from continuing operations is 11,989,675 and 9,308,844,
respectively. The number of stock options which would have been assumed to
be converted in the quarter and nine months ended September 30, 1998 and have
a dilutive effect if the Company had income from continuing operations is
2,851,159 and 3,595,147, respectively.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net (loss) from continuing operations $ (96,220) $ (54,430) $ (231,415) $ (140,010)
Extraordinary item: Debt prepayment costs - - (424) -
---------- ----------- ---------- -----------
Net (loss) to common shareholders $ (96,220) $ (54,430) $ (231,839) $ (140,010)
Basic earnings per average common share:
Weighted average shares outstanding 76,184,604 65,090,284 70,416,096 59,905,854
(Loss) from continuing operations $ (1.26) $ (0.84) $ (3.28) $ (2.34)
Extraordinary item: Debt prepayment costs $ - $ - $ (0.01) $ -
Net (loss) to common shareholders $ (1.26) $ (0.84) $ (3.29) $ (2.34)
Diluted earnings per average common share:
Weighted average shares outstanding 76,184,604 65,090,284 70,416,096 59,905,854
Dilutive shares resulting from
preferred stock and stock options - - - -
---------- ----------- ---------- -----------
Weighted average shares and common stock
equivalents outstanding 76,184,604 65,090,284 70,416,096 59,905,854
(Loss) from continuing operations $ (1.26) $ (0.84) $ (3.28) $ (2.34)
Extraordinary item: Debt prepayment costs $ - $ - $ (0.01) $ -
Net (loss) to common shareholders $ (1.26) $ (0.84) $ (3.29) $ (2.34)
</TABLE>
<PAGE>
6. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 - "Reporting Comprehensive
Income" ("SFAS 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim
and annual periods beginning after December 15, 1997. The Company primarily
has two components of comprehensive income, cumulative translation adjustments
and unrealized appreciation on investments. The amount of other comprehensive
loss for the quarter and the nine months ended September 30, 1999 was ($93,974)
and ($231,058), respectively.
7. On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks, Muse, Tate &
Furst Equity Fund IV, L.P., ("Hicks Muse Fund IV") purchased 250,000 shares of a
new issue of RCN Series A 7% Senior Convertible Preferred Stock ("Series A
Preferred Stock"), par value $1 per share, for gross proceeds of $250,000.
The Series A Preferred Stock is cumulative and has an annual dividend rate of
7% payable quarterly in cash or additional shares of Series A Preferred Stock
and has an initial conversion price of $39.00 per share. The Series A
Preferred Stock is convertible into common stock at any time. The Series A
Preferred Stock is subject to mandatory redemption on March 31, 2014 at
$1,000 per share, plus accrued and unpaid dividends, but may be called by the
Company after four years. At September 30, 1999 the Company paid dividends in
the amount of $8,529 in the form of additional shares of Series A Preferred
Stock. At September 30, 1999, the number of common shares that would be issued
upon conversion of the Series A Preferred Stock was 6,628,957. The Company
incurred $10,000 of issuance costs in connection with the sale of the Series A
Preferred Stock.
8. On April 28, 1999, the Company acquired a 47.5% stake in JuniorNet
Corporation, a commercial-free online learning service for children.
The Company purchased the ownership stake for approximately $47 million in
cash. Concurrent with that transaction, JuniorNet purchased the Company's
Lancit Media subsidiary ("Lancit") for approximately $25 million in cash.
The Company acquired Lancit in June 1998 for approximately $0.4 million in
cash and shares of its common stock with a fair value at the time of
issuance of approximately $7.4 million
9. On May 27, 1999 the Company completed a public offering of 9,200,000 shares
of RCN common stock, par value $1 per share, with a price to the Public of
$39.00 per share. The net proceeds to the Company were approximately $344,043
after deducting issuance costs.
10. In June 1999, the Company and certain of its subsidiaries together, ( the
"Borrowers") entered into a $1,000,000 Senior Secured Credit Facility (the
"Credit Facility") with the Chase Manhattan Bank and certain other lenders.
The collateralized facilities are comprised of a $250,000 seven-year revolving
credit facility (the "Revolver"), a $250,000 seven-year multi-draw term loan
facility (the "Term Loan A") and a $500,000 eight-year term loan facility (the
"Term Loan B"). All three facilities are governed by a single credit agreement
dated as of June 3, 1999 (the "Credit Agreement").
The Revolver may be borrowed and repaid from time to time. At September 30,
1999 there were no outstanding loans under the Revolver. Up to $150,000 of
the Revolver may be used to fund working capital needs and for general
corporate purposes. The remaining $100,000 of the Revolver as well as the
term loans may be used solely to finance telecommunications assets. The
amount of the commitments under the Revolver automatically reduces to
$175,000 on June 3, 2005 and the remaining commitments are reduced quarterly
in equal installments through to maturity at June 3, 2006. The Revolver can
also be utilized for letters of credit up to a maximum of $15,000. As of
September 30, 1999 approximately $7,264 in the form of letters of credit
had been drawn under the Revolver.
The Term Loan A is available for drawing amounts until December 3, 2001, at
which time any undrawn commitments expire. At September 30, 1999 there were no
outstanding loans under the Term Loan A. Any outstanding borrowings under the
Term Loan A at September 3, 2002 will be repaid in quarterly installments
based on percentage increments of the Term Loan A that start at 3.75% per
quarter on September 3, 2002 and increase in steps to a maximum of 10% per
quarter on September 3, 2005 through to maturity at June 3, 2006.
As of September 30, 1999, $500,000 of the Term Loan B was outstanding. The Term
Loan B was fully drawn at closing. Amortization of the Term Loan B starts on
September 3, 2002 with quarterly installments of $1,000 per quarter until
September 3, 2006 when the quarterly installments increase to $121,000 per
quarter through to maturity at June 3, 2007.
The interest rate on the Credit Facility is, at the election of the
Borrowers, based on either a LIBOR or an alternate base rate option. For
the Revolver or Term Loan A borrowing, the interest rate will be LIBOR plus a
spread of up to 300 basis points or the base rate plus a spread of 200 basis
points, depending upon whether the Company's earnings before interest, income
taxes, depreciation and amortization ("EBITDA") has become positive and
thereafter upon the ratio of debt to EBITDA. In the case of the Revolver and
the Term Loan A, a fee of 125 basis points on the unused commitment accrues
until the Company's EBITDA has become positive and thereafter at up to 125
basis points depending upon the Company's utilization of the commitments.
For all Term Loan B borrowings the interest includes a spread that is fixed
at 350 basis points over the LIBOR or 250 basis points over the alternate base
rate.
The Credit Agreement contains conditions precedent to borrowing, events of
default (including change of control) and covenants customary for facilities
of this nature, including financial covenants and covenants limiting debt,
liens, investments, consolidation, mergers, acquisitions, asset sales, sale
and leaseback transactions, payments of dividends and other distributions,
making of capital expenditures and transactions with affiliates. In addition,
the Borrowers are subject to a prohibition on granting pledges, as well as
entering into certain other restrictive agreements, and subject to
certain exemptions and reinvestment rights; the Borrowers must apply 50% of
excess cash flow for each fiscal year commencing with the fiscal year ending
on December 31, 2003 and certain cash proceeds realized from certain asset
sales, certain payments under insurance policies and certain incurrences of
additional debt to repay the Credit Facility.
The Credit Facility is secured by substantially all of the assets of the
Company and its subsidiaries.
Prepayments of the eight-year term loan require payment of a fee of 2% of the
amount of such prepayment if made on or prior to June 3, 2000 and 1% of such
prepayment if made thereafter but on or prior to June 3, 2001.
The foregoing summary of certain provisions of the Credit Agreement does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the Credit Agreement.
11) In June 1999, the Company prepaid its previous eight-year term credit
facility in the amount of $100,000 with the proceeds of the Credit Facility
discussed in Note 10. The early extinguishment of the previous term credit
facility prompted the write off of the applicable unamortized debt issuance
cost resulting in an extraordinary charge of approximately ($424).
12) In July 1999, the Company acquired Brainstorm Networks, Inc.("Brainstorm"),
a leading independent Internet Service Provider ("ISP") that provides dedicated
and DSL services. The Company purchased Brainstorm for approximately $2,897
in cash and shares of its common stock with a fair value at the time
of issuance of approximately $11,619.
In August 1999, the Company acquired Direct Network Access, Ltd.("DNAI"),one
of the Bay Area's largest independent ISPs. The Company acquired DNAI for
approximately $3,454 in cash and shares of its common stock with a fair value
at the time of issuance of approximately $6,844.
Both of these transactions will be accounted for under the purchase method
of accounting. The Company does not expect these acquisitions to have a
material Proforma effect on its financial position or results of operations.
13) In July 1999, the Company entered into $250,000 of two-year interest rate
protection agreements with various counterparties. These agreements convert
$250,000 of the Company's floating rate debt under the Chase Facility to a
fixed rate of approximately 6.08%. At September 30, 1999, the Company's
reported interest expense was approximately $259 higher due to these
agreements.
14) On October 4, 1999, the Company announced that Vulcan Ventures
Incorporated ("Vulcan"), the investment organization of Paul G. Allen, has
agreed to make a $1.65 billion investment in the Registrant. The investment is
in the form of mandatorily convertible preferred stock (the "Preferred Stock"),
which will be converted into the Registrant's Common Stock, par value $1.00 per
share ("Common Stock"), no later than seven years after it is issued. Vulcan
has agreed to purchase 1,650,000 shares of the Preferred Stock. The Preferred
Stock has a liquidation preference of $1,000 per share and is convertible into
Common Stock at a price of $62 per share.
Vulcan will generally be permitted to appoint two members to the
Company's Board of Directors. The Preferred Stock will automatically be
converted to Common Stock or Class B Stock seven years after the transaction
closes, if not previously called or converted. The Preferred Stock has a
dividend rate of 7% per annum. All dividends will be paid in additional
shares of Preferred Stock.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars, Except Per Share Data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to expected capital
expenditures, capital contributions to joint ventures by joint venture partners,
and expected trends in operating losses and cash flows associated with
investments in new markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, the Company's ability
to develop and penetrate existing and new markets, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's Form 10-K.
General
RCN Corporation (the "Company" or "RCN") provides a wide range of
telecommunications services through high-speed, high-capacity advanced fiber
optic networks. RCN currently offers local and long-distance telephone, video
and data services, including high speed Internet access. We provide our
services primarily to residential customers in selected markets with high levels
of population density and favorable demographics. RCN's initial advanced fiber
optic networks have been established in selected markets in the Boston to
Washington D.C. corridor and RCN has begun developing advanced fiber optic
networks in the San Francisco to San Diego corridor.
The Company expects that the operating and net losses from its 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 operating income in the future as it develops its advanced fiber
optic network.
The Company's operating losses have resulted primarily from expenditures
associated with the development of the Company's operational infrastructure
and marketing expenses. The Company expects it will continue to experience
negative operating income while it continues to invest in its networks and until
such time as revenue growth is sufficient to fund operating expenses. The
Company expects to achieve positive operating margins over time by (i)
increasing the number of customers it serves, (ii) increasing the number of
connections per customer by cross marketing its services and promoting bundled
service options and therefore increasing the revenue per customer, (iii)
lowering the costs associated with new subscriber additions and (iv) reducing
the cost of providing services by capturing economies of scale. The Company
expects its operating revenues will increase in future periods through internal
growth of its current advanced fiber optic networks, increases in penetration,
and increases in the number of services per customer; however, the Company
also expects that operating losses will increase for some period of time as
the Company initiates network development in new markets and expands its
current networks. When the Company makes its initial investment in a new
market, the operating losses typically increase as the network and sales force
are expanded to facilitate growth. The Company's ability to generate positive
cash flow in the future will depend on the extent of capital expenditures in
current and additional markets, the ability of its joint ventures to generate
revenues and cash flow, competition in the Company's markets and any potential
adverse regulatory developments. The Company will be dependent on various
financing sources to fund its growth as well as continued losses from
operations. There can be no assurance that such funding will be available,
or available on terms acceptable to the Company. See "Liquidity and Capital
Resources."
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
For the three months ended September 30, 1999, sales increased 19.7% to $69,622
from $58,172 for the same period in 1998. Operating loss before depreciation,
and amortization was ($32,587) as compared to ($16,578) for the same period in
1998.
Sales
- -----
Voice sales include local telephone service fees consisting primarily of monthly
line charges, local toll and special features and long-distance telephone
service fees based on minutes of traffic and tariffed rates or contracted fees.
Voice sales include both resold services and traffic over the Company's own
switches. Video sales are comprised primarily of subscription fees for basic,
premium and pay-per-view cable television services; for both wireless and hybrid
fiber/coaxial cable customers in New York, New Jersey and Pennsylvania which the
Company expects to migrate to its advanced fiber networks over time as well as
advanced fiber customers, primarily in Lehigh Valley, New York City, Boston and
Washington. Data sales represent Internet access fees billed at contracted
rates. In June, the Company's management made the decision to reclassify
sales to commercial customers into their respective voice, video and data
components. Such sales had previously been recorded as commercial and other
sales. Additionally, reciprocal compensation has been reclassified from voice
sales to other sales.
Total sales increased $11,450 or 19.7% to $69,622 for the quarter ended
September 30, 1999 from $58,172 for the quarter ended September 30, 1998. The
increase was fueled by higher average service connections which increased
19.5% to approximately 920,000 for the quarter ended September 30, 1999
(including connections of the Starpower joint venture) from approximately
770,000 for the quarter ended September 30, 1998. Total service connections
increased 16.8% to approximately 944,000 at September 30, 1999 (including
connections of the Starpower joint venture) from approximately 808,000 at
September 30, 1998. The increase in average service connections resulted
principally from growth in dial-up Internet connections and growth in average
advanced fiber connections, which increased 219.3% from approximately 57,000
for the quarter ended September 30, 1998 to approximately 182,000 for the
quarter ended September 30, 1999. Total advanced fiber connections increased
134.9% from approximately 83,000 at September 30, 1998 to approximately
195,000 at September 30, 1999. Advanced fiber units passed increased 157.5% to
approximately 551,000 units at September 30, 1999 from approximately 214,000
units at September 30, 1998.
Voice sales increased $3,349, or 34.5%, to $13,068 for the quarter ended
September 30, 1999 from $9,719 for the quarter ended September 30, 1998.
Increases in higher average connections contributed approximately $4,600 of the
increase and were offset by a decrease of approximately $1,200 related to lower
average revenue per connection as a result of lower revenue per minute of use.
Average advanced fiber voice connections increased approximately 271.4% to
approximately 52,000 for the quarter ended September 30, 1999 (including
connections of the Starpower joint venture) from approximately 14,000 for the
quarter ended September 30, 1998. Average off-net voice connections decreased
approximately 5.5% to approximately 52,000 for the quarter ended September 30,
1999 from approximately 55,000 for the quarter ended September 30, 1998.
This decrease in average off-net voice connections results because during the
fourth quarter of 1998, the Company ceased marketing resale of its competitors'
local phone service to new customers. The Company believes that the effect of
this decision will be lower revenue growth than would result if such resale
continued; however, the Company also believes this decision will have a
positive impact on the Company's overall gross margin percentage and a neutral
effect on operating income (loss) before depreciation and amortization
("EBITDA").
Video sales increased $2,680, or 9.3% to $31,479 for the quarter ended
September 30, 1999 from $28,799 for the quarter ended September 30, 1998.
The increase was primarily due to approximately 27,948 additional average
video connections for the quarter ended September 30, 1999 as compared to the
quarter ended September 30, 1998. Average on-net video connections grew
74,000 or 180.5% to 115,000 for the quarter ended September 30, 1999 (including
connections of the Starpower joint venture) from 41,000 for the quarter ended
September 30, 1998. Average off-net video connections were approximately
211,000 and 165,000 for the quarters ended September 30, 1999 and 1998,
respectively. Overall higher average service connections contributed
approximately $2,200 to the increase in video sales and higher average revenue
per connection contributed the remainder.
<PAGE>
Data sales increased $3,869, or 29.1% to $17,177 for the quarter ended September
30, 1999 from $13,308 for the quarter ended September 30, 1998. The increase
was primarily due to approximately 87,000 additional average data connections
for the quarter ended September 30, 1999 as compared to the quarter ended
September 30, 1998. For the quarter ended September 30, 1999, the Company had
approximately 521,000 average off-net data connections and approximately 15,000
average advanced fiber data connections, including connections of the Starpower
joint venture. For the quarter ended September 30, 1998, the Company had
approximately 447,000 average off-net data connections and approximately 2,000
average advanced fiber data connections, including connections of the Starpower
joint venture.
During the fourth quarter of 1998, dial-up Internet access replaced resold local
phone service as the Company's initial product offering in areas in which RCN's
fiber optic network is still under construction. The Company expects that its
advanced fiber networks will eventually be extended to reach most of its dial-up
Internet connections.
Other sales increased $1,551, or 24.4% to $7,897 for the quarter ended September
30, 1999 from $6,346 for the quarter ended September 30, 1998. The increase
was due primarily to higher reciprocal compensation. Reciprocal compensation
is the fee local exchange carriers pay to terminate calls on each other's
networks. Because of the uncertainty of various regulatory rulings which
affect the collectibility of this revenue, the Company recognizes this revenue
as it is realized.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the three months ended September 30,
1999, the Company's average monthly churn rate was approximately 2.3%.
Costs and expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Direct expenses include direct costs of providing services, primarily video
programming, franchise costs, and network access fees.
Direct expenses increased $8,469, or 30.4% to $36,344 for the quarter ended
September 30, 1999 from $27,875 for the quarter ended September 30, 1998. The
increase is principally the result of higher sales, a lower margin on video
sales due to higher franchise fees and programming rates and a lower margin on
data sales due to transitional costs associated with the conversion of existing
circuits to certain technology upgrades.
Operating, selling, general and administrative expenses primarily include
customer service costs, advertising, sales, marketing, order processing,
telecommunications network maintenance and repair ("technical expenses"),
general and administrative expenses, installation and provisioning expenses
and other corporate overhead.
Operating, selling, general and administrative costs increased $18,990, or
40.5% to $65,865 for the quarter ended September 30, 1999 from $46,875 for the
quarter ended September 30, 1998.
<PAGE>
Customer service costs, including order processing, increased approximately
$324, or 3.7%, for the quarter ended September 30, 1999 as compared to the
quarter ended September 30, 1998. The increase is primarily personnel related
to support the 19.5% increase in average connections over the end of the
comparable period in 1998 and to increase the level of service.
Technical expense, including installation and provisioning, increased
approximately $5,766, or 65.2%, for the quarter ended September 30, 1999 as
compared to the quarter ended September 30, 1998. Technical expense increases of
approximately $8,300 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Rental and utilities expense, primarily
for material storage and hub sites, increased approximately $1,700. These
increases were partially offset by an increase of approximately $3,400 in
technical costs capitalized as part of the cost basis of the telecommunications
network.
Sales and marketing costs increased approximately $2,218, or 28.4%, for the
quarter ended September 30, 1999 as compared to the quarter ended September 30,
1998. The increase resulted principally from additional staff and related
commissions and benefits, to cover increases in marketable homes, to increase
penetration in the Company's existing markets and to increase the number of
services per customer.
Advertising costs increased approximately $900 for the quarter ended September
30, 1999 as compared to the quarter ended September 30, 1998. The increase
is primarily related to costs incurred to begin to develop brand awareness in
the California market.
General and administrative expenses increased approximately $9,779, or 70.8%,
for the quarter ended September 30, 1999 as compared to the quarter ended
September 30, 1998. Information technology expenses increased approximately
$4,700. The Company is in the process of developing information technology
systems which will provide a sophisticated customer care infrastructure as well
as other administrative support systems. The expense increases represent staff
additions to both support this effort and maintain the systems as well as
consulting expenses associated with the planning and analysis stages of such
systems development. The Company expects that such charges may increase in the
future periods until the planning and analysis stages of its IT systems
development projects are complete.
Higher bad debt expense of approximately $1,000 was associated with the increase
in sales. Operating taxes, primarily property taxes, increased approximately
$500 as a result of expanded operations. Approximately $4,300 of the increase
in general and administrative expense is attributable to the acquisitions in
1998 of Erols, Ultranet, Interport Communications, Inc., Javanet, Inc. and
Lancit Media. Rent expense increased approximately $1,300 primarily related to
additional space required to support the increase in headcount. The remaining
increase primarily represents additional development and support expenses
associated with expanding operations and new markets.
<PAGE>
Depreciation and amortization
- -----------------------------
Depreciation and amortization is comprised principally of depreciation related
to the Company's advanced fiber network, its wireless network, and its hybrid
fiber/coaxial cable systems; and amortization of subscriber lists, building
access rights and goodwill resulting primarily from its acquisitions in 1998.
Depreciation and amortization was $36,133 for the three month period ending
September 30, 1999 and $24,146 for the three month period ending September 30,
1998. The increase of $11,987, or 49.6% was the result of a higher depreciable
basis of plant resulting primarily from expansion of the Company's advanced
fiber network, and amortization of intangible assets arising from the
acquisitions in 1998. The cost basis of property, plant and equipment at
September 30, 1999 and 1998 was $942,754 and $503,191, respectively. The basis
of intangible assets was $290,028 and $297,763 at September 30, 1999 and 1998,
respectively.
Interest income
- ----------------
Interest income was $23,729 and $16,424 for the three month periods ended
September 30, 1999 and 1998, respectively. The increase of $7,305, or 44.5%,
results primarily from higher average cash, temporary cash investments and
short-term investments as compared to the same period in 1998. Cash, temporary
cash investments and short-term investments were approximately $1,593,000 at
September 30, 1999 and approximately $1,108,000 at September 30, 1998. During
1999, proceeds from the following increased cash, temporary cash investments and
short-term investments: (1) the issuance of 250,000 shares of a new issue of
the Company's Series A Preferred Stock, in April 1999, which yielded net
proceeds of $239,979, (2) the issuance of 9,200,000 shares of the Company's
common stock in May 1999, which yielded net proceeds of $344,043 and (3) the
$500,000 from new borrowings, partially offset by the repayment of the
Company's $100,000 term loan (Note 11). These increases were partially offset
principally by higher capital expenditures and higher working capital
requirements.
Interest expense
- ----------------
For the quarter ended September 30, 1999, interest expense was $44,822 as
compared to $31,157, for the quarter ended September 30, 1998. The increase of
$13,665 resulted primarily from higher interest and commitment fees of $12,834
relating the Company's Credit Facility which the Company entered into with Chase
Manhattan Bamk in June 1999 (Note 10), of which $500,000 of the Term Loan B was
borrowed in June 1999. The remaining increase is due to higher accretion on
the 11.125%, the 9.8%, and the 11% senior discount notes issued in October 1997,
February 1998 and June 1998, respectively, of $2,536 and to higher amortization
of debt issuance costs of approximately $1,200.
<PAGE>
Income tax
- ----------
The Company's effective income tax rate was a benefit of 1.5% for the
quarter ended September 30, 1999 and less than .1% for the quarter ended
September 30, 1998. The tax effect of the Company's cumulative losses has
exceeded the tax effect of accelerated deductions, primarily depreciation,
which the Company has taken for federal income tax purposes. As a result,
generally accepted accounting principles do not permit the recognition of such
excess losses in the financial statements. This accounting treatment does not
impact cash flows for taxes or the amounts or expiration periods of actual net
operating loss carryovers.
Minority interest
- -----------------
For the third quarters of 1999 and 1998 minority interest of $7,741 and $4,491,
respectively, primarily represents the interest of Boston Edison Company
("BECO") in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
- ---------------------------------------------
For the third quarter of 1999, equity in the loss of unconsolidated entities
primarily represents the Company's share of the losses and amortization of
excess cost over net assets of; Megacable of $1,197, Starpower of $2,816 and
JuniorNet of $6,185. For the third quarter of 1998, equity in the loss of
unconsolidated entities primarily represents the Company's share of the losses
and amortization of excess cost over net assets of Megacable of $957 and
Starpower of $1,238.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
For the nine months ended September 30, 1999, sales increased 37.7% to $203,939
from $148,118 for the same period in 1998. Operating losses before
depreciation, amortization and acquired in-process technology was $(79,442) as
compared to $(34,514) for the same period in 1998.
Sales
- -----
Total sales increased $55,821, or 37.7% to $203,939 for the nine months ended
September 30, 1999 from $148,118 for the nine months ended September 30, 1998.
The increase was fueled by higher average service connections which increased
40.8% to approximately 897,000 for the nine months ended September 30, 1999
(including connections of the Starpower joint venture) from approximately
637,000 for the nine months ended September 30, 1998. The increase in average
service connections resulted principally from growth in dial-up Internet
connections and growth in average advanced fiber connections, which increased
364.7% from approximately 34,000 for the nine months ended September 30, 1998
to approximately 158,000 for the nine months ended September 30, 1999. Total
advanced fiber connections increased 134.9% from approximately 83,000 at
September 30, 1998 to approximately 195,000 at September 30, 1999. Advanced
fiber units passed increased 157.5% to approximately 551,000 units at September
30, 1999 from approximately 214,000 units at September 30, 1998.
Voice sales increased $18,601, or 83.9%, to $40,775 for the nine months ended
September 30, 1999 from $22,174 for the nine months ended September 30, 1998.
Approximately $17,400 of the increase in voice sales is attributable to higher
average connections. Average advanced fiber voice connections increased
approximately 450.0% to approximately 44,000 for the nine months ended September
30, 1999 (including connections of the Starpower joint venture) from
approximately 8,000 for the nine months ended September 30, 1998. Average off-
net voice connections increased approximately 28.9% to approximately 58,000 for
the nine months ended September 30, 1999 from approximately 45,000 for the nine
months ended September 30, 1998. The remaining increase in voice sales is
principally attributable to higher revenue per connection.
Video sales increased $9,450, or 11.3% to $92,838 for the nine months ended
September 30, 1999 from $83,388 for the nine months ended September 30, 1998.
The increase was primarily due to approximately 27,000 additional average video
connections for the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998. Average on-net video connections grew 78,000
or 312.0% to approximately 103,000 for the nine months ended September 30, 1999
(including connections of the Starpower joint venture) from approximately 25,000
for the nine months ended September 30, 1998. Average off-net video
connections were approximately 170,000 and 221,000 for the nine months ended
September 30, 1999 and 1998, respectively. Overall higher service connections
contributed approximately $7,200 to the increase in video sales and higher
average revenue per connection principally contributed the remainder.
<PAGE>
Data sales increased $23,991, or 164.0% to $49,570 for the nine months ended
September 30, 1999 from $25,579 for the nine months ended September 30, 1998.
The increase was primarily due to approximately 184,000 additional average
data connections for the nine months ended September 30, 1999 as compared to
the nine months ended September 30, 1998. Partially accounting for the increase
in average data connections was the inclusion for a full nine months in 1999 of
the subscribers acquired from Erols and UltraNet in late February 1998, from
Interport in June of 1998 and from JavaNet in July 1998 (the "1998
Acquisitions").
For the nine months ended September 30, 1999, the Company had approximately
510,000 average off-net data connections and approximately 12,000 average
advanced fiber data connections, including connections of the Starpower joint
venture. For the nine months ended September 30, 1998, the Company had
approximately 337,000 average off-net data connections and approximately
1,000 advanced fiber data connections, including connections of the Starpower
joint venture.
Other sales increased $3,778, or 22.3% to $20,756 for the nine months ended
September 30, 1999 from $16,978 for the nine months ended September 30, 1998.
The increase was due primarily to higher reciprocal compensation. Additionally,
higher sales of Lancit, which was acquired in a later period of 1998 and sold
in April 1999 (Note 8) contributed approximately $1,000 to the increase.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the nine months ended September 30, 1999,
the Company's average monthly churn rate was approximately 2.2%.
Costs and expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Direct expenses increased $35,491, or 50.6% to $105,662 for the nine months
ended September 30, 1999 from $70,171 for the nine months ended September 30,
1998. The increase was principally the result of higher sales, a lower margin
on video sales due to higher franchise fees and programming rates, and a lower
margin on data sales due to transitional costs associated with the conversion
of existing circuits to certain technology upgrades.
Operating, selling, general and administrative costs increased $65,258, or
58.0% to $177,719 for the nine months ended September 30, 1999 from $112,461
for the nine months ended September 30, 1998.
<PAGE>
Customer services costs, including order processing, increased approximately
$5,176, or 23.8%, for the nine months ended September 30, 1999 as compared to
the nine months ended September 30, 1998. The increase is primarily personnel
related to support the 40.8% increase in average connections over the comparable
period in 1998 and to increase the level of service.
Technical expense, including installation and provisioning, increased
approximately $15,381, or 72.4%, for the nine months ended September 30, 1999
as compared to the nine months ended September 30, 1998. Technical expense
increases of approximately $20,500 were due to engineering and construction
headcount and contract labor additions made to plan and execute network
expansion and network operations control center monitoring. Rental and
utility expense, primarily for material storage and hub sites, increased
approximately $4,300, partially offset by an increase of approximately $8,000
in technical costs capitalized as part of the cost basis of the
telecommunications network.
Sales and marketing costs increased approximately $5,893, or 29.1%, for the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. The increase resulted principally from additional staff
and related commissions and benefits, to cover increases in marketable homes,
to increase penetration in the Company's existing markets and to increase the
number of services per customer.
Advertising costs increased approximately $1,700 for the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998.
The increase is primarily related to costs incurred to begin to develop brand
awareness in the California market.
General and administrative expenses increased approximately $37,138, or 127.5%,
for the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998. Information technology expenses increased
approximately $10,900. The Company is in the process of developing information
technology systems which will provide a sophisticated customer care
infrastructure as well as other administrative support systems. The expense
increases represent staff additions to both support this effort and maintain
the systems as well as consulting expenses associated with the planning and
analysis stages of such systems development. The Company expects that such
charges may increase in the future periods until the planning and analysis
stages of its IT systems development projects are complete.
Higher bad debt expense of approximately $3,600 was associated with the
increase in sales. Operating taxes, primarily property taxes, increased
approximately $1,500 as a result of expanded operations. External legal
expense increased approximately $2,100 primarily associated with the procurement
of regulatory approvals for potential future markets. Approximately $14,000 of
the increase in general and administrative expense is attributable to the 1998
Acquisitions and the acquisition of Lancit Media, which were included for the
full nine months in 1999. Rent and utility expense increased approximately
$3,000 primarily related to additional space required to support the increase
in headcount. The remaining increase primarily represents additional
development and support expenses associated with expanding operations and
new markets.
<PAGE>
Depreciation and amortization
- -----------------------------
Depreciation and amortization was $98,948 for the nine month period ending
September 30, 1999 and $60,976 for the nine month period ending September 30,
1998. The increase of $37,972, or 62.3% was the result of a higher depreciable
basis of plant resulting primarily from expansion of the Company's advanced
fiber network, and amortization of intangible assets arising from the
acquisitions in 1998. The cost basis of property, plant and equipment at
September 30, 1999 and 1998 was $942,754 and $503,191, respectively. The basis
of intangible assets was $290,028 and $297,763 at September 30, 1999 and 1998,
respectively.
Non-recurring Acquisition Costs
- -------------------------------
Acquisition costs - In-process technology was $18,293 for the six months ended
June 30, 1998. In the allocation of purchase price associated with the
acquisition of Erols and UltraNet, $13,228 and $5,065, respectively, was
determined to represent acquired in-process research & development ("IPR&D").
Specifically, four projects were identified which qualified as IPR&D by
definition of not having achieved technological feasibility and representing
technology which at the point of acquisition offered no alternative use other
than the defined project. The fair value of the IPR&D projects associated with
these acquisitions is based upon a discounted cash flow analysis modified to
represent only that portion of the project associated with completed research
and development efforts at the date of acquisition. For both the Erols and the
UltraNet acquisitions, RCN identified the R&D development projects to include-
-Cable Modem Internet access for subscribers, consisting of projects to
develop the hardware, systems and software to permit subscribers to be offered
high-speed Internet access through direct cable connection. The remaining
development effort is concerned with technical standards for this service and
with the design and integration of this product into RCN's cable and fiber
optic network. RCN management estimated that this project for both
acquisitions was approximately 70% complete at the date of acquisition.
-Internet Telephony, representing projects to develop the potential for dial-
up telephone service through the Internet. This service area presented
significant technical challenges as well as political, commercial and market
challenges to be faced before service could be offered to subscribers. Since
at the acquisition date neither hardware nor systems have been acquired or
developed in support of this new product, a high degree of development
activity remains. RCN management estimated that this project for both
acquisitions was only approximately 20% complete at the date of acquisition.
-E-Commerce Systems, consisting of the companies' efforts to develop a
suitable system that would permit subscribers to conduct commercial activities
over the Internet. Following evaluation of commercially-available packages,
none were capable of meeting subscriber needs and development of the suitable
system was undertaken. RCN management estimated that the project for both
acquisitions was approximately 90% complete at the date of acquisition.
<PAGE>
-High-speed shared office Internet access, representing a blending of fiber
optic and Internet networking technologies, was under development as a package
to be offered to commercial clients. While the technical challenges were still
being addressed at the acquisition date, there was no certainty that this
system would result in a competitive product offering in the market. The
management of RCN estimated that the project for both acquisitions was
approximately 75% complete at the date of acquisition.
Relative to the qualification of these projects as IPR&D projects under the
meaning within Statement of Financial Accounting Standards No. 2 ("SFAS 2"),
each represented at the date of acquisition a development project associated
with new and uncertain technology that was incomplete and had not reached
technical feasibility. Further, the technology under development in each of
these areas was not seen to present opportunities for alternative future use
should the contemplated development project fail to achieve completion. In each
of the above projects, the uncertainty associated with each, in the absence of a
successful product introduction, may result in the possible abandonment of the
project and the loss of both invested development funds and the profit
contributions that such projects were expected to bring to the business as a
whole.
Interest income
- ----------------
Interest income was $56,222 and $43,232 for the nine month periods ended
September 30, 1999 and 1998, respectively. The increase of $12,990, or 30.0%,
results from higher average cash, temporary cash investments and short-term
investments as compared to the same period in 1998. Cash, temporary cash
investments and short-term investments were approximately $1,593,000 at
September 30, 1999 and approximately $1,108,000 at September 30, 1998.
During 1999, proceeds from the following increased cash, temporary cash
investments and short-term investments: (1) the issuance of 250,000 shares of
a new issue of the Company's Series A Preferred Stock in April 1999, which
yielded net proceeds of approximately $239,979, (2) the issuance of 9,200,000
shares of the Company's common stock, in May 1999, which yielded net proceeds
of approximately $344,043 and (3) $500,000 from new borrowings, partially
offset by the repayment of the Company's $100,000 term loan (Note 11).
These increases were partially offset by higher capital expenditures and higher
working capital requirements.
Interest expense
- ----------------
For the nine months ended September 30, 1999, interest expense was $112,285 as
compared to $80,811 for the nine months ended September 30, 1998. The increase
resulted primarily from higher interest and commitment fees of $16,700 relating
the Company's Credit Facility which the Company entered into with Chase
Manhattan Bamk in June 1999 (Note 10), of which $500,000 of the Term Loan B was
borrowed in June 1999. The remaining increase is due to higher accretion on the
11.125%, 9.8% and 11% senior discount notes issued in October 1997, February
1998 and June 1998, respectively, of $18,365 and to higher amortization
of debt issuance costs of approximately $1,653. These increases were partially
offset primarily by lower interest relating to the prepayment of the $100,000
term loan (Note 11) and higher capitalized interest aggregating approximately
$5,459.
Gain on the sale of Lancit
- --------------------------
In April 1999, the Company sold it's investment in Lancit to JuniorNet, a
commercial-free online learning service for children, for approximately
$24,600 in cash. Concurrent with the sale, the Company acquired an ownership
interest in JuniorNet of approximately 47.54%. The Company recognized a $8,930
gain on the sale. The Company also deferred $8,201 representing the portion of
the gain attributable to the Company's ownership interest in JuniorNet
immediately after the acquisition.
<PAGE>
Income tax
- ----------
The Company's effective income tax rate was a benefit of 1.8% and 6.6% for the
nine months ended September 30, 1999 and September 30, 1998, respectively.
The primary reason for the difference is that the tax effect of the Company's
cumulative losses has exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. As a result, generally accepted accounting principles do not permit
the recognition of such excess losses in the financial statements. This
accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers.
Minority interest
- -----------------
For the nine months ended September 30, 1999 and 1998 minority interest of
$19,847 and $11,545, respectively, primarily represents the interest of Boston
Edison Company ("BECO") in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
- ---------------------------------------------
For the nine months ended September 30, 1999, equity in the loss of
unconsolidated entities primarily represents the Company's share of the losses
and amortization of excess cost over net assets of; Megacable of $1,662,
Starpower $8,724 and JuniorNet of $10,328. For the nine months ended September
30, 1998, equity in the loss of unconsolidated entities primarily represents the
Company's share of the losses and amortization of excess cost over net assets of
Megacable of $2,008 and Starpower of $6,161.
Extraordinary Item - prepayment of debt
- ----------------------------------------
In June 1999, the Company prepaid a term loan with the proceeds of the Credit
Facility (Note 11). The early extinguishment of the debt resulted in the
write off of the applicable unamortized debt issuance cost which is reflected
as an extraordinary charge of ($424).
Liquidity and Capital Resources
- -------------------------------
Because our network development plan involves relatively low fixed costs, we
are able to schedule capital expenditures to meet expected subscriber growth
in each major market. Our principal fixed costs in each such market are
incurred in connection with the establishment of a video transmission and
telephone switching facility. To make each market economically viable, it is
then necessary to construct infrastructure to connect a minimum number of
subscribers to the transmission and switching facility. We phase our market
entry projects to ensure that we have sufficient cash on hand to fund this
construction.
Based on its current growth plan, the Company expects that it will require a
substantial amount of capital to expand the development of its network and
operations into new areas within its larger target markets. The Company
needs capital to fund the construction of its advanced fiber optic networks,
upgrading its Hybrid Fiber/Coaxial plant, fund operating losses and repay its
debts. The Company currently estimates that its capital requirements
for the period from January 1, 1999 through 2000 will be approximately
$1.8 billion, which include capital expenditures of approximately $600 million
in 1999 and approximately $1 billion in 2000. These capital expenditures will
be used principally to fund additional construction to the Company's fiber
optic network in high density areas in the Boston, New York, Washington, D.C.
and San Francisco Bay markets as well as to expand into new markets and to
develop its information technology systems. These estimates are
forward-looking statements that may change if circumstances related to
construction, timing or receipt of regulatory approvals and opportunities to
accelerate the deployment of the Company's networks do not occur as expected.
In addition to the Company's own capital requirements, its joint venture
partners are each expected to contribute approximately $275 million, of
which approximately $208 million has been contributed, to the joint ventures
through 2000 in connection with development of the Boston and Washington, D.C.
markets.
<PAGE>
The Company expects to supplement its existing available credit facilities and
operating cash flow by continuing to seek to raise capital to increase its
network coverage and pay for other capital expenditures, working capital, debt
service requirements, anticipated future operating losses and acquisitions.
The Company's current joint venture agreements reduce the amount of expenditures
required by RCN to develop the network due both to access to the joint venture
partners' existing facilities and to the anticipated joint venture partners'
equity contributions. However, the joint venture arrangements will also reduce
the potential cash flows to be realized from operation of the networks in the
markets in which the joint ventures operate and restrict the Company's access
to cash flow generated by the joint ventures (which will be paid in the form of
dividends). The Company may enter into additional joint ventures in the future
as the Company begins to develop new markets.
Pursuant to an exchange agreement between BECO and the Company, BECO had the
right at the time of the distribution of RCN common stock in September 1997, and
has the right every two years thereafter, to convert all or a portion of its
ownership interest in the RCN-BECOCOM joint venture into RCN common stock
pursuant to specific terms and conditions, including exercise periods, appraisal
procedures and restrictions specifically set forth in the exchange agreement.
BECO may exercise its conversion rights, in whole or in part, from time to time.
The exchange agreement also grants customary registration rights to BECO with
respect to shares of common stock issued upon exchange of its investment
interest in RCN-BECOCOM. In February 1999, BECO converted a portion of its
interest into 1,107,539 shares of RCN common stock pursuant to its rights
under the exchange agreement. Capital contributions to the joint venture will
continue to be made 49% by BECO and 51% by RCN unless BECO disposes of shares
it receives on any conversion. On May 27, 1999, BECO exercised its right to
convert BECO's remaining investment in RCN-BECOCOM, LLC as of that date to RCN
common stock, less $1.00. The number of our shares which BECO is entitled to
receive on this additional conversion and the effect that the conversion will
have on the current ownership interests of the parties in RCN-BECOCOM, LLC
will be determined pursuant to an appraisal process which is currently in
progress. Investments by BECO in RCN-BECOCOM,LLC following May 27, 1999
will not be subject to this conversion, but may be converted by BECO in the
future pursuant to the exchange agreement. Thomas May, Chairman, President
and Chief Executive Officer of BECO, was appointed as a director of RCN in
September 1997.
Sources of funding for the Company's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. There can be no assurance that
sufficient additional financing will continue to be available to the Company
or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain such financing could result in the delay or
curtailment of the Company's development and expansion plans and expenditures.
Any of these events could impair the Company's ability to meet its debt service
requirements and could have a material adverse effect on its business.
In October 1997, the Company raised $575,000 in gross proceeds from an offering
of two tranches of debt securities. The offering was comprised of $225,000
principal amount of 10% Senior Notes and $601,045 principal amount at maturity
of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds include
approximately $44,000 of restricted cash to be used to fund the Escrow Account
to pay interest on the 10% Senior Notes for three years. In February 1998, the
Company raised $350,587 in gross proceeds from an offering of $567,000 principal
amount at maturity of 9.8% Senior Discount Notes, due in 2008. In June 1998 the
Company raised $149,999 in gross proceeds from an offering of $256,755
principal amount at maturity of 11% Senior Discount Notes, due 2008. Also
in June 1998, the Company raised $112,866 in net proceeds from an offering
of 6,098,355 shares of the Company's Common Stock. The Indentures for the
Notes referred to above all contain similar provisions. The Chase Manhattan
Bank acts as Trustee for each of the Indentures. All the aforementioned Notes
are general senior unsecured obligations of RCN. The 9.8% Senior Discount Notes
will mature on February 15, 2008. The 9.8% Senior Discount Notes will not bear
cash interest prior to February 15, 2003. Thereafter, cash interest on the notes
will accrue at 9.8% per annum and will be payable semi-annually in arrears on
February 15 and August 15 of each year commencing February 15, 2003. The 10%
and 11 1/8% Notes (the "1997 Notes") will mature on October 5, 2007. Interest
on the 10% Senior Notes is 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.
<PAGE>
The 11 1/8% Senior Discount Notes will not bear cash interest prior to October
15, 2002. Thereafter, cash interest on the notes will accrue at a rate of
11 1/8% per annum and will be payable semi-annually in arrears on April 15 and
October 15 of each year commencing April 15, 2002. The 11% Senior Discount
Notes will not bear cash interest prior to January 1, 2003. Thereafter, cash
interest on the notes will accrue at a rate of 11% per annum and will be
payable semi-annually in arrears on January 1 and July 1 of each year,
commencing July 1, 2003.
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 RCN. The 9.8% Senior Discount
Notes may be redeemed at redemption prices starting at 104.900% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued and unpaid interest. The 1997 Notes are redeemable,
in whole or in part, at any time on or after October 15, 2002 at the option
of RCN. The 10% Senior Notes may be redeemed at redemption prices
starting at 105% of the principal amount and declining to 100% of the principal
amount, plus any accrued and unpaid interest. The 11 1/8% Senior Discount
Notes may be redeemed at redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued and unpaid interest The 11% Senior Discount Notes
will be redeemable, in whole or in part, at any time on or after July 1, 2003 at
the option of RCN. The 11% Senior Discount Notes may be redeemed at
redemption prices starting at 105.5% of the principal amount at maturity and
declining to 100% of the principal amount at maturity, plus accrued and unpaid
interest.
RCN may, at its option, use the net proceeds of certain offerings of RCN Common
Stock to redeem up to an aggregate of 35% of the aggregate principal amount at
maturity of the debt securities issued under the Indentures at a certain
premium. Upon the occurrence of a change of control, RCN must make an offer to
purchase all of the debt securities issued under the Indentures then outstanding
at a premium.
The Indentures contain certain convenants 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.
On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks Muse Fund IV
purchased 250,000 shares of Series A Preferred Stock, par value $1 per share,
for gross proceeds of $250,000. The Series A Preferred Stock is cumulative
and has an annual dividend rate of 7% payable quarterly in cash or additional
shares of Series A Preferred Stock and has a initial conversion price of $39.00
per share. The Series A Preferred Stock is convertible into common stock at
any time. The Series A Preferred Stock is subject to a mandatory redemption
on March 31, 2014 at $1,000 per share, plus accrued and unpaid dividends, but
may be called by the Company after four years. At September 30, 1999 the
Company paid dividends in the amount of $8,529 in the form of additional shares
of Series A Preferred Stock. At September 30, the number of common shares that
would be issued upon conversion of the Series A Preferred Stock was 6,628,957.
The Company incurred $10,000 of issuance cost in connection with the sale of the
Series A Preferred Stock.
On May 27, 1999 the Company completed a public offering of 9,200,000 shares
of RCN common stock, par value $1 per share, with a price to the Public of
$39.00 per share. The net proceeds to the Company were approximately $344,043
after deducting issuance costs.
The Company and certain of its subsidiaries together, (the "Borrowers") entered
into a $1,000,000 Senior Secured Credit Facility (the "Credit Facility") with
the Chase Manhattan Bank and certain other lenders. The collateralized
facilities are comprised of a $250,000 seven-year revolving credit facility
(the "Revolver"), a $250,000 seven-year multi-draw term loan facility (the
"Term Loan A") and a $500,000 eight-year term loan facility (the "Term Loan
B"). All three facilities are governed by a single credit agreement dated as
of June 3, 1999 (the "Credit Agreement").
The Revolver may be borrowed and repaid from time to time. Up to $150,000 of
the Revolver may be used to fund working capital needs and for general
corporate purposes. The remaining $100,000 of the Revolver as well as the
term loans may be used solely to finance telecommunications assets. The amount
of the commitments under the Revolver automatically reduces to $175,000 on June
3, 2005 and the remaining commitments are reduced quarterly in equal
installments through to maturity at June 3, 2006. The Revolver can also be
utilized for letters of credit up to a maximum of $15,000. As of September 30,
1999 approximately $7,264 in the form of letters of credit had been drawn
under the Revolver.
The Term Loan A is available for drawing until December 3, 2001, at which time
any undrawn commitments expire. At September 30, 1999 there were no outstanding
loans under the Term Loan A. Any outstanding borrowings under the Term Loan
A at September 3, 2002 will be repaid in quarterly installments based on
percentage increments of the Term Loan A that start at 3.75% per quarter on
September 3, 2002 and increase in steps to a maximum of 10% per quarter on
September 3, 2005 through to maturity at June 3, 2006.
As of September 30, 1999, $500,000 of the Term Loan B was outstanding. The Term
Loan B was fully drawn at closing. Amortization of the Term Loan B starts on
September 3, 2002 with quarterly installments of $1,000 per quarter until
September 3, 2006 when the quarterly installments increase to $121,000 per
quarter through to maturity at June 3, 2007.
The interest rate on the Credit Facility is, at the election of the
Borrowers, based on either a LIBOR or an alternate base rate. For a Revolver
or Term Loan A borrowing, the interest rate will be LIBOR plus a spread of up
to 300 basis points or the base rate plus a spread of 200 basis points,
depending upon whether the Company's EBITDA has become positive and thereafter
upon the ratio of debt to EBITDA. In the case of the Revolver and the Term
Loan A, a fee of 125 basis points on the unused commitment accrues
until the Company's EBITDA has become positive and thereafter at up to 125
basis points depending upon the Company's utilization of the commitments.
For all Term Loan B borrowings the interest includes a spread that is fixed at
350 basis points over the LIBOR or 250 basis points over the alternate base
rate.
The Credit Agreement contains conditions precedent to borrowing, events of
default (including change of control) and covenants customary for facilities
of this nature, including financial covenants and covenants limiting debt,
liens, investments, consolidations, merger, acquisitions, asset sales, sale
and leaseback transactions, payments of dividends and other distributions,
making of capital expenditures and transactions with affiliates. In addition,
the Borrower's are subject to a prohibition on granting pledges, as well as
entering into certain other restrictive agreements, and subject to certain
exceptions and reinvestment rights; the Borrowers must apply 50% of excess
cash flow for each fiscal year commencing with the fiscal year ending on
December 31, 2002 and certain cash proceeds realized from certain asset sales,
certain payments under insurance policies and certain incurrences of
additional debt to repay the Credit Facility.
The Credit Facility is secured by substantially all of the assets of the
Company and its subsidiaries.
Prepayments of the eight-year term loan require payment of a fee of 2% of the
amount of such prepayment if made on or prior to June 3, 2000 and 1% of such
prepayment if made thereafter but on or prior to June 3, 2001.
The foregoing summary of certain provisions of the Credit Agreement does not
purport to be complete and is subject to, and qualified in its entirety by
reference to the Credit Agreement.
<PAGE>
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At September 30, 1999 the Company had an
aggregate of approximately $1,743,571 of indebtedness outstanding, and the
ability to borrow up to an additional $500,000 under the Credit Agreement.
The Company also has cash, temporary cash investments and short-term investments
aggregating approximately $1,592,503 and a current ratio of approximately
8.85:1.
As a result of the substantial indebtedness of the Company, the Company's fixed
charges are expected to exceed its earnings for the foreseeable future. Based
on its current plans, the Company will require substantial additional capital
particularly in connection with the buildout of the Company's networks and the
introduction of its telecommunications services to new markets. The leveraged
nature of the Company could limit its ability to effect future financing or may
otherwise restrict the Company's business activities.
<PAGE>
The extent of the Company's leverage may have the following consequences: (i)
limit the ability of the Company to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) require that a substantial portion of the Company's cash flows
from operations be dedicated to the payment of principal and interest on its
indebtedness and therefore not be available for other purposes; (iii) limit the
Company's flexibility in planning for, or reacting to, changes in its business;
(iv) place the Company at a competitive disadvantage as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
For the nine months ended September 30, 1999, the Company's net cash used in
operating activities was $(89,358), comprised primarily of a net loss of
($223,310) adjusted by non-cash depreciation and amortization of $98,948, other
non-cash items totaling $74,279, working capital changes of $(20,744). Net cash
used in investing activities of ($898,764) consisted primarily of purchases of
short-term investments of $2,402,867, additions to property, plant and equipment
of $339,726, acquisition costs of $53,637, an investment in an unconsolidated
joint venture of $9,455 partially offset by sales and maturities of short-term
investments of $1,887,908 and the proceeds from the sale of a business segment
of $23,711. Net cash provided by financing activities of $1,049,054 consisted
primarily of proceeds from the issuance of common stock $344,342, the issuance
of preferred stock $239,897, the issuance of long-term debt $500,000, the
contribution from minority interest partner of $82,320, partially offset by a
decrease in investments restricted for debt service of $11,250, payments made
for debt financing costs and capital lease obligations of $31,781 and $100,691
respectively.
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
Certain statements concerning Year 2000 issues, which contain more than
historical information, may be considered forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and are thus
subject to risks and uncertainties. Actual results may differ materially from
those expressed by any forward-looking statements. The Company's Year 2000
discussion should be read in conjunction with the Company's statement on
forward-looking statements which appears at the beginning of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
State of Readiness
The Company has certain information technology ("IT") systems (systems used in
the management of the business) and non-information technology ("non-IT")
systems (systems used to provide service to customers) which are subject to
Year 2000 exposures and require remediation. The Company has established a Year
2000 Program Management Office ("PMO") which is staffed with personnel who
address, on a full-time and ongoing basis, the Year 2000 issue. This group is
led by a full-time Director who reports in the organization, on a daily basis,
directly to the Senior Vice President of IT and, on a periodic basis, to a
Year 2000 Steering Committee comprised of the Company's Chairman, President,
Chief Financial Officer, Senior Vice President of IT, General Counsel and
President of Network Technology. The PMO personnel work with subject matter
experts consisting of current employees from various disciplines across the
Company to specifically identify these systems and implement a plan for
remediation. This plan, the Year 2000 Compliance Program, includes a 5-step
process of remediation as follows:
1. inventory
2. planning
3. assessment
4. repair
5. integration
The Company has evaluated which systems are critical to its operations and has
prioritized its Year 2000 remediation efforts to address these systems first. As
a result, the Company is in different stages of this Program for its various
systems.
For business reasons unrelated to Year 2000 issues, the Company is replacing its
financial, billing, operational support, and customer services systems. These
systems are critical to the Company's operations. The financial system
replacement involved converting the legacy of financial systems to a state-of-
the-art Oracle system. The Oracle system, which went into production use on
November 1, 1998, is expected to ensure Year 2000 compliance in financial
applications. The replacement systems for the Company's billing, operational
support and customer services will also be Year 2000 compliant at installation.
The replacement of the billing, operational support and customer service systems
is in process and includes substantial risk of not progressing along the planned
time line due to the scope of the project. To manage this risk, the Company has
assumed that the replacement systems will not be available before the Year 2000.
The Company has renovated the current billing, operational support and customer
service systems to be Year 2000 compliant.
The Company has completed most renovations critical to its IT systems. In
addition, the Company has tested most of its critical business systems and
expects to run thorough integration testing in mid-November, 1999. No IT
projects have been deferred due to the Year 2000 remediation efforts.
The Company has completed the remediation and testing of all its mission
critical cable systems. As a result of remediation and testing, we believe
the Company's cable systems, including head-ends and set-top equipment, are
Year 2000 compliant and meet applicable regulatory requirements.
The Company has also completed the remediation and testing of all its mission
critical telephone systems. As a result of the remediation and testing, we
believe that the Company's telephone systems, including telephone switches, are
Year 2000 compliant and meet applicable regulatory requirements. The testing
and remediation of the remainder of the non-critical telephone systems are
expected to be completed during November.
The Company's Internet Systems are currently in the remediation phase. The
compliance process has been slowed by recent acquisitions and on-going
consolidation efforts. Full compliance is anticipated by the end of November,
1999.
<PAGE>
The Year 2000 compliance status of interdependent third parties is not yet fully
known. The Company recognizes the importance of communication with third parties
to determine their plans for becoming Year 2000 compliant. The Company surveyed
approximately 380 critical vendors to evaluate Year 2000 compliance.
Dispite these efforts, there can be no assurance that third party systems will
be made Year 2000 compliant in a timely manner, or that non-compliance of these
systems will not have a material adverse effect on the Company's operations
and financial condition.
Cost
Based upon its current assessment, the total cost associated with the Company's
Year 2000 Compliance Program is not expected to be material to the Company's
results of operations or financial position. The estimated total cost of the
Company's Year 2000 Compliance Program is approximately $4,500. This is
comprised of approximately $450 for salaries, approximately $3,600 for
consulting services which includes approximately $800 for program code
remediation; approximately $230 for equipment replacement/rental and
approximately $240 in miscellaneous expenses. Through the end of September 1999,
approximately $2,103 has been incurred, of which approximately $1,503 was
incurred in the first six months of 1999. The cost for replacing systems
which had been planned, and for which the timeline for replacement was not
accelerated due to Year 2000 issues, have not been included.
Risk Assessment and Contingencies
The most reasonable likely risk of failure by the Company with respect to Year
2000 non-compliance would be an inability to provide service for the Company's
customers and an inability on the part of the Company to timely process
service request and bill its customers. As a result, while the Company believes
its plan for Year 2000 remediation and testing is on schedule, the Company is
unable to determine the impact that any system interruption in interconnected
third party networks would have on the Company's business.
However, the Company does not believe it is exposed to any significant Year
2000 risk with respect to its mission critical systems other than would be
caused by substantial deviation from the plans and time frames set forth above.
The Company is currently in the process of completing remediation and testing
of other systems using the same five-step program as outlined above.
The Company acquired two new Internet subsidiaries in mid 1999. The Company
expects to complete evaluation, remediation and testing of these new
subsidiaries' systems before the end November 1999. RCN does not expect to
find any major Year 2000 compliance issues. The possibility exists that
remediation will not be complete before the year end transition. If problems
arise that cannot be resolved before year-end, appropriate contingencies will
be designed and implemented.
The facilities at the Interport internet subsidiary were determined to be
inadequate for a internet routing system. To better protect the Company's
customers that are served by our Interport subsidiary the services provided
are being consolidated into other facilities. The possibility exists that
the consolidation process will not be completed by the end of the year. High
priority services have been identified, and are being addressed first. If
the consolidation is not complete by year-end, some low priority services
may be unprotected against power outages.
Because the Interport and California subsidiaries are only a small portion
of the Company's internet business, the potential non-compliance of these
systems are not expected to have a material impact on the Company's operation.
There can be no assurance that the Company's Year 2000 readiness plan will
progress as intended. The Company continues to refine its Year 2000
remediation efforts and the associated costs. The Company continues to develop
and update its comprehensive contingency plan in the event of network, system
or hardware failure and continues to monitor associated cost estimates.
The above discussion contains statements that are "forward-looking". The above
information is based on the Company's current best estimates. Given the
complexity of these issues and possible as yet unidentified risks, actual
results may differ materially from those anticipated and discussed above.
Specific factors that might cause such differences include, among others,
the availability and cost of personnel trained in this area, the ability to
locate and correct all affected computer codes, the timing and success of
remedial efforts of our third party vendors and similar uncertainties. No
assurance can be given that the third parties, on whom the Company depends for
essential services (such as electric utilities, interexchange carriers,
software and hardware equipment suppliers, etc.) will remediate their critical
systems in a timely manner. Failure or delay by any of these parties could
disrupt the Company's business.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Company has adopted Item 305 of Regulation S-K "Quantitative & qualitative
disclosures about market risk" which is effective in financial statements for
fiscal years ending after June 15, 1998. The Company currently has no items that
relate to "trading portfolios". Under the "other than trading portfolios" the
Company does have eight short-term investment portfolios categorized as
available for sale securities that are stated at cost, which approximates
market, and which are re-evaluated at each balance sheet date and one portfolio
that is categorized as held to maturity which is an escrow account against a
defined number of future interest payments related to the Company's 10% Senior
Discount Notes. These portfolios consist of Federal Agency notes, Commercial
Paper, Corporate Debt Securities, Certificates of Deposit, U.S. Treasury notes,
and Asset Backed Securities. The Company believes there is limited exposure to
market risk due primarily to the small amount of market sensitive investments
that have the potential to create material market risk. Furthermore, the
Company's internal investment policies have set maturity limits, concentration
limits, and credit quality limits to minimize risk and promote liquidity. The
Company did not include trade accounts payable and trade accounts receivable
in the "other than trading portfolio" because their carrying amounts approximate
fair value.
The objective of the Company's "other than trading portfolio" is to invest in
high quality securities and seeks to preserve principal, meet liquidity needs,
and deliver a suitable return in relationship to these guidelines. RCN may
from time to time enter into interest rate protection agreements. See note 13
to the unaudited financial statements included in Part I.
<PAGE>
Part II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(99) Employee Stock Purchase Plan
(99) Equity Incentive Plan.
(b.) Reports on Form 8-K
On August 17, 1999, RCN filed a Current Report on Form 8-K describing the
Senior Secured Credit Facility (the "Chase Facility") entered into between RCN
Corporation and certain of its subsidiaries and with the Chase Manhattan Bank
and certain other lenders. The collateralized facilities are comprised of
a $250,000,000 seven-year revolving credit facility (the "Revolver"), a
$250,000,000 seven-year multi-draw term loan facility (the "Term Loan A") and
a $500,000,000 eight-year term loan facility (the Term Loan B"). All three
facilities are governed by a single credit agreement dated as of June 3, 1999
(the "Chase Credit Agreement").
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RCN Corporation
Date: November 15, 1999
/s/ Bruce C. Godfrey
------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 181,058
<SECURITIES> 1,411,445
<RECEIVABLES> 53,221
<ALLOWANCES> 11,217
<INVENTORY> 11,858
<CURRENT-ASSETS> 1,704,315
<PP&E> 942,754
<DEPRECIATION> 206,658
<TOTAL-ASSETS> 2,854,279
<CURRENT-LIABILITIES> 192,532
<BONDS> 1,743,186
0
258
<COMMON> 76,886
<OTHER-SE> 689,518
<TOTAL-LIABILITY-AND-EQUITY> 2,854,279
<SALES> 0
<TOTAL-REVENUES> 203,939
<CGS> 0
<TOTAL-COSTS> 198,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,768
<INTEREST-EXPENSE> 112,285
<INCOME-PRETAX> (225,990)
<INCOME-TAX> (3,971)
<INCOME-CONTINUING> (231,415)
<DISCONTINUED> 0
<EXTRAORDINARY> (424)
<CHANGES> 0
<NET-INCOME> (231,839)
<EPS-BASIC> (3.29)
<EPS-DILUTED> (3.29)
</TABLE>
RCN CORPORATION
EXECUTIVE STOCK PURCHASE PLAN
As Amended and Restated, Effective December 10, 1998
1. Purpose. The purpose of the RCN Corporation Executive
Stock Purchase Plan is to strengthen the mutuality of interests between
executives and shareholders. The Plan offers certain executives of RCN
Corporation and its affiliated companies the opportunity to defer the receipt
of a portion of their compensation on a pre-tax basis and to have the deferred
amounts reflect the value of the common stock of RCN Corporation. Further, RCN
Corporation will credit matching contributions equal to 100% of the executive's
deferrals. Subject to certain limitations as described herein, matching
contributions will be credited to executives' matching accounts in the form
of hypothetical shares of Common Stock of RCN Corporation. Subject to
executives' elections regarding the timing of payment, a number of shares of
Common Stock of RCN Corporation equal to the number of hypothetical share units
credited to the executive's matching contribution account will be paid to the
executive if he or she remains an employee for three years following the
purchase. The Plan, as amended and restated, effective December 10, 1998,
shall apply only to Participants who are credited with service to the Company
on or after December 10, 1998. The Plan as in effect immediately preceding
the amendment and restatement of the Plan, effective December 10, 1998 shall
continue to apply to Participants who are not credited with service to the
Company after December 9, 1998.
2. Definitions. Unless the context otherwise requires,
the following words as used herein shall have the following meanings:
"Account" means the Deferral Account, the Matching Account and
the Distribution Account, which are bookkeeping accounts established pursuant
to the Plan and maintained in the names of the respective Participants, to which
all amounts deferred and earnings allocated under the Plan shall be credited,
and from which all amounts distributed under the Plan shall be debited.
"Administrator" means the Company or any person or entity to
which the Board delegates this function under Section 10.
"Affiliated Company" means each corporation, 100% of the stock
of which is owned, directly or indirectly, by the Company.
"Annual Compensation" shall mean, with respect to any Eligible
Employee in any calendar year, the sum of (i) such Eligible Employee's annual
base salary for such year plus (ii) the short term bonus received by such
Eligible Employee in respect of Company performance during such year. The
Administrator shall have the sole discretion to determine an Eligible Employee's
Annual Compensation as of any relevant time in accordance with the provisions of
the Plan.
<PAGE>
"Applicable Dividends" means, with respect to a Share Unit, the
aggregate number of Share Units credited to a Participant's Account under
Section 5.3 (or to a Participant's Matching Account under Section 6, as
applicable) as the result of a dividend paid by the Company in respect of
Shares.
"Applicable Election Date" means the following:
(a) except as provided in (b), with respect to the
deferral of base compensation earned during any payroll period, December 31
of the calendar year immediately preceding the commencement of such payroll
period;
(b) with respect to the deferral of base compensation
earned during any payroll period in the first calendar year for which an
Employee is an Eligible Employee, the first day of the first calendar quarter
following his or her becoming an Eligible Employee, provided that the
Applicable Election Date with respect to the deferral of such base compensation
earned by an Employee who is an Eligible Employee as of the Effective Date shall
be the Effective Date;
(c) with respect to any short term bonus, December
31 of the calendar year immediately preceding the calendar year in which the
bonus is payable; and
(d) with respect to accumulated balances of an
Account:
(i) except as otherwise provided in (ii)
below, by June 30 of the calendar year preceding the calendar year in which
all or any portion of the Account would be distributable; and
(ii) for accumulated Account balances that,
but for an executive's further deferral election, would be distributable in 1998
or 1999, within 15 days of the adoption of this amendment and restatement of the
Plan;
provided that except as otherwise provided in Section 7, the date for payment of
any amount attributable to an election made pursuant to an Election Form with
respect to accumulated balances shall not be earlier than the first day of the
second calendar year beginning after the date such portion of the Account would
have been payable but for such election.
"Board" means the board of directors of the Company.
"Change in Control" means:
(a) The acquisition by any person, entity or
"group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), other than Level 3
<PAGE>
Telecom Holdings, Inc. and any affiliate of Level 3 Telecom Holdings, Inc., of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of either (i) the then outstanding Shares or
(ii) the combined voting power of the Company's then outstanding voting
securities;
(b) Effective upon the consummation of any such
transaction, approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, with respect to which persons who were
the shareholders of the Company immediately prior to such reorganization,
merger or consolidation, do not, immediately thereafter, own more than 50%
of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of the Company
or the sale of all or substantially all of the assets of the Company; or
(c) The replacement of more than 50% of the
members of the Board with persons who were not nominated or otherwise
designated by the remaining members of the Board.
"CMI" means Cable Michigan, Inc., a Pennsylvania corporation.
"CMI Share Unit" means a hypothetical share of Common Stock of
CMI, par value $1.00, credited to Participant's CMI Distribution Account.
"Company" means RCN Corporation, a Delaware corporation;
provided that for purposes of the definition of the term "Change in Control,"
the term "Company" shall also mean CMI or CTE, as applicable.
"CTE" means Commonwealth Telephone Enterprises Inc., a
Pennsylvania corporation.
"CTE Share Unit" means a hypothetical share of Common Stock
of CTE, par value $1.00, credited to Participant's CTE Distribution Account.
"Deferral Account" means the bookkeeping account established
by the Administrator for each Participant to reflect the Share Units credited
with respect to such Participant pursuant to Section 5.
"Deferral Date" means the date or dates on which base
compensation, short term bonus or an accumulated Account balance to which
any Election Form relates would otherwise have been paid.
<PAGE>
"Disability" means a disability with respect to which a
Participant is eligible for and receiving benefits under a long-term
disability program sponsored by the Company or an Affiliated Company.
"Distribution" means the distribution by C-TEC Corporation to
its stockholders of Shares (the "Distribution"), effective as of October 1,
1997.
"Distribution Account" means the bookkeeping account established
for each Participant to reflect the Share Units, the CMI Share Units and the CTE
Share Units credited with respect to each individual who was a Participant in
the C-TEC Corporation Executive Stock Purchase Plan immediately preceding the
Distribution and who, immediately after the Distribution, was an employee of
the Company.
"CMI Distribution Account" means the portion of the
Distribution Account to which are credited CMI Share Units which were deemed
credited to the Participant's Distribution Account as of the Distribution,
plus additional CMI Share Units thereafter credited in accordance with Section
4.4.
"CTE Distribution Account" means the portion of the
Distribution Account to which are credited CTE Share Units which were deemed
credited to the Participant's Distribution Account as of the Distribution,
plus additional CTE Share Units thereafter credited in accordance with Section
4.5.
"RCN Distribution Account" means the portion of the
Distribution Account to which are credited Share Units which were deemed
credited to the Participant's Distribution Account as of the Distribution,
plus additional Share Units thereafter credited in accordance with Sections
5 and 6.
"Dividend Payment Date" means the date on which a dividend is
paid by the Company with respect to Shares.
"Effective Date" means October 1, 1997. The effective date of
this amendment and restatement of the Plan is December 10, 1998.
"Election Form" means the election form described in Section
5.5.
"Eligible Employee" means an Employee who is designated by the
Board as eligible to participate in the Plan and who has completed one full
calendar quarter of employment with the Company or an Affiliated Company,
provided, however, that the Board may, in its sole discretion, designate as
Eligible Employees and Participants, persons who were active participants in
<PAGE>
the C-TEC Corporation Executive Stock Purchase and who in respect of such
participation were granted Share Units hereunder in connection with the
Distribution.
"Employee" means an employee of the Company or an Affiliated
Company.
"Entry Date" means, for any Eligible Employee, the first day
of the first calendar quarter following his or her becoming an Eligible
Employee, provided that the Entry Date of any Employee who is an Eligible
Employee as of the Effective Date shall be the Effective Date.
"Fair Market Value" of a Share on any given day means:
(a) The closing price per Share on the national
securities exchange on which the Shares are principally traded on the next
preceding date on which there was a sale of Shares on such exchange; or
(b) If the Shares are not listed or admitted to
trading on any such exchange, the closing price per Share on the Nasdaq
National Market on the next preceding date on which there was a sale of Shares,
or if such closing price is not available, the average of the highest reported
bid and lowest reported asked prices per Share as reported by NASDAQ on the
next preceding date on which such bid and asked prices were reported; or
(c) If the Shares are not then listed on any
securities exchange or prices therefor are not then quoted in NASDAQ, the value
determined by the Administrator in good faith.
"Fund" means the fund maintained under the Trust Agreement.
"Matching Account" means the bookkeeping account established
by the Administrator for each Participant to reflect Share Units credited
pursuant to Section 6.
"Participant" means any Eligible Employee or former Eligible,
Employee who has elected to participate in the Plan as described in Section 4,
or who has an undistributed amount credited to a Deferral Account or a Matching
Account or who was issued Share Units hereunder in connection with the
Distribution.
"Plan" means RCN Corporation Executive Stock Purchase Plan, as
set forth herein, and as amended from time to time.
"Pre-Tax Contribution" means the amount of a Participant's
contribution to the Plan as determined under Section 5.1, reduced by any
applicable employment taxes.
<PAGE>
"Purchase Date" means, with respect to a Deferral Date or a
Dividend Payment Date, the date or dates on which the Trustee purchases Shares
to reflect the Pre-Tax Contributions made on such Deferral Date or the dividends
paid on such Dividend Payment Date. The Trustee may purchase Shares from the
Company or on the open market.
"Share Units" means units credited to a Participant's Deferral
Account under Sections 5.2 and 5.3 and units credited to a Participant's
Matching Account under Section 6.
"Shares" means Common Stock of the Company, par value $1.00 per
share.
"Trust Agreement" means the agreement of trust entered into
between the Company and the Trustee for purposes of the Plan.
"Trustee" means the individual(s) or corporate trustee
appointed as trustee under the Trust Agreement.
"Unforeseeable Emergency" means an unanticipated emergency that
is caused by an event beyond the control of the Participant and that would
result in severe financial hardship to the Participant if early withdrawal
were not permitted.
3. Shares. Not more than 500,000 Shares and Share Units
in the aggregate, without duplication, may be issued under the Plan, subject
to adjustment as provided in Section 13.2.
4. Eligibility to Participate; Initial Credits.
4.1. Eligibility to Participate. Any Eligible
Employee shall be eligible to participate in the Plan. An Eligible Employee
shall become a Participant by delivering to the Administrator an executed
Election Form and such other forms as may be required by the Administrator.
4.2. Initial Credits. As of the Distribution, the
Distribution Account of each individual who was a Participant in the C-TEC
Corporation Executive Stock Purchase Plan immediately preceding the Distribution
and who, immediately after the Distribution, was an employee of the Company,
shall be credited with such number of Share Units, CMI Share Units and CTE
Share Units, rounded, in each case to the nearest 0.0001 of a share, equal to
the sum of
4.2.1. The number of shares of stock in the
Company, CMI and CTE that would have been issued in the Distribution if each
share unit representing a share of Common Stock of C-TEC Corporation and
credited to the Participant's Deferral Account were a bona fide share of
Common Stock of C-TEC Corporation; plus
<PAGE>
4.2.2. The number of shares of stock in the
Company, CMI and CTE issuable in the Distribution with respect to such
Participant's matching shares credited under the C-TEC Corporation Executive
Stock Purchase Plan.
4.3. RCN Distribution Account. Effective immediately
after the Distribution, the portion of each Participant's RCN Distribution
Account attributable to the Participant's Deferral Account under the C-TEC
Corporation Executive Stock Purchase Plan shall be credited to the Participant's
Deferral Account. Effective immediately after the Distribution, the portion of
each Participant's RCN Distribution Account attributable to matching shares
issuable under the C-TEC Corporation Executive Stock Purchase Plan shall be
credited to the Participant's Matching Account, provided that such Matching
Share Units shall be subject to forfeiture pursuant to Section 6, based on the
lapse of time from the date of the Participant's deferral election as of which
the matching shares to which such Matching Shares are attributable were
credited pursuant to the C-TEC Corporation Executive Stock Purchase Plan. In
all respects thereafter, the value of the portion of the RCN Distribution
Account credited to the Deferral Account shall be determined as if it were
invested and reinvested as part of the Deferral Account pursuant to Section
5, and the value of the portion of the RCN Distribution account credited to
the Matching Account shall be determined as if it were invested and reinvested
as part of the Matching Account pursuant to Section 6.
4.4. CMI Distribution Account. In all respects
commencing immediately after the Distribution, the value of the portion of the
CMI Distribution Account attributable to the Participant's Deferral Account
under the C-TEC Corporation Executive Stock Purchase Plan shall be determined
as if it were invested and reinvested as part of the Deferral Account pursuant
to Section 5.2 and Section 5.3, and the value of the portion of the CMI
Distribution Account attributable to matching shares under the C-TEC Corporation
Executive Stock Purchase Plan shall be determined as if it were invested and
reinvested as part of the Matching Account pursuant to Section 6; provided,
however, that for purposes of this Section 4.4, each reference to the Company
and to Shares shall be deemed to be a reference to CMI and shares of Common
Stock of CMI, and provided further, provided that the value of the portion of
the CMI Distribution Account attributable to matching shares under the C-TEC
Corporation Executive Stock Purchase Plan shall be subject to forfeiture
pursuant to Section 6, of the Participant's deferral election as of which the
matching shares to which such Matching Shares are attributable were credited
pursuant to the C-TEC Corporation Executive Stock Purchase Plan.
4.5. CTE Distribution Account. In all respects
commencing immediately after the Distribution, the value of the portion of the
CTE Distribution Account attributable to the Participant's Deferral Account
under the C-TEC Corporation Executive Stock Purchase Plan shall be determined
as if it were invested and reinvested as part of the Deferral Account pursuant
to Section 5.2 and Section 5.3, and the value of the portion of the CTE
Distribution Account attributable to matching shares under the C-TEC
Corporation Executive
<PAGE>
Stock Purchase Plan shall be determined as if it were invested and reinvested
as part of the Matching Account pursuant to Section 6; provided, however, that
for purposes of this Section 4.4, each reference to the Company and to Shares
shall be deemed to be a reference to CTE and shares of Common Stock of CTE, and
provided further, provided that the value of the portion of the CTE Distribution
Account attributable to matching shares under the C-TEC Corporation Executive
Stock Purchase Plan shall be subject to forfeiture pursuant to Section 6, of
the Participant's deferral election as of which the matching shares to which
such Matching Shares are attributable were credited pursuant to the C-TEC
Corporation Executive Stock Purchase Plan.
5. Pre-Tax Contributions.
5.1. Election to Participate.
5.1.1. Deferral of Base Compensation. An
Eligible Employee may elect to defer receipt of all or a portion (in whole
percentages) of his or her base compensation payable by the Company or an
Affiliated Company attributable to any payroll period beginning on or after
the Entry Date by executing an Election Form and filing it with the
Administrator on or before the Applicable Election Date. Deferrals by any
Eligible Employee pursuant to this Section 5.1.1 shall not exceed 20% of such
Eligible Employee's projected base compensation for the year in question, as
determined by the Administrator from time to time. Subject to the foregoing,
each Eligible Employee shall specify on such Election Form the schedule of
Deferral Dates on which such aggregate amount is to be withheld and
contributed to the Plan.
5.1.2. Deferral of Bonus. Subject to Section
5.1.3, an Eligible Employee may elect to defer receipt of all or a portion (in
whole percentages) of his or her short term bonus payable by the Company or an
Affiliated Company on or after the Entry Date by executing an Election Form and
filing it with the Administrator on or before the Applicable Election Date.
5.1.3. Limitations on Pre-Tax Contributions.
An Eligible Employee's Pre-Tax Contribution under Sections 5.1.1 and 5.1.2 for
any calendar year shall not exceed 20% of such Eligible Employee's Annual
Compensation for such year. The Administrator shall adjust the Eligible
Employee's Pre-Tax Contributions as it determines necessary to meet the
requirements of this Section 5.1.3.
5.2. Crediting Accounts. On any Purchase Date, but
as of the applicable Deferral Date, the Company shall credit each Participant's
Deferral Account with a number of Share Units, rounded to the nearest 0.0001 of
a Share, determined as follows:
5.2.1. an amount, rounded down to the next
lowest whole number, obtained by dividing:
<PAGE>
5.2.1.1. the amount of all
Participants' Pre-Tax Contributions attributable to such Deferral Date that is
invested on such Purchase Date; by
5.2.1.2. the average per Share cost
paid by the Trustee on such Purchase Date with respect to such Deferral Date;
provided, however, that if the Trustee purchases (or notionally purchases) the
Shares from the Company, the Trustee's average per Share cost, for purposes of
this Section 5.2, shall be the Fair Market Value per Share on such Deferral
Date;
5.2.2. multiplied by a fraction:
5.2.2.1. the numerator of which is
the Participant's Pre-Tax Contribution attributable to such Deferral Date;
and
5.2.2.2. the denominator of which
is all Participants' Pre-Tax Contributions attributable to such Deferral Date.
5.3. Crediting of Dividends to Accounts.
5.3.1. Cash Dividends. If the Company pays a
cash dividend with respect to Shares, then as of the Dividend Payment Date, the
Company shall credit each Participant's Deferral Account with a number of Share
Units determined as follows:
5.3.1.1. an amount, rounded to the
nearest 0.0001 of a Share, obtained by dividing
5.3.1.1.1. the amount of the
dividend paid on such Dividend Payment Date with respect to a Share multiplied
by the number of Share Units credited to all Participants' Accounts on the
record date for such Dividend; by
5.3.1.1.2. the average per
Share cost paid by the Trustee on the Purchase Date with respect to such
Dividend Payment Date; provided, however, that if the Trustee purchases (or
notionally purchases) the Shares from the Company, the Trustee's average per
Share cost, for purposes of this Section 5.3, shall be the Fair Market Value
per Share on such Dividend Payment Date;
<PAGE>
5.3.1.2. multiplied by a fraction:
5.3.1.2.1. the numerator of
which is the number of Share Units credited to the Participant's Deferral
Account on the record date for such Dividend; and
5.3.1.2.2. the denominator of
which is the number of Share Units credited to all Participants' Accounts on
the record date for such Dividend.
5.3.2. Share Dividends. If the Company pays
a dividend with respect to Shares in the form of additional Shares, then as of
the Dividend Payment Date, the Company shall credit each Participant's Deferral
Account with a number of Share Units equal to the product of:
5.3.2.1. the Share Units credited to
the Participant's Deferral Account on the record date for such Dividend; and
5.3.2.2. the number of Shares payable
as a dividend for each outstanding Share.
5.3.3. Extraordinary Dividends. Except as
set forth in Sections 5.3.1 and 5.3.2, dividends and distributions in respect
of Shares shall be treated in accordance with Section 13.2.
5.4. Treatment of Excess Cash. An amount
representing the amount received by the Trustee under Section 5.6.1 and not
used to purchase Shares shall be allocated in any reasonable manner by the
Administrator, including, but not limited to, allocating such amounts as of the
next Deferral Date among Participants' Deferral Accounts pro-rata or in
proportion to Participant's Pre-Tax Contributions attributable to such Deferral
Date. Amounts shall be allocated to the purchase of Shares in the order in
which received by the Trustee.
5.5. Election Form. Each Election Form shall be in
form and substance satisfactory to the Administrator, and shall set forth:
5.5.1. the amount of base compensation and/or
short term bonus to be deferred and the Deferral Date(s) on which such
deferrals are to be effected, subject to Section 5.1.3;
5.5.2. the date on which distributions shall
commence under Section 7;
<PAGE>
5.5.3. if distributions are to commence under
Section 7, whether such distributions will be a single sum or in installments;
and
5.5.4. the beneficiary or beneficiaries to
whom benefits should be paid in the event of the Participant's death.
An Election Form providing for the deferral of all or a
portion of base compensation or short term bonus shall remain in effect until
revoked or replaced by a new Election Form.
5.6. Funding.
5.6.1. On or as soon as administratively
practicable following each Deferral Date, an amount equal to the amount deferred
by all Participants shall be paid by the Company to the Trustee, and shall
thereafter be held by the Trustee in accordance with the terms of the Trust
Agreement.
5.6.2. Amounts contributed to the Trustee under
the Trust Agreement and assets purchased with such amounts shall be subject to
the claims of the Company's creditors and creditors of Affiliated Companies.
5.6.3. To the extent that any benefits provided
under the Plan are actually paid from the Fund, the Company shall have no
further obligation with respect to such benefits.
5.6.4. Except as provided in Section 5.6.1,
neither the Company nor any Affiliated Company shall be required to segregate
or physically to set aside any funds or asset to satisfy any right to payment
of amounts credited to any Deferral Account. Neither a Participant, nor any
beneficiary nor any other person shall be deemed to have any property interest,
legal or equitable, in any specific asset of the Company or any Affiliated
Company or of the Fund with respect to any right to payment of any amount
pursuant Section 5. To the extent that any person acquires any right to
receive payments under the Plan of an amount credited to an Account, such
right to payment shall be no greater than, nor shall it have any preference or
priority over, the rights, of any unsecured general creditor of the Company or
any Affiliated Company.
5.7. Voting Rights. Share Units represent a
hypothetical number of Shares, for bookkeeping purposes only. Accordingly,
Participants shall have no voting rights or any other rights of a shareholder
with respect to such Share Units.
<PAGE>
5.8. Unforeseeable Emergency. In the event of an
Unforeseeable Emergency as determined by the Administrator, a Participant may
receive a lump sum payment in an amount necessary to meet the emergency, but
not in excess of the amount credited to his Deferral Account. Such amount
shall be paid in Shares, and the Participant's Deferral Account shall be
debited accordingly.
5.9. Beneficiary Designation. Each Participant
shall designate on his or her Election Form the beneficiary or beneficiaries
who shall receive payments of Shares under Section 7 upon the Participant's
death. A Participant may amend any beneficiary designation by filing a written
amendment thereof with the Administrator. If the Participant has not made an
effective beneficiary designation, or if the designated beneficiary
predeceases the Participant, the Participant's beneficiary shall be the
Participant's estate.
5.10. Cash Entitlement Only. Any provision of this
Plan to the contrary notwithstanding, unless and until such time as the Plan
is approved by the shareholders of the Company, a Share Unit credited under this
Section 5 shall represent only the right to be paid in cash the Fair Market
Value of a Share at the time otherwise herein provided for such payment.
5.11. Non Pro Rata Deferrals. Notwithstanding any
other provision of this Section 5, with respect to the payment under Section
7 of any Excess Share Units, as hereinafter defined, the Administrator in its
sole discretion may distribute, in lieu of one Share or the Fair Market Value
thereof, an amount in cash equal to the value per Share used for purposes
of Sections 5.2.1.2 and 5.3.1.1.2 in crediting such Excess Share Unit to the
applicable Deferral Account. For purposes of this Section 5.11, "Excess Share
Units" shall mean that number of Share Units credited to such Deferral Account
in excess of the number of Share Units that would have been so credited had the
Participant elected a "Pro Rata Deferral"; and a "Pro Rata Deferral" shall mean
a deferral on any Deferral Date of a percentage of base compensation not in
excess of 20%.
6. Matching Contributions.
6.1. Matching Share Unit Credits. As of each
Deferral Date, the Company shall credit to each Participant's Matching Account,
Share Units equal to the number of whole Share Units standing to the credit of
such Participant's Deferral Account under Section 5.2 as of such Deferral Date
(less any Share Units in respect of which Shares have previously been issued
under this Section 6.1). All Shares issued under this Section shall be subject
to forfeiture as provided in Section 6.2. The number and value of Matching
Share Units credited to each Participant's Matching Account shall be
determined as if it were invested and reinvested on the same basis as the
Deferral Account pursuant to Section 5.
<PAGE>
6.2. Forfeiture of Matching Share Units. Shares
credited to Participants' Matching Accounts under Section 6.1 shall be subject
to the following terms:
6.2.1. If the Participant terminates
employment with the Company and all Affiliated Companies, CTE or CMI, as the
case may be, prior to the lapse of 12 consecutive full calendar quarters
following the date as of which Share Units are credited under Section 6.1,
other than due to death or disability, the Participant shall forfeit all rights
to the Shares and the Shares shall be released forfeited from the Participant's
Matching Account. Share Units credited to a Participant's Matching Account
shall vest if the Participant remains employed by the Company or any
Affiliated Company, CTE or CMI, as the case may be, until the lapse of 12
consecutive full calendar quarters following the date as of which such Share
Units are credited under Section 6.1, or if earlier, upon (i) a Change in
Control or (ii) the Participant's termination of employment with the Company
and all Affiliated Companies, CTE or CMI, as the case may be, due to death or
disability.
6.2.2. Share Units credited to Participants'
Matching Accounts represent a hypothetical number of Shares, for bookkeeping
purposes only. Accordingly, Participants shall have no voting rights or any
other rights of a shareholder with respect to such Share Units.
Notwithstanding the foregoing, however, the Company may, but shall not be
required to, establish a procedure pursuant to which a Participant may direct
the Trustee regarding the voting of a number of Shares held pursuant to the
Trust Agreement equal to the number of Share Units credited to the Participant's
Matching Account.
7. Commencement and Form of Distribution. Amounts
representing Share Units credited to a Participant's Account shall be
distributed as follows:
7.1. Commencement Date.
7.1.1. In General. Subject to Sections 7.1.2
and 7.3, as soon as administratively practicable following the earlier of (i)
the Participant's termination of employment with the Company and all Affiliated
Companies, CTE or CMI, as the case may be, or (ii) the date or dates designated
by the Participant in his or her Election Form (which shall not be earlier than
following the lapse of 12 consecutive full calendar quarters following the
applicable Deferral Date), the Company shall commence to issue or pay to the
Participant:
7.1.1.1. A number of Shares equal to
the number of whole Share Units credited to the Participant's Account, plus an
amount of cash in lieu of fractional Share Units if no subsequent distribution
dates are anticipated;
7.1.1.2. A number of shares of Common
Stock of CMI equal to the number of whole CMI Share Units credited to the
Participant's Account, plus an amount of cash in lieu of fractional CMI Share
<PAGE>
Units if no subsequent distribution dates are anticipated; and
7.1.1.3. A number of shares of Common
Stock of CTE equal to the number of whole CTE Share Units credited to the
Participant's Account, plus an amount of cash in lieu of fractional CTE Share
Units if no subsequent distribution dates are anticipated.
7.1.2. Change in Control.
7.1.2.1. As soon as administratively
practicable following a Change in Control of the Company, shall commence to
issue or pay to the Participant a number of Shares equal to the number of
whole Share Units credited to the Participant's Account, plus an amount of
cash in lieu of fractional Share Units, or, as determined by the
Administrator, cash having a value equal to the value of the Participant's
Account.
7.1.2.2. As soon as administratively
practicable following a Change in Control of CMI, the Company shall commence to
issue or pay to the Participant a number of shares of Common Stock of CMI equal
to the number of whole CMI Share Units credited to the Participant's Account,
plus an amount of cash in lieu of fractional CMI Share Units, or, as determined
by the Administrator, cash having a value equal to the value of the
Participant's Account.
7.1.2.3. As soon as administratively
practicable following a Change in Control of CTE, the Company shall commence
to issue or pay to the Participant a number of shares of Common Stock of CTE
equal to the number of whole CTE Share Units credited to the Participant's
Account, plus an amount of cash in lieu of fractional CTE Share Units, or,
as determined by the Administrator, cash having a value equal to the value
of the Participant's Account.
7.2. Form of Payment. Cash shall be paid in a
single sum payment and shares shall be issued, as elected by the Participant
in the applicable Election Form, in a single payment or in substantially equal
quarterly installments over ten years. The Administrator may accelerate any
such installment for any reason, in its sole discretion.
7.3. Payment following Death of Participant.
Notwithstanding the election made by the Participant under Section 5.5, as soon
as administratively practicable following the death of a Participant, the
Company shall issue to the Participant's beneficiary or beneficiaries (as
designated in accordance with Section 5.9), a number of Shares equal to the
number of Share Units credited to the Participant's Deferral Account and cash
in lieu of fractional Share Units plus the amount of cash, if any, allocated
<PAGE>
to such Account at the time of such distribution, plus the value, in cash or
stock, as determined by the Administrator, of CMI Share Units and CTE Share
Units credited to the Participant's Distribution Account.
7.4. Shares Subject to Distribution. The Shares
distributed under the Plan may be unissued shares or treasury shares, including
Shares held in the Fund and Shares bought on the open market. Shares
distributed under the Plan shall be validly issued, fully paid and
non-assessable.
8. Nonassignment. The rights and privileges conferred under
this Plan and any Shares issued under Section 6.1 for so long as such Shares
remain subject to forfeiture pursuant to the terms of Section 6.2 shall not be
transferred, assigned, pledged or hypothecated in any way (whether by operation
of law or otherwise) and shall not be subject to execution, attachment or
similar process. Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of such right or privilege or Shares (which Shares are subject
to forfeiture) contrary to the provisions hereof, including the levy of any
attachment or similar process thereon, shall be without effect.
9. Incapacity of Recipient. Any Shares or cash payable
under the Plan, including Shares distributable from escrow under Section 6.2,
to a person who is under a legal disability may be made to or for the benefit
of such person in such of the following ways as the Administrator shall
determine:
9.1. to such person;
9.2. to the legal representative of such person;
9.3. to a near relative of such person to be used
for such person's benefit; or
9.4. to pay the expenses of support, maintenance
or education of such person.
The Administrator shall not be required to see to the
application by any third party of payments made pursuant to this Section.
10. Administration. The Plan shall be administered by the
Company or by any person or entity to which the Board delegates administrative
responsibilities under the Plan. The Administrator shall be responsible for
and shall have sole discretion with respect to:
10.1. the maintenance of any records necessary in
connection with the operation of the Plan;
<PAGE>
10.2. calculating amounts to be credited to
Participants' Deferral Accounts and Matching Accounts, and the amount of
payments due to Participants and beneficiaries from such Accounts;
10.3. interpreting the provisions of the Plan;
10.4. directing the Trustee to pay benefits out of
the Fund; and
10.5. otherwise administering the Plan in accordance
with its terms.
11. Claims Procedures. At any time that the Administrator
makes a determination adverse to a Participant or beneficiary with respect to a
claim for benefits or participation under the Plan, the Administrator shall
notify the claimant in writing of such determination, setting forth:
11.1. the specific reason for such determination;
11.2. a reference to the specific provision or
provisions of the Plan on which such determination is based;
11.3. a description of any additional material or
information necessary to perfect the claim, and an explanation of the reason
that such material is required; and
11.4. an explanation of the rights and procedures
set -forth in this Section 10.
A person who receives notice of an adverse determination by
the Administrator with respect to a claim may request, within 60 days of
receipt of such notice, that the Administrator review the previous
determination. This request may be made on behalf of a claimant by a duly
authorized representative. The claimant or representative may review
pertinent documents and submit issues and comments with respect to the
controversy to the Administrator. The Administrator shall render a decision
within 60 days of receipt of a request for review, which decision shall be in
writing and shall set forth the specific reasons for the decision reached and
the specific provisions of the Plan on which the decision is based. A copy
of the ruling shall be forwarded to the claimant.
12. Employee Benefit Plans. The Plan shall not in any way
effect a Participant's right to participate in any pension, profit-sharing,
incentive, thrift, group insurance, death benefit, stock option, termination
pay or similar plans of the Company or any Affiliated Company, which are now
in effect or may hereafter be adopted, to the extent that the Participant
<PAGE>
is entitled to participate under the applicable terms and provisions of such
plans. Contributions and benefits under the Plan shall not be included in
determining a Participant's benefits under any retirement plan qualified under
section 401(a) of the Internal Revenue Code of 1986, as amended, in which such
Participant may participate, except as may otherwise be provided in such
other plan.
13. Amendment and Termination.
13.1. The Plan shall remain in effect until
terminated by the Board. The Board shall have the power to amend or terminate
the Plan at any time, and to freeze or suspend contributions to the Plan at any
time, provided that the amendment or termination of the Plan shall not impair
the rights of any Participant with respect to any amount credited to an Account
at the time of amendment or termination without the Participant's consent. The
Board may submit certain amendments to the shareholders for their approval in
order to comply with Rule 16b-3, or for any other reason.
13.2. With the exception of the events described in
Sections 5.3.1 and 5.3.2, in the event that the Board determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities of the
Company, issuance of warrants or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or
event affects the Shares such that an adjustment is determined by the Board to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Board may, in such manner as it may deem equitable, make such adjustments and
take such actions in respect of Shares and Share Units hereunder as it deems
appropriate, desirable or necessary.
14. Miscellaneous.
14.1. The existence of the Plan and the execution of
an Election Form, and any actions undertaken thereunder, shall not confer upon
tell Participant any right to continued employment by the Company or any
Affiliated Company, CTE or CMI, as the case may be.
14.2. The Plan shall be administered under and in
accordance with the laws of Delaware.
14.3. The terms of the Plan and the Election Forms and
the decisions of the Administrator shall be binding upon the Company and all
Affiliated Companies, their successors and assigns, and each Participant and
his or her heirs and legal representatives.
<PAGE>
14.4. Prior to any distribution of Shares to the
Participant hereunder, the Participant and the Company shall enter into a
mutually satisfactory arrangement to satisfy applicable federal, state, local
or other tax withholding requirements with respect to the distribution.
Any taxes imposed on a Participant shall be the sole
responsibility of the Participant. Without limiting the generality of the
foregoing, if any (contribution or payment under the Plan obligates the Company
or an Affiliated Company, CTE or CMI, as the case may be, to deduct or withhold
an amount for purposes of federal, state, local or other taxes, such obligation
may be satisfied by (1) deducting such taxes from any contributions or payments
made pursuant to the Plan or any cash compensation payable with respect to the
Participant or (2) the remittance by the Participant of an amount equal to the
amount required to be deducted or withheld prior to such contribution or
payment, as determined by the Company or the Affiliated Company, CTE or CMI,
as the case may be, in its sole discretion.
14.5. Effect of Denial of Tax Treatment. Pre-tax
Contributions under Section 5 and issuances of Shares under Section 6 are
intended to be taxable to Participants no earlier than the time that Shares or
other amounts ire distributed by the Trustee or the escrow agent, as the case
may be. If, in the sole determination of the Administrator, taxation of any
such amount to Participants is accelerated to any earlier time, the
Administrator shall cause that number of Shares or other amounts to be
distributed to Participants equal in value to the accelerated income.
14.6. Section 16. The Administrator may issue
special rules relating to participation by Employees who are subject to Section
16 of the Securities Exchange Act of 1934, as amended from time to time.
RCN CORPORATION
By:___________________________
Date:_________________________
RCN CORPORATION
1997 EQUITY INCENTIVE PLAN
1. Definitions
The purpose of the Plan is to provide a means through which the Company
may attract able persons to enter and remain in the employ of the Company and
its Subsidiaries and to provide a means whereby they can acquire and maintain
Common Stock ownership, or be paid incentive compensation measured by reference
to the value of Common Stock, thereby strengthening their commitment to the
welfare of the Company and promoting an identity of interest between
stockholders of the Company and these employees, directors and consultants.
So that the appropriate incentive can be provided, the Plan provides for
granting Incentive Stock Options, Nonqualified Stock Options, Outperformance
Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit
Awards, Performance Stock Unit Awards and other Stock-based awards, or any
combination of the foregoing.
2. Definitions
The following definitions shall be applicable throughout the Plan.
(a) "Award" means, individually or collectively, any Incentive Stock
Option, Nonqualified Stock Option, Outperformance Option, Stock Appreciation
Right, Restricted Stock Award, Phantom Stock Unit Award, Performance Share Unit
Award or any other Stock-based award under the Plan.
(b) "Award Agreement" means the agreement between the Company and a
Participant who has been granted an Award which defines the rights and
obligations of the parties with respect to such Award.
(c) "Award Period" means a period of time within which performance is
measured for the purpose of determining whether an Award of Performance Share
Units has been earned.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause" means the Company or a Subsidiary (as the case may be) having
cause to terminate a Participant's employment or service in accordance with the
provisions of any existing employment, consulting or any other agreement
between the Participant and the Company or a Subsidiary (as the case may be)
or, in the absence of such an employment, consulting or other agreement, upon
(i) the determination by the Company or a Subsidiary (as the case may be) that
the Participant has ceased to perform his duties to the Company or a Subsidiary
(as the case may be) (other than as a result of his incapacity due to physical
or mental illness or injury), which failure amounts to intentional and extended
neglect of his duties, (ii) the Committee's determination that the Participant
has engaged in conduct materially injurious to the Company, or (iii) the
Participant having pled no contest to a charge of a felony or having been
convicted of a felony.
(f) A "Change in Control" shall be deemed to occur, unless the Board
otherwise directs by prior resolution, in the event that:
(i) Except as provided in subparagraph (v) of this definition, any
person, entity or group (within the meaning of Section 13(d) (3) of the
Exchange Act, other than Peter Kiewit & Sons, Inc. and its affiliates,
becomes directly or indirectly, in a single transaction or in a related
series of transactions by way of merger, consolidation or other business
combination or otherwise, the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of the capital stock of the Company entitled to
more than 40% of the aggregate votes represented by the capital stock of
all classes of common stock of the Company entitled to vote generally in
the election of directors ("Outstanding Voting Securities"); provided,
however, that the following acquisitions will not constitute a Change of
Control: (A) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Subsidiary or (B) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation,
the conditions described in clauses (A) and (B) of clause (iii) of this
definition are satisfied; or
(ii) Individuals who, as of the effective date of the Plan,
constitute the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the Company's
Board of Directors; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board will be
considered as though such individual were a member of the Incumbent Board;
or
(iii) The occurrence of a reorganization, merger or consolidation, in
each case, unless, following such reorganization, merger or consolidation,
(A) more than 50% of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation in substantially the
same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the Outstanding Voting
Securities, and (B) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company, as applicable, or (B) the sale
or other disposition of all or substantially all of the assets of the
Company, other than to a corporation, with respect to which following such
sale or other disposition, (1) more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively
of the Outstanding Voting Securities immediately prior to such sale or
other disposition, in substantially the same proportion as their ownership
immediately prior to such sale or other disposition, of the Outstanding
Voting Securities and (2) at least a majority of the members of the board
of directors of such corporation were members of the Incumbent Board at
the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company;
provided, however, that no transaction resulting in the disposition of one
or more Subsidiaries or other business units of the Company will be
treated as substantially all of the assets of the Company unless the
assets so disposed of comprise more than 90% of all corporate assets.
(v) If Peter Kiewit & Sons, Inc. and its affiliates reduce their
direct or indirect ownership interest of the Outstanding Voting Securities
of the Company (the "Kiewit Interest"), below the percentage of ownership
of such securities on the Effective Date, then there shall be substituted,
for the reference to "50%" appearing in the text of subparagraph (i) of
this definition, a percentage equal to 50% minus the number of whole
percentage points by which the Kiewit Interest was reduced below 50%, but
the substituted percentage shall in no event be less than 40%.
(g) "Code" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations under
such section.
(h) "Committee" means the Compensation Committee appointed by the Board to
administer the Plan.
(i) "Common Stock" means the common stock, par value $1.00 per share, of
the Company.
(j) "Company" means RCN Corporation, a Delaware corporation.
(k) "Date of Grant" means the date on which the granting of an Award
authorized or such other date as may be specified in such authorization.
(l) "Disability" means that the Participant has been determined to meet
the requirements for payment of long-term disability benefits be reason of
total disability in accordance with the provisions of the Company's Long-Term
Disability Plan.
(m) "Eligible Person" means any (i) person regularly employed by the
Company or Parent or a Subsidiary; provided, however, that no such employee
covered by a collective bargaining agreement shall be an Eligible Person unless
and to the extent that such eligibility is set forth in such collective
bargaining agreement or in an agreement or instrument relating thereto; (ii)
director of the Company; (iii) consultant to the Company or a Subsidiary; or
(iv) employee of Cable Michigan, Inc. ("CMI") or C-TEC Corporation ("C-TEC") or
any successors thereto who is or may be granted options to purchase shares of
Common Stock in connection with a distribution by C-TEC to its shareholders of
shares of Common Stock.
(n) "Exchange Act" means the Security Exchange Act of 1934.
(o) "Fair Market Value" on a given date means (i) if the Stock is listed
on a national securities exchange, the average between the highest and lowest
sale prices reported as having occurred on the primary exchange with which the
Stock is listed and traded on the date prior to such date, or, if there is no
such sale on that date, then on the last preceding date on which such a sale
was reported; (ii) if the Stock is not listed on any national securities
exchange but is quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, the average between the highest and lowest sale reported on the date
prior to such date, or, if there is no such sale on that date, then on the last
preceding date on which a sale was reported; or (iii) if the Stock is not
listed on a national securities exchange nor quoted in the National Market
System of the National Association of Securities Dealers Automated Quotation
System on a last sale basis, the amount determined by the Committee to be the
fair market value based upon a good faith attempt to value the Stock
accurately.
(p) "Holder" means a Participant who has been granted an Award.
(q) "Incentive Stock Option" means an Option granted by the Committee to a
Participant under the Plan which is designated by the Committee as an
"incentive stock option" within the meaning of Section 422 of the Code.
(r) "Non-Employee Director" means a "non-employee director" within the
meaning of Rule 16b-3 of the Exchange Act or any successor rule or regulation.
(s) "Nonqualified Stock Option" means an Option granted under the Plan
which is not designated as an Incentive Stock Option.
(t) "Normal Termination" means termination of employment or service with
the Company or a Subsidiary, C-TEC or CMI, as the case may be:
(i) Upon retirement pursuant to the retirement plan of the Company or
a subsidiary (as the case may be), as may be applicable at the time to the
Participant in question;
(ii) On account of Disability; or
(iii) By the Company without Cause.
(u) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(v) "Option Period" means the Period of time set by the Committee after
which time an Option, OSO or SAR will expire.
(w) "Option Price" means the exercise price set for an Option described in
Section 7(a).
(x) "Outperformance Option" or "OSO" means an Award granted under Section
8.
(y) "Outside Director" means a member of the Board who is not also an
employee of the Company.
(z) "Participant" means an Eligible Person who has been selected by the
Committee to participate in the Plan and to receive an Award.
(aa) "Performance Goals" means the performance objective of the Company
during an Award Period, Restricted Period or other period, with respect to
Performance Share Units, Restricted Stock, Phantom Stock Units or other Awards,
respectively, established for the purpose of determining whether, and to what
extent, such Awards will be earned for such period. Performance goals intended
to comply with Section 162(m) of the Code shall be based on the business
criteria available to set performance goals under the Company's 1997 Bonus
Plan.
(bb) "Performance Share Unit" means a hypothetical investment equivalent
equal to one share of Stock granted in connection with an Award made under
Section 10.
(cc) "Phantom Stock Unit" means a hypothetical investment equivalent equal
to one share of Stock granted in connection with an Award made under Section
11.
(dd) "Plan" means the Company's 1997 Equity Incentive Plan.
(ee) "Qualified Committee" means a committee composed of at least two
Qualified Directors.
(ff) "Qualified Director" means a person who is (i) a Non-Employee
Director and (ii) an "outside director" within the meaning of Section 162(m) of
the Code.
(gg) "Restricted Period" means, with respect to any share of Restricted
Stock or any Phantom Stock Unit, the period of time determined by the Committee
during which such Award is subject to the restrictions set forth in Section 11.
(hh) "Restricted Stock" means shares of Stock issued or transferred to a
Participant subject to forfeiture and the other restrictions set forth in
Section 11.
(ii) "Restricted Stock Award" means an Award of Restricted Stock granted
under Section 11.
(jj) "Securities Act" means the Securities Act of 1933, as amended.
(kk) "Stock" means the Common Stock or such other authorized shares of
stock of the Company as from time to time may be authorized for use under the
Plan.
(ll) "Stock Appreciation Right" or "SAR" means an Award granted under
Section 9.
(mm) "Subsidiary" means a corporation which is a "subsidiary corporation"
of the Company or the Parent as defined in Section 424 of the Code.
(nn) "Adjusted Price" shall have the meaning ascribed thereto in
subsection 8(c).
(oo) "Annualized Percentage RCN Stock Price Change" shall have the meaning
ascribed thereto in subsection 8(g).
(pp) "Annualized Percentage S&P Change" shall have the meaning ascribed
thereto in subsection 8(g).
(qq) "Annualized Percentage S&P Performance" shall have the meaning
ascribed thereto in subsection 8(c).
(rr) "RCN Period" shall have the meaning ascribed thereto in subsection
8(g).
(ss) "Dividend Equivalents" shall have the meaning ascribed thereto in
subsection 11(a)(iv).
(tt) "Initial Price" shall have the meaning ascribed thereto in subsection
8(b).
(uu) "Multiplier" shall have the meaning ascribed thereto in subsection
8(f).
(vv) "Outperformance Percentage" shall have the meaning ascribed thereto
in subsection 8(h).
(ww) "S&P Period" shall have the meaning ascribed thereto in subsection
8(c).
(xx) "Substituted Index" shall have the meaning ascribed thereto in
subsection 8(j).
(yy) "Parent" means a corporation which is a "parent corporation" of the
Company as defined in Section 424 of the Code.
3. Effective Date, Duration and Shareholder Approval
The Plan is effective as of October 1, 1997, the date of adoption of the
Plan by the Board. The effectiveness of the Plan and the validity of any and
all Awards granted pursuant to the Plan is contingent upon approval of the Plan
by the stockholders of the Company in a manner which complies with (i) Section
422(b)(1) and Section 162(m) of the Code and (ii) the requirements of the
primary national securities exchange with which the Common Stock is listed, if
so listed, and/or the National Market System of the National Association of
Securities Dealers Automated Quotation System, if the Common Stock is quoted
thereon. Unless and until the stockholders approve the Plan in compliance with
the applicable requirements, no Award granted under the Plan shall be
effective.
The expiration date of the Plan, after which no Awards may be granted
hereunder, shall be September 30, 2007; provided, however, that the
administration of the Plan shall continue in effect until all matters relating
to the payment of Awards previously granted have been settled.
4. Administration
The Committee shall administer the Plan. The majority of the members of
the Committee shall constitute a quorum. The acts of majority of the members
present at any meeting at which a quorum is present or acts approved in writing
by a majority of the Committee shall be deemed the acts of the Committee.
Subject to the provisions of the Plan, the Committee shall have exclusive
power to:
(a) Select the Eligible Persons to participate in the Plan;
(b) Determine the nature and extent of the Awards to be made to each
Participant;
(c) Determine the time or times when Awards will be made to Eligible
Persons;
(d) Determine the duration of each Award Period and Restricted Period;
(e) Determine the conditions to which the payment of Awards may be
subject;
(f) Establish the Performance Goals, if any, for each Award;
(g) Prescribe the form of Award Agreement or other form or forms
evidencing Awards;
(h) Cause records to be established in which there shall be entered, from
time to time as Awards are made to Eligible Persons, the date of each Award,
the number of Incentive Stock Options, Nonqualified Stock Options, OSOs, SARs,
Phantom Stock Units, Performance Share Units, shares of Restricted Stock and
any other Awards granted by the Committee to each Eligible Person, the
expiration date and the duration of any applicable Award Period or Restricted
Period and the number of shares of Stock underlying each Award; and
(i) At any time prior to or in connection with any termination of
employment or service of a Holder with the Company or its subsidiaries, provide
for a longer post-termination exercise or survival period with respect to any
Award (not to exceed three years) or modify any such forfeiture provisions with
respect to any Award; except to the extent that the ability to so modify an
Award shall cause an Award intended to qualify as "performance-based" under
Section 162(m) to not so qualify.
The Committee shall have the authority, subject to the provisions of the
Plan, to establish, adopt, or revise such rules and regulations and to make all
such determinations relating to the Plan as it may deem necessary or advisable
for the administration of the Plan. The Committee's interpretation of the Plan
or any documents evidencing Awards granted pursuant thereto and al decisions
and determinations by the Committee with respect to the Plan shall be final,
binding, and conclusive on all parties unless otherwise determined by the
Board.
5. Grant of Awards; Shares Subject to the Plan
The Committee may, from time to time, grant Awards of Options, OSOs, Stock
Appreciation Rights, Restricted Stock, Phantom Stock Units, Performance Share
Units and/or any other Award authorized under the Plan to one or more Eligible
Persons; provided, however, that:
(a) Subject to Section 15, the aggregate number of shares of Stock made
subject to all Awards may not exceed 5,000,000, plus shares of stock issuable
pursuant to awards hereunder in connection with the distribution by C-TEC to its
shareholders of shares of Common Stock.
(b) Such shares shall be deemed to have been used in payment of Awards
whether they are actually delivered or the Fair Market Value equivalent of such
shares is paid in cash. In the event any Option, OSO, SAR not attached to an
Option, Restricted Stock Award, Phantom Stock Unit, Performance Share Unit
shall be surrendered, terminate, expire, or be forfeited or any other Award,
the number of shares of Stock no longer subject thereto shall thereupon be
released and shall thereafter be available for new Awards under the Plan;
(c) Stock delivered by the Company in settlement of Awards under the Plan
may be authorized and unissued Stock or Stock held in the treasury of the
Company or may be purchased on the open market or by private purchase;
(d) No Participant may receive Awards under the Plan with respect to more
than 1,000,000 shares of Stock in any one year; and
(e) The Committee may, in its sole discretion, require a Participant to
pay consideration for an Award in an amount and in a manner as the Committee
deems appropriate.
6. Eligibility
Participation shall be limited to Eligible Persons who have received
written notification from the committee, or from a person designated by the
Committee, that they have been selected to participate in the Plan.
7. Stock Options
The Committee is authorized to grant one or more Incentive Stock Options
or Nonqualified Stock Options to any Eligible Person; provided, however, that
no Incentive Stock Options shall be granted to any Eligible Person who is not
an employee of the Company. Each Option so granted shall be subject to the
following conditions, or to such other conditions as may be reflected in the
applicable Award Agreement.
(a) Option price. The Option Price per share of Stock for each Option
shall be set by the Committee at the time of grant but, with respect to
Incentive Stock Options, shall not be less than the Fair Market Value of a
share of Stock at the Date of Grant.
(b) Manner of exercise and form of payment. Options which have become
exercisable may be exercised by delivery of written notice of exercise to the
Committee accompanied by payment of the Option Price. The Option Price shall be
payable in cash or, in the discretion of the Committee, either (i) in shares of
Stock valued at the Fair Market Value at the time the Option is exercised, (ii)
in other property having a fair market value on the date of exercise equal to
the Option Price, or (iii) by delivering to the Committee a copy of irrevocable
instructions to a stockbroker to deliver promptly to the Company an amount of
sale or loan proceeds sufficient to pay the Option Price.
(i) Option Period and Vesting. Options shall vest and become
exercisable in such manner and on such date or dates as shall be
determined by the Committee. The Committee shall also establish an Option
Period which shall not exceed ten years. Notwithstanding any dates set by
the Committee for vesting and exercisability, the Committee may in its
sole discretion accelerate the vesting and exercisability of any Option.
If an Option is exercisable in installments, exercise of one installment
shall not effect the Holder's ability to exercise unexercised installments
in accordance with the terms of the Plan and the applicable Award
Agreement. The Option shall expire upon a Holder's termination of
employment with the Company or a Subsidiary at such times as are set forth
in Section 13.
(c) Other Terms and Conditions. Each Option granted under the Plan shall
be evidenced by an Award Agreement, which shall contain such provisions as may
be determined by the Committee and, except as may be specifically stated
otherwise in such Award Agreement, be subject to the following terms and
conditions:
(i) Each Option or portion thereof that is exercisable shall be
exercisable for the full amount or for any part thereof.
(ii) Each share of Stock purchased through the exercise of an Option
shall be paid for in full at the time of the exercise. Each Option shall
cease to be exercisable, as to any share of Stock, when the Holder
purchases the share or exercises a related SAR or when the Option expires.
(iii) Subject to Section 14(k), Options shall not be transferable by
the Holder except by will or the laws of descent and distribution and
shall be exercisable during the Holder's lifetime only by the Holder.
(iv) Each Option shall vest and become exercisable by the Holder in
accordance with the vesting schedule established by the Committee and set
forth in the Award Agreement.
(v) Each Award Agreement may contain a provision that, upon demand by
the Committee for such a representation, the Holder shall deliver to the
Committee at the time of the exercise of an Option a written
representation that the shares to be acquired upon such exercise are to be
acquired for investment and not for resale or with a view to the
distribution thereof. Upon such demand, delivery of such representation
prior to the delivery of any shares issued upon exercise of an Option
shall be a condition precedent to the right of the Holder or such other
person to purchase any shares. In the event certificates for Stock are
delivered under the Plan with respect to which such investment
representation has been obtained, the Committee may cause a legend or
legends to be placed on such certificates to make appropriate reference to
such representation and to restrict transfer in the absence of compliance
with applicable federal or state securities laws.
(vi) Each Incentive Stock Option Award Agreement shall contain a
provision requiring the Holder to notify the Company in writing
immediately after the Holder makes a disqualifying disposition of any
Stock acquired pursuant to the exercise of such Incentive Stock Option. A
disqualifying disposition is any disposition (including any sale) of such
Stock before the later of (a) two years after the Date of Grant of the
Incentive Stock Option or (b) one year after the date the Holder acquired
the Stock by exercising the Incentive Stock Option.
(d) Incentive Stock Option Grants to 10% Stockholders. Notwithstanding
anything to the contrary in this Section 7, if an Incentive Stock Option is
granted to a Holder who owns stock representing more than ten percent of the
voting power of all classes of stock of the Company, its Parent or of a
Subsidiary, the Option Period shall not exceed five years from the Date of
Grant of such Option and the Option Price shall be at least 110 percent of the
Fair Market Value (on the Date of Grant) of the Stock subject to the Option.
(e) $100,000 Per Year Limitation for Incentive Stock Options. To the
extent the aggregate Fair Market Value (determined as of the Date of Grant) of
Stock for which Incentive Stock Options are exercisable for the first time by
any Participant during any calendar year (under all plans of the Company, its
Parent and its Subsidiaries) exceeds $100,000, the portion of the Option under
which such excess arises shall be treated as Nonqualified Stock Option.
(f) Voluntary Surrender. The Committee may permit the voluntary surrender
of all or any portion of any Nonqualified Stock Option issued pursuant to this
Section 7 and its corresponding SAR, if any, granted under the Plan to be
conditioned upon the granting to the Holder of a new Option for the same or a
different number of shares as the Option surrendered or require such voluntary
surrender as a condition precedent to a grant of a new Option to such
Participant. Such new Option shall be exercisable at an Option Price, during an
Option Period, and in accordance with any other terms or conditions specified
by the Committee at the time the new Option is granted, all determined in
accordance with the provisions of the Plan without regard to the Option Price,
Option Period, or any other terms and conditions of the Nonqualified Stock
Option surrendered.
8. Outperformance Options
The Committee may from time to time at its discretion, subject to the
provisions of the Plan, grant one or more Outperformance Options to any
Eligible Person. At the time of each grant, the Committee shall determine the
number of shares subject to such Outperformance Options and, subject to the
provisions of the Plan, any other terms or conditions affecting the
Outperformance Options. Each such Outperformance Option shall be evidenced by
an Award Agreement containing terms and conditions established by the Committee
not inconsistent with the provisions of the Plan. Such agreements need not be
identical with respect to Participants.
Subject to subsections 8(i) and 8(j) below, the terms of the
Outperformance Options granted pursuant to this Plan shall including the
following:
(a) Each Outperformance Option shall relate to a number of shares of
Stock.
(b) The initial per-share exercise price of an Outperformance Option
(the "Initial Share") shall be equal to the Fair Market Value per share of
Stock on the trading day immediately preceding the Date of Grant.
(c) The Initial Price shall be adjusted upward or downward as of the
date of exercise of such Outperformance Option (the "Adjusted Price"), by
a percentage equal to the annualized percentage increase or decrease in
the Standard & Poor's 500 Index (the "Annualized Percentage S&P
Performance") over the period (the "S&P Period") beginning on the date of
grant and ending on the trading day immediately preceding the date of
exercise; provided, however, that the Adjusted Price may never be less
than the Initial Price unless the closing price of stock on the trading
day immediately preceding the date of exercise is equal to or greater than
the Initial Price. For purposes of determining the Annualized Percentage
S&P Performance with respect to any S&P Period, the Standard & Poor's 500
Index as of the last day of the S&P Period shall be deemed to equal the
average closing value of such index over the ten-consecutive-trading day
period ending on the last day of such S&P Period.
(d) The Option Period of each Outperformance Option shall be ten (10)
years from the date of grant or such shorter period as determined by the
Committee.
(e) Each Outperformance Option shall become vested and exercisable in
accordance with the terms and conditions established by the Committee and
reflected in the written Award Agreement.
(f) Upon receipt by the Committee of a Holder's notice of intent to
exercise an Outperformance Option, the Committee shall deliver to the
Participant with respect to and in cancellation of the portion of the
Outperformance Option being exercised (i) a number of whole shares of
Stock with a fair market value equal to the product of (a) the closing
price of a share of Stock on the trading day immediately preceding the
date of exercise, less the Adjusted Price, multiplied by (B) the
multiplication factor to be applied to the Outperformance Option (the
"Multiplier"), plus (ii) cash in lieu of fractional shares, unless the
Committee determines, in its discretion, to elect any one or more of the
following methods of payment with respect to and in cancellation of the
Outperformance Option: (1) the Committee may, upon the receipt from the
Participant of an amount with respect to the portion of the Outperformance
Option being exercised equal to the Adjusted Price multiplied by the
Multiplier, deliver to such Participant a number of shares of Stock equal
to the product of the number of shares relating to the Outperformance
Option being exercised and the Multiplier; or (2) the Committee may
provide to a Participant any other form of benefit or arrangement
(including, without limitation, shares of Common Stock, cash or a
combination thereof) which, in the Committee's judgment after considering
all relevant factors, provides substantially equivalent economic benefit
to such Participant.
(g) The Multiplier shall be determined on the date of exercise based
on the extent to which the annualized percentage change (expressed as a
whole percentage point followed by two decimal places) in the fair market
value per share of Stock (the "Annualized Percentage RCN Stock Price
Change") over the period (the "RCN Period") beginning on the date of grant
and ending on the trading day immediately preceding the date of exercise
exceeds the annualized percentage change (expressed as a whole percentage
point followed by two decimal places) in the Standard and Poor's 500 Index
(the "Annualized Percentage S&O Change") over the corresponding S&P Period
(determined in a manner consistent with the determination of the
Annualized Percentage S&P Performance under paragraph (c) above.
(h The Multiplier shall be based on a range of factors each
corresponding to a percentage (the "Outperformance Percentage") by which
the Annualized Percentage RCN Stock Price Change exceeds the Annualized
Percentage S&P Change. The range of factors and their relationship to the
Outperformance Percentage shall be established by the Committee, at the
sole discretion of the Committee (based on whatever information it deems
appropriate), at the time of grant of the OSO, which factors and
Outperformance Percentage may vary from Award to Award; provided, however,
that, subject to adjustment as provided in Section 15 below, the
Multiplier may not exceed eight (8).
(i Notwithstanding the foregoing provisions of this Section 8, the
Committee may provide in the Award Agreement that the Multiplier shall be
reduced by a percentage or percentages, with respect to any portion of the
OSO exercised during one or more years following the Date of Grant. For
purposes of determining the Annualized Percentage RCN Stock Price Change
with respect to any RCN Period, the Fair Market Value of a share of
Company Stock as of the last day of any RCN Period shall be deemed to
equal the average of the closing prices of such share of stock over the
ten-consecutive-trading-day period ending on the last day of such RCN
Period.
(j Notwithstanding the foregoing provisions of this Section 8, the
Committee may substitute, with respect to one or more tranches of grants,
any other nationally recognized broad-based index of stock prices
established and maintained by an independent third party (a "Substituted
Index") for the Standard & Poor's 500 Index. Any such substitution may
only be made at the time of the grant. If any such index is substituted
for the Standard & Poor's Index, all defined terms used in the calculation
of amounts due in respect of Outperformance Options which take their
meaning by reference for the Standard & Poor's 500 Index shall instead
take their meaning by reference to the Substituted Index.
9. Stock Appreciation Rights
Any Option granted under the Plan may include SARs, either at the Date of
Grant or, except in the case of an Incentive Stock Option, by subsequent
amendment. The Committee also may award SARs to Eligible Persons independent of
any Option. An SAR shall confer on the Holder thereof the right to receive in
shares of Stock, cash or a combination thereof the value equal to the excess of
the Fair Market Value of one share of Stock on the date of exercise over the
exercise price for the SAR, with respect to every share of Stock for which the
SAR is granted. An SAR shall be subject to such terms and conditions not
inconsistent with the Plan as the Committee shall impose, including, but not
limited to, the following:
(a Vesting. SARS granted in connection with an Option shall become
exercisable, be transferable and shall expire according to the same vesting
schedule, transferability rules and expiration provisions as the corresponding
Option. An SAR granted independent of an Option shall become exercisable, be
transferable and shall have an Option Period in accordance with a vesting
schedule, transferability rules and expiration provisions as established by the
Committee and reflected in an Award Agreement.
(b Automatic exercise. If on the last day of the Option Period, the Fair
Market Value of the Stock exceeds the Option Price (or in the case of an SAR
granted independent of an Option, the Fair Market Value of the Stock on the
Date of Grant), the Holder has not exercised the SAR or the corresponding
Option, and neither the SAR nor the corresponding Option has expired, such SAR
shall be deemed to have been exercised by the Holder on such last day and the
Company shall make the appropriate payment therefor.
(c Payment. Upon the exercise of an SAR, the Company shall pay to the
Holder an amount equal to the number of shares subject to the SAR multiplied by
the excess, if any, of the Fair Market Value of one share of Stock on the
exercise date over the Option Price, in the case of an SAR granted in
connection with an Option, or the Fair Market Value of one share of Stock on
the Date of Grant, in the case of an SAR granted independent of an Option. The
Company shall pay such excess in cash, in shares of Stock valued at Fair Market
Value, or any combination thereof, as determined by the Committee. Fractional
shares shall be settled in cash.
(d Method of exercise. A Holder may exercise an SAR after such time as
the SAR vests by filing an irrevocable written notice with the Committee or its
designee, specifying the number of SARs to be exercised, and the date on which
such SARs were awarded.
(e Expiration. Each SAR shall cease to be exercisable, as to any share of
Stock, when the Holder exercises the SAR or exercises a related Option, with
respect to such shares of Stock. In the case of an SAR granted independent of
an Option, the Option Period shall be set by the Committee on the Date of Grant
and shall not exceed ten years.
10. Performance Shares
(a Award grants. The Committee is authorized to establish Performance
Share programs to be effective over designated Award Periods determined by the
Committee. The Committee may grant Awards of Performance Share Units to
Eligible Persons in accordance with such Performance Share programs. Before or
within 90 days after the beginning of each Award Period, the Committee will
establish written Performance Goals base upon financial objectives for the
Company for such Award Period and a schedule relating the accomplishment of the
Performance Goals to the Awards to be earned by Holders. The Committee shall
determine the number of Performance Share Units to be awarded, if any, to each
Eligible Person who is selected to receive such an Award. The Committee may add
new Participants to a Performance Share program after its commencement by
making pro rata grants.
(b Determination of Award. At the completion of a Performance Share Award
Period (provided the Holder is still in the employ or service of the Company or
a Subsidiary), or at other times as specified by the Committee, the Committee
shall calculate the number of shares of Stock earned with respect to each
Holder's Performance Share Unit Award by multiplying the number of Performance
Share Units granted to the Participant by a performance factor representing the
degree of attainment of the Performance Goals. To the degree that the
Performance Goals are not achieved at the end of the Performance Share Award
Period, the Award shall expire.
(c Partial Awards. A Participant for less than a full Award Period, by
reason of commencement of employment after the beginning of an Award Period,
shall receive such portion of an Award, if any, for that Award Period as the
Committee shall determine.
(d Payment of Performance Share Unit Awards. Performance Share Unit
Awards shall be payable in that number of shares of Stock determined in
accordance with Section 9(b); provided, however, that, at its discretion, the
Committee may make payment to any Participant in the form of cash upon the
specific request of such Participant. The amount of any payment made in cash
shall be based upon the Fair Market Value of the Stock on the day prior to
payment. Payments of Performance Share Unit Awards shall be made as soon as
practicable after the completion of an Award Period.
(e Adjustment of Performance Goals. The Committee may, during the Award
Period, make such adjustments to Performance Goals as it may deem appropriate,
to compensate for, or reflect, (i) extraordinary or non-recurring events
experienced during an Award Period by the Company or by any other corporation
whose performance is relevant to the determination of whether Performance Goals
have been attained; (ii) any significant changes that may have occurred during
such Award Period in applicable accounting rules or principles or changes in
the Company's method of accounting or in that of any other corporation whose
performance is relevant to the determination of whether an Award has been
earned or (iii) any significant changes that may have occurred during such
Award Period in tax laws or other laws or regulations that alter or affect the
computation of the measures of Performance Goals used for the calculation of
Awards; provided, however, that, with respect to such Awards intended to
qualify as "performance-based compensation" under Section 162(m) of the Code,
such adjustment shall be made only to the extent that the Committee determines
that such adjustments may be made without a loss of deductibility of the
compensation includible with respect to such Award under Section 162(m) of the
Code.
11. Restricted Stock Awards and Phantom Stock Units
(a Award of Restricted Stock and Phantom Stock Units.
(i The Committee shall have the authority (1) to grant Restricted
Stock and Phantom Stock Unit Awards, (2) to issue or transfer Restricted
Stock to Eligible Persons, and (3) to establish terms, conditions and
restrictions applicable to such Restricted Stock and Phantom Stock Units,
including the Restricted Period, which may differ with respect to each
grantee, the time or times at which Restricted Stock or Phantom Stock
Units shall be granted or become vested and the number of shares or units
to be covered by each grant.
(ii The Holder of a Restricted Stock Award shall execute and deliver
to the Company an Award Agreement with respect to the Restricted Stock
setting forth the restrictions applicable to such Restricted Stock. If the
Committee determines that the Restricted Stock shall be held in escrow
rather than delivered to the Holder pending the release of the applicable
restrictions, the Holder additionally shall execute and deliver to the
Company (i) an escrow agreement satisfactory to the Committee, and (ii)
the appropriate blank stock powers with respect to the Restricted Stock
covered by such agreements. If a Holder shall fail to execute a Restricted
Stock Award Agreement and, if applicable, an escrow agreement and stock
powers, the Award shall be null and void. Subject to the restrictions set
forth in Section 10(b), the Holder shall generally have the rights and
privileges of a stockholder as to such Restricted Stock, including the
right to vote such Restricted Stock. At the discretion of the Committee,
cash dividends and stock dividends with respect to the Restricted Stock
may be either currently paid to the Holder or withheld by the Company for
the Holder's account, and interest may be paid on the amount of cash
dividends withheld at a rate and subject to such terms as determined by
the Committee. Cash dividends or stock dividends so withheld by the
Committee shall not be subject to forfeiture.
(iii Upon the Award of Restricted Stock, the Committee shall cause a
stock certificate registered in the name of the Holder to be issued and,
if it so determines, deposited together with the stock powers with an
escrow agent designated by the Committee. If an escrow arrangement is
used, the Committee shall cause the escrow agent to issue to the Holder a
receipt evidencing any stock certificate held by it registered in the name
of the Holder.
(iv The terms and conditions of a grant of Phantom Stock Units shall
be reflected in a written Award Agreement. No shares of Stock shall be
issued at the time a Phantom Stock Unit Award is made, and the Company
will not be required to set aside a fund for the payment of any such
Award. Holders of Phantom Stock Units shall receive an amount equal to the
cash dividends paid by the Company upon one share of Stock for each
Phantom Stock Unit then credited to such Holder's account ("Dividend
Equivalents"). The Committee shall, in its sole discretion, determine
whether to credit to the account of, or to currently pay to, each Holder
of an Award of Phantom Stock Units such Dividend Equivalents. Dividend
Equivalents credited to a Holder's account shall be subject to forfeiture
on the same basis as the related Phantom Stock Units, and may bear
interest at a rate and subject to such terms as are determined by the
Committee.
(b Restrictions
(i Restricted Stock awarded to a Participant shall be subject to the
following restrictions until the expiration of the Restricted Period, and
to such other terms and conditions as may be set forth in the applicable
Award Agreement: (1) if an escrow arrangement is used, the Holder shall
not be entitled to delivery of the stock certificate; (2) the shares shall
be subject to the restrictions on transferability set forth in the Award
agreement; (3) the shares shall be subject to forfeiture until the
expiration of the Restricted Period, upon the termination of employment or
service with the Company or a Subsidiary, to the extent provided in
Section 13 and the Award Agreement and, to the extent such shares are
forfeited, the stock certificates shall be returned to the Company, and
all rights of the Holder to such shares and as a shareholder shall
terminate without further obligation on the part of the Company.
(ii Phantom Stock Units awarded to any Participant shall be subject
to (1) forfeiture until the expiration of the Restricted Period, upon the
termination of employment or service with the Company or a Subsidiary, to
the extent provided in Section 13 and the Award Agreement, and to the
extent such Awards are forfeited, all rights of the Holder to such Awards
shall terminate without further obligation on the part of the Company and
(2) such other terms and conditions as may be set forth in the applicable
Award Agreement.
(iii The Committee shall have the authority to remove any or all of
the restrictions on the Restricted Stock and Phantom Stock Units whenever
it may determine that, by reason of changes in applicable laws or other
changes in circumstances arising after the date of the Restricted Stock
Award or Phantom Stock Award, such action is appropriate.
(c Restricted Period. The Restricted Period of Restricted Stock or
Phantom Stock Units shall commence on the Date of Grant and shall expire from
time to time as to that part of the Restricted Stock or Phantom Stock Units
indicated in a schedule established by the Committee and set forth in a written
Award Agreement.
(d Delivery of Restricted Stock and Settlement of Phantom Stock Units.
Upon the expiration of the Restricted Period with respect to any shares of
Stock covered by a Restricted Stock Award, the restrictions set forth in
Section 11(b) and the Award Agreement shall be of no further force or effect
with respect to shares of Restricted Stock which have not then been forfeited.
If an escrow arrangement is used, upon such expiration, the Company shall
deliver to the Holder, or his beneficiary, without charge, the Stock
Certificate evidencing the shares of Restricted Stock which have not then been
forfeited and with respect to which the Restricted Period has expired (to the
nearest full share) and any cash dividends or stock dividends credited to the
Holder's account with respect to such Restricted Stock and the interest
thereon, if any.
Upon the expiration of the Restricted Period with respect to any Phantom
Stock Units covered by a Phantom Stock Unit Award, the Company shall deliver to
the Holder, or his beneficiary, without charge, one share of Stock for each
Phantom Stock Unit which has not then been forfeited and with respect to which
the Restricted Period has expired and cash equal to any Dividend Equivalents
credited with respect to each such Phantom Stock Unit and the interest thereon,
if any; provided, however, that, if so noted in the applicable Award Agreement,
the Committee may, in its sole discretion, elect to pay cash or part cash and
part Stock in lieu of delivering only Stock for Vested Units. If cash payment
is made in lieu of delivering Stock, the amount of such payment shall be equal
to the Fair Market Value of the Stock as of the date on which the Restricted
Period lapsed with respect to such Phantom Stock Unit.
(e Stock Restrictions. Each certificate representing Restricted Stock
awarded under the Plan shall bear the following legend until the end of the
Restricted Period with respect to such Stock:
"Transfer of this certificate and the shares represented hereby is
restricted pursuant to the terms of a Restricted Stock Agreement, dated as
of __________, between RCN Corporation and ______________. A copy of such
Agreement is on file at the offices of the Company at
_________________________."
Stop transfer orders shall be entered with the Company's transfer agent
and registrar against the transfer of legended securities.
12. Other Awards
The Committee may issue unrestricted Stock or any other Stock-based award,
including performance-based Options, under the Plan to Eligible Persons, alone
or in tandem with other Awards, in such amounts and subject to such terms and
conditions as the Committee shall from time to time in its sole discretion
determine. Stock bonus awards under the Plan may be granted as, or in payment
of, a bonus, or to provide incentives or recognize special achievements or
contributions.
13. Expiration of Award upon Termination of Employment
Except as otherwise determined by the Committee and set forth in an Award
Agreement, the following provisions will apply to Awards upon a Holder's
termination of employment with the Company or a Subsidiary, C-TEC or CMI, as
the case may be.
(a Options, OSOs and SARs
(i If prior to the end of the Option Period (with respect to any
Option, OSO or SAR), the Holder shall undergo a Normal Termination, all
unvested Options, OSOs and SARs then held by such holder shall expire on
the date of Normal Termination and all vested options, OSOs and SARs then
held by such Holder shall expire on the earlier of the last day of the
respective Option Period or the Date that is three months after the date
of such Normal Termination. All vesting with respect to Options, OSOs and
SARs shall cease on the date of Normal termination and all Options, OSOs
and SARs which are vested as of such date shall remain exercisable by the
Holder until their expiration as provided above.
(ii If the Holder dies prior to the end of the Option Period (with
respect to any Option, OSO or SAR) and while still in the employ or
service of the Company or a Subsidiary, C-TEC or CMI, C-TEC or CMI, as the
case may be, or within three months of Normal Termination, all unvested
Options, OSOs and SARs then held by such Holder shall expire on the date
of death and all other Options, OSOs and SARs then held by such Holder
shall expire on the earlier of the last day of the respective Option
Period or the date that is one year after the date of the death of the
Holder. All vesting with respect to Options, OSOs and SARs shall cease on
the earlier of the date of Normal termination or the date of death and all
such Options, OSOs and SARs which are vested as of such date shall remain
exercisable by the person or persons to whom the Holder's rights under the
Options, OSOs and SARs pass by will or the applicable laws of descent and
distribution until their expiration as provided above.
(b Restricted Stock, Phantom Stock Units and Phantom Share Units
(i Upon a Normal termination prior to the end of any Restricted
Period, all Restricted Stock and Phantom Stock Units shall be forfeited
with respect to the portion of such Awards for which restrictions have not
lapsed at the time of such termination. Upon a Normal Termination prior to
the end of any Award Period, all Performance Share Units which have not
theretofore become vested and earned shall expire; provided, however, that
the Committee may, in its sole discretion, award a pro rata portion of any
Performance Share Unit Award representing the degree of attainment of the
Performance Goals related thereto over the period prior to termination.
(ii Upon a Holder's death prior to the end of any restricted Period,
all restricted Stock and Phantom Stock Units shall be forfeited with
respect to the portion of such Awards for which restrictions have not
lapsed at the time of such death. Upon a Holder's death prior to the end
of any Award Period, all Performance Share Units which have not
theretofore become vested and earned shall expire; provided, however, that
the Committee may, in its sole discretion, award a pro rata portion of any
Performance Share Unit Award representing the degree of attainment of the
Performance Goals related thereto over the period prior to death.
(c Termination for Reasons Other Than Normal termination or Death
(i If a Holder ceases employment or service with the Company or
Subsidiary, C-TEC or CMI, C-TEC or CMI, as the case may be, for any reason
other than Normal Termination or death, all Options, OSOs, SARs,
Restricted Stock (with respect to which restrictions have not lapsed),
Phantom Stock Units (with respect to which restrictions have not lapsed)
and Performance Share Units then held by such Holder shall expire
immediately upon such cessation of employment or service.
14. General
(a Additional Provisions of an Award. Awards under the Plan also may be
subject to such other provisions (whether or not applicable to the benefit
awarded to any other Participant) as the Committee determines appropriate
including, without limitation, provisions to assist the Participant in
financing the purchase of Stock upon the exercise of Options, provisions for
the forfeiture of or restrictions on resale or other disposition of shares of
Stock acquired under any Award, provisions giving the Company the right to
repurchase shares of Stock acquired under any Award in the event the
Participant elects to dispose of such shares, and provisions to comply with
Federal and state securities laws and Federal and state tax withholding
requirements. Any such provisions shall be reflected in the applicable Award
agreement.
(b Privileges of Stock Ownership. Except as otherwise specifically
provided in the Plan, no person shall be entitled to the privileges of stock
ownership in respect of shares of Stock which are subject to Awards hereunder
until such shares have been issued to that person.
(c Government and other Regulations. The obligation of the Company to
make payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules and regulations, and to such approvals by governmental agencies as
may be required. Notwithstanding any terms or conditions of any Award to the
contrary, the Company shall be under no obligation to offer to sell or to sell
and shall be prohibited from offering to sell or selling any shares of Stock
pursuant to an Award unless such shares have been properly registered for sale
pursuant to the Securities Act with the Securities and Exchange Commission or
unless the Company have received an opinion of counsel, satisfactory to the
Company, that such shares may be offered or sold without such registration
pursuant to an available exemption therefrom and the terms and conditions of
such exemption have been fully complied with. The Company shall be under no
obligation to register for sale under the Securities Act any of the shares of
Stock to be offered or sold under the Plan. If the shares of Stock to be
offered or sold under the Plan are offered or sold pursuant to an exemption
from registration under the Securities Act, the Company may restrict the
transfer of such shares and may legend the Stock certificates representing such
shares in such manner as it deems advisable to ensure the availability of any
such exemption.
(d Tax Withholding. Notwithstanding any other provision of the Plan, the
Company or a Subsidiary, as appropriate, shall have the right to deduct from
all Awards cash and/or Stock, valued at Fair Market Value on the date of
payment, in an amount necessary to satisfy all Federal, state or local taxes as
required by law to be withheld with respect to such Awards and, in the case of
Awards paid in Stock, the Holder or other person receiving such Stock may be
required to pay to the Company prior to delivery of such Stock, the amount of
any such taxes which the Company is required to withhold, if any, with respect
to such Stock. Subject in particular cases to the disapproval of the Committee,
the Company may accept shares of Stock of equivalent Fair Market Value in
payment of such withholding tax obligations if the Holder of the Award elects
to make payment in such manner.
(e Claim to Awards and Employment Rights. No employee or other person
shall have any claim or right to be granted an Award under the Plan or, having
been selected for the grant of an Award, to be selected for a grant of any
other Award. Neither the Plan nor any action taken hereunder shall be construed
as giving any participant any right to be retained in the employ or service of
the Company or any Subsidiary.
(f Designation and Change of Beneficiary. Each Participant may file with
the Committee a written designation of one or more persons as the beneficiary
who shall be entitled to receive the rights or amounts payable with respect to
an Award due under the Plan upon his death. A Participant may, from time to
time, revoke or change his beneficiary designation without the consent of any
prior beneficiary by filing a new designation with the Committee. The last such
designation received by the Committee shall be controlling; provided however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt. If no beneficiary
designation is filed by the Participant, the beneficiary shall be deemed to be
his or her spouse or, if the Participant is unmarried at the time of death, his
or her estate.
(g Payment to Persons Other Than Participants. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable to
care for his affairs because of illness or accident, or is a minor, or has
died, then any payment due to such person or his estate (unless a prior claim
therefor has been made by a duly appointed legal representative) may, if the
Committee so directs the Company, be paid to his spouse, child, relative, an
institution maintaining or having custody of such person, or any other person
deemed by the Committee to be a proper recipient on behalf of such person
otherwise entitled to payment. Any such payment shall be a complete discharge
of the liability of the Committee and the Company therefor.
(h No Liability of Committee Members. No member of the Committee shall be
personally liable by reason of any contract or other instrument executed by
such member or on his behalf in his capacity as a member of the Committee nor
for any mistake of judgment made in good faith, and the Company shall indemnify
and hold harmless each member of the Committee and each other employee, officer
or director of the Company to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated,
against any cost or expense (including counsel fees) or liability (including
any sum paid in settlement of a claim) arising out of any act or omission to
act in connection with the Plan unless arising out of such person's own fraud
or willful bad faith; provided, however, that approval of the Board shall be
required for the payment of any amount in settlement of a claim against any
such person. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or By-Laws, as a matter of law, or
otherwise, or any power that the Company have to indemnify them or hold them
harmless.
(i Governing law. The Plan shall be governed by and construed in
accordance with the internal laws of the State of Delaware applicable to
contracts made and performed within such state, without regard to principles of
conflicts of law thereof, except as such laws may be supplanted by the federal
laws of the United States of America, which laws shall then govern its effect
and its construction to the extent they supplant Delaware law.
(j Funding. No provision of the Plan shall require the Company, for the
purposes of satisfying any obligations under the Plan, to purchase assets or
place any assets in a trust or other entity to which contributions are made or
otherwise to segregate any assets, nor shall the Company maintain separate bank
accounts, books, records or other evidence of the existence of a segregated or
separately maintained or administered fund for such purposes. Holders shall
have no rights under the Plan other than as unsecured general creditors of the
Company, except that insofar as they may have become entitled to payment of
additional compensation by performance of services, they shall have the same
rights as other employees under general law.
(k Nontransferability. A person's rights and interest under the Plan,
including amounts payable, may not be sold, assigned, donated, or transferred
or otherwise disposed of, mortgaged, pledged or encumbered except, in the event
of a Holder's death, to a designated beneficiary to the extent permitted by the
Pan, or in the absence of such designation, by will or the laws of descent and
distribution; provided, however, the Committee may, in its sole discretion and
subject to such conditions as it may establish, allow for transfer of Awards
other than Incentive Stock Options to other persons or entities.
(l Reliance on Reports. Each member of the Committee and each member of
the Board shall be fully justified in relying, acting or failing to act, and
shall not be liable for having so relied, acted or failed to act in good faith,
upon any report made by the independent public accountant of the Company and
its Subsidiaries and upon any other information furnished in connection with
the Plan by any person or persons other than himself.
(m Relationship to Other Benefits. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
profit sharing, group insurance or other benefit plan of the Company except as
otherwise specifically provided in such other plan.
(n Expenses. The expenses of administering the Plan shall be borne by the
Company.
(o Pronouns. Masculine pronouns and other words of masculine gender shall
refer to both men and women.
(p Titles and Headings. The titles and headings of the sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings shall control.
15. Changes in Capital Structure
Awards granted under the Plan and any agreements evidencing such Awards
shall be subject to equitable adjustment or substitution, as determined by the
Committee in its sole discretion, as to the number of shares, the Multiplier
(with respect to OJOs), the exercise price, the price or kind of a share of
Stock or other consideration subject to such Awards (i) in the event of changes
in the outstanding Common Stock or in the capital structure of the Company by
reason of stock dividends, stock splits, reverse stock splits,
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges, spinoffs, split-ups or other relevant changes in capitalization
occurring after the Date of Grant of any such Award, (ii) in the event of any
change in applicable laws or any change in circumstances which results or would
result in any substantial dilution or enlargement of the rights granted to, or
available for, Participants in the Plan, or (iii) upon the occurrence of any
other event which otherwise warrants equitable adjustment because it interferes
with the intended operation of the Plan. In addition, upon any such event, the
aggregate number of shares of Stock available under the Plan and the maximum
number of shares of Stock with respect to which any one person may be granted
in connection with Awards, during any year shall be appropriately adjusted by
the Committee, whose determination shall be conclusive. With respect to Awards
intended to qualify as "performance-based compensation" under Section 162(m) of
the Code, such adjustments or substitutions shall be made only to the extent
that the Committee determines that such adjustments or substitutions may be
made without a loss of deductibility for such Awards under Section 162(m) of
the Code. The Company shall give each Participant notice of an adjustment
hereunder and, upon notice, such adjustment shall be conclusive and binding for
all purposes.
Notwithstanding the above, in the event of any of the following:
(a The Company is merged or consolidated with another corporation or
entity and, in connection therewith, consideration is received by shareholders
of the Company in a form other than stock or other equity interests of the
surviving entity;
(b All or substantially all of the assets of the Company are acquired by
another person;
(c The reorganization or liquidation of the Company; or
(d The Company shall enter into a written agreement to undergo an event
described in clauses (a), (b) or (c) above, then the Committee may, in its sole
discretion and upon at least 10 days advance notice to the affected persons,
cancel any outstanding Awards and pay to the Holders thereof, in cash, the
value of such Awards and pay to the Holders thereof, in cash, the value of such
Awards based upon the price per share of Stock received or to be received by
other shareholders of the Company in the event. The terms of this Section 15
may be varied by the Committee in any particular Award agreement.
16. Change in Control
Upon the occurrence of a Change in Control (i) all outstanding Options,
OSOs and freestanding SARs shall be come immediately exercisable in full, (ii)
all restrictions with respect to outstanding shares of Restricted Stock shall
lapse, (iii) all outstanding Phantom Stock Units will be immediately converted
into shares of Stock, or cash equivalents at the discretion of the Committee,
and paid out to such Holders, (iv) the Committee will make a determination on
the degree of achievement of all Performance Goals with respect to outstanding
Performance Share Units and shall make such payments with respect thereto as it
deems appropriate and (v) all other Awards shall accelerate and become payable
as determined by the Committee.
17. Nonexclusivity of the Plan
Neither the adoption of the Plan by the Board nor the submission of this
Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without
limitations, the granting of stock options otherwise than under this Plan, and
such arrangements may be either applicable generally or only in specific cases.
18. Amendments and Termination
The Board may at any time terminate the Plan. With the express written
consent of an individual Participant, the Board or the Committee may cancel or
reduce or otherwise alter outstanding Awards if, in its judgment, the tax,
accounting, or other effects of the plan or potential payout thereunder would
not be in the best interest of the Company. The Board or the Committee may, at
any time, or from time to time, amend or suspend and, if suspended, reinstate,
the plan in whole or in part; provided, however, that no amendment which
requires stockholder approval in order for the plan to continue to comply with
Section 162(m) of the Code shall be effective unless the same shall be approved
by the requisite vote of the stockholders of the Company.
* * *
As adopted by the Board of Directors of
RCN Corporation as of
[________], 1997
By:________________________________
[Name, Title]
