<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 June 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 June 30, 1999.
Common Stock 75,859,602
<PAGE>
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations- for the Quarters and Six
Months Ended June 30, 1999 and 1998
Condensed Consolidated Balance Sheets-
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of
Cash Flows- for the Six Months Ended
June 30, 1999 and 1998
Condensed Consolidated Statement of
Changes in Shareholders' Equity - for
the Six Months Ended June 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 2. Changes in Securities and Use of Proceeds
Item 4. Submission of matters to a vote of security holders
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 Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 66,929 $ 49,808 $ 134,318 $ 89,946
Costs and expenses, excluding
depreciation and amortization 92,335 59,427 181,172 107,882
Depreciation and amortization 30,541 18,699 62,815 36,830
Nonrecurring acquisition costs: In-process
technology - - - 18,293
------------ ------------ ------------ -----------
Operating (loss) (55,947) (28,318) (109,669) (73,059)
Interest income 19,090 13,993 32,492 26,808
Interest expense (35,672) (26,919) (67,462) (49,654)
Gain on the sale of subsidiary 8,930 - 8,930 -
Other (expense) income, net (234) 251 473 (648)
------------ ------------ ------------ -----------
(Loss) before income taxes (63,833) (40,993) (135,236) (96,553)
(Benefit) provision for income taxes (1,520) 1,789 (2,534) (9,893)
------------ ------------ ------------ -----------
(Loss) before equity in unconsolidated
entities and minority interest (62,313) (42,782) (132,702) (86,660)
Equity in (loss) of unconsolidated entities (6,613) (4,481) (10,516) (5,974)
Minority interest in loss of
consolidated entities 5,568 3,468 12,106 7,054
------------ ------------ ------------ -----------
Net (loss) before extraordinary item (63,358) (43,795) (131,112) (85,580)
Extraordinary item: Debt prepayment costs (424) - (424) -
------------ ------------ ------------ -----------
Net (loss) (63,782) (43,795) (131,536) (85,580)
Preferred stock dividends and accretion
requirements 4,083 - 4,083 -
------------ ------------ ------------ -----------
Net (loss) to common shareholders $ (67,865) $ (43,795) $ (135,619) $ (85,580)
============ ============ ============ ===========
Basic and Diluted (loss) per average common share:
Net (loss) before extraordinary item $ (0.97) $ (0.75) $ (2.00) $ (1.49)
============ ============ =========== ===========
Extraordinary item: Debt prepayment costs $ (0.01) $ - $ (0.01) $ -
============ ============ =========== ===========
Net (loss) to common shareholders $ (0.98) $ (0.75) $ (2.01) $ (1.49)
============ ============ =========== ===========
Weighted average shares outstanding 69,478,473 58,410,970 67,554,148 57,313,640
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 440,794 $ 120,126
Short-term investments 1,298,299 892,448
Accounts receivable from related parties 5,881 6,919
Accounts receivable, net of reserve for
doubtful accounts of $8,889 at June 30,
1999 and $5,766 at December 31, 1998 37,877 29,988
Material and supply inventory, at average cost 9,633 3,870
Prepayments and other 20,274 15,368
Deferred income taxes 714 712
Investments restricted for debt service 23,445 23,437
-------------- -------------
Total current assets 1,836,917 1,092,868
Property, plant and equipment, net of accumulated
depreciation of $184,620 at June 30, 1999 and
$153,304 at December 31, 1998 612,054 448,375
Investments restricted for debt service 10,215 19,869
Investments 178,725 129,529
Intangible assets, net of accumulated amortization
of $123,586 at June 30, 1999 and $97,313 at
December 31, 1998 139,608 169,718
Deferred charges and other assets 82,931 47,256
-------------- -------------
Total assets $ 2,860,450 $ 1,907,615
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 315 $ 4,097
Accounts payable 70,193 65,623
Accounts payable to related parties 12,130 7,153
Advance billings and customer deposits 17,852 21,679
Accrued interest 8,062 5,267
Accrued telephony cost of sales 14,905 12,000
Accrued expenses 51,004 62,250
-------------- -------------
Total current liabilities 174,461 178,069
Long-term debt 1,716,005 1,263,036
Deferred income taxes 993 3,281
Other deferred credits 23,507 14,667
Minority interest 103,372 77,116
Commitments and contingencies
Preferred stock, par value $1 per share: Authorized
25,000,000 shares: Issued and outstanding
254,083 at June 30,1999; Liquidation Preference
$1,000 per share 244,062 -
Common shareholders' equity:
Common stock, par value $1 per share: Authorized
200,000,000 shares: Issued and outstanding
76,421,602 at June 30, 1999 and 65,477,493
December 31, 1998 76,421 65,477
Class B Common stock, par value $1 per share:
Authorized 400,000,000 shares: - -
Additional paid-in capital 896,687 539,770
Cumulative translation adjustments (2,447) (3,055)
Unrealized appreciation on investments (5,043) 1,113
Treasury stock, 562,000 shares at cost at
June 30, 1999 and 557,000 shares at cost
December 31, 1998 (9,391) (9,301)
Deficit (358,177) (222,558)
-------------- -------------
Total common shareholders' equity 598,050 371,446
-------------- -------------
Total liabilities and shareholders' equity $ 2,860,450 $ 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>
Six Months Ended
June 30,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (57,278) $ 15,053
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (196,231) (92,788)
Investment in unconsolidated joint venture (9,455) (12,500)
Purchase of short-term investments (1,743,668) (211,440)
Sales and maturities of short-term investments 1,339,955 97,019
Acquisitions (47,131) (40,769)
Proceeds from the sale of a business segment 23,711 -
Purchase of Preferred Stock of Intertainer, Inc (1,500) -
Other (3,990) 2,559
-------------- --------------
Net cash (used in) investing activities (638,309) (257,919)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 500,000 502,587
Redemption of long-term debt & capital lease obligation (100,447) (494)
Proceeds from the issuance of common stock 344,649 113,305
Proceeds from the issuance of preferred stock 239,979 -
Purchase of treasury stock (90) (2,472)
Payments made for debt financing costs (31,562) (8,177)
Contribution to minority interest partner - (108)
Contribution from minority interest partner 49,000 26,215
Interest paid on Senior Notes 11,250 -
Proceeds from the exercise of stock options 3,476 1,592
Decrease in restricted cash - 11,125
-------------- --------------
Net cash provided by financing activities 1,016,255 643,573
-------------- --------------
Net increase in cash and temporary cash investments 320,668 400,707
Cash and temporary cash investments at beginning of year 120,126 222,910
-------------- --------------
Cash and temporary cash investments at June 30 $ 440,794 $ 623,617
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 62,928 $ 48,566
============== ==============
Income taxes $ 1,457 $ 747
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 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 6/30/99 (135,619)
Preferred stock offering 239,979
Preferred stock dividend 4,083
Common stock offering 9,200 335,459
Stock options & warrants 1,736 21,251
Purchase of treasury
stock
Unrealized appreciation
on investments
Cumulative translation
adjustments
Other 8 207
-------- ---------- ---------- ---------
Balance, June 30, 1999 $244,062 $ 76,421 $ 896,687 $(358,177)
======== ========== ========== =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
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 6/30/99 (135,619)
Preferred stock offering 239,979
Preferred stock dividend 4,083
Common stock offering 344,659
Stock options & warrants 22,987
Purchase of treasury
stock (90) (90)
Unrealized depreciation
on investments (6,156) (6,156)
Cumulative translation
adjustments 608 608
Other 215
-------- ----------- -------------- -------------
Balance, June 30, 1999 $ (9,391) $ (2,447) $ (5,043) $ 842,112
======== =========== ============== =============
</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. The Company owns a 40% equity interest in Megacable. For the quarters ended
June 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 $(89) and $(342), respectively.
For the six months ended June 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 $(465) and
$(1,051), respectively.
Summarized information for the financial position and results of operations of
Megacable, as of and for the six months ended June 30, 1999 and 1998, is as
follows:
(In U.S. Dollars)
1999 1998
------- -------
Assets $110,158 $79,186
Liabilities 28,375 5,440
Shareholders' equity 81,783 73,746
Sales 22,118 19,062
Cost and expenses 16,117 13,082
Foreign currency transaction losses - 71
Net income $ 5,332 $ 5,707
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 $608 for the six month period ended June 30, 1999. 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.
<PAGE>
4. During the six months ended June 30, 1999, approximately 1,020,600 options
were granted, approximately 627,941 were exercised yielding cash proceeds of
$3,476 and approximately 660,083 options were canceled. At June 30, 1999,
there are approximately 8,583,998 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 six months ended June 30, 1999 and have a dilutive effect if the
Company had income from continuing operations is 11,626,712 and 7,968,429,
respectively. The number of stock options which would have been assumed to
be converted in the quarter and six months ended June 30, 1998 and have a
dilutive effect if the Company had income from continuing operations is
3,892,527 and 3,967,141, respectively.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net (loss) from continuing operations $ (67,441) $ (43,795) $ (135,195) $ (85,580)
Extraordinary item: Debt prepayment costs (424) - (424) -
---------- ----------- ---------- -----------
Net (loss) to common shareholders $ (67,865) $ (43,795) $ (135,619) $ (85,580)
Basic earnings per average common share:
Weighted average shares outstanding 69,478,473 58,410,970 67,554,148 57,313,640
(Loss) from continuing operations $ (0.97) $ (0.75) $ (2.00) $ (1.49)
Extraordinary item: Debt prepayment costs $ (0.01) $ - $ (0.01) $ -
Net (loss) to common shareholders $ (0.98) $ (0.75) $ (2.01) $ (1.49)
Diluted earnings per average common share:
Weighted average shares outstanding 69,478,473 58,410,970 67,554,148 57,313,640
Dilutive shares resulting from
preferred stock and stock options - - - -
---------- ----------- ---------- -----------
Weighted average shares and common stock
equivalents outstanding 69,478,473 58,410,970 67,554,148 57,313,640
(Loss) from continuing operations $ (0.97) $ (0.75) $ (2.00) $ (1.49)
Extraordinary item: Debt prepayment costs $ (0.01) $ - $ (0.01) $ -
Net (loss) to common shareholders $ (0.98) $ (0.75) $ (2.01) $ (1.49)
</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 six months ended June 30, 1999 was ($72,620) and
($141,167), 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 a 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 June 30, 1999 the Company paid dividends in the
amount of $4,083 in the form of additional shares of Series A Preferred Stock.
At June 30, 1999, the number of common shares that would be issued upon
conversion of the Series A Preferred Stock was 6,514,949. The Company incurred
$10,000 of issuance cost 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 June 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 June 30, 1999 approximately
$7,000 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 June 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 June 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 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., a leading
independent Internet Service Provider ("ISP") that provides dedicated and DSL
services. In August 1999, the Company acquired Direct Network Access, Ltd.
,one of the Bay Area's largest independent ISPs. Both of these transactions
were primarily funded through new issuances of RCN Corporation Common Stock,
and both will be accounted for under the purchase method of accounting. The
Company does not expect that these acquisitions will have a material effect
to 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%
<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 June 30, 1999 Compared to Three Months Ended June 30, 1998
For the three months ended June 30, 1999, sales increased 34.4% to $66,929
from $49,808 for the same period in 1998. Operating loss before depreciation,
and amortization was ($25,406) as compared to ($9,619) 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 $17,121 or 34.4% to $66,929 for the quarter ended
June 30, 1999 from $49,808 for the quarter ended June 30, 1998. The increase
was fueled by higher average service connections which increased 31.5% to
approximately 896,000 for the quarter ended June 30, 1999 (including connections
of the Starpower joint venture) from approximately 681,000 for the quarter ended
June 30, 1998. Total service connections increased 27.2% to approximately
903,000 at June 30, 1999 (including connections of the Starpower joint venture)
from approximately 710,000 at June 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 471.4% from
approximately 28,000 for the quarter ended June 30, 1998 to approximately
160,000 for the quarter ended June 30, 1999. Total advanced fiber connections
increased 260.4% from approximately 48,000 at June 30, 1998 to approximately
173,000 at June 30, 1999. Advanced fiber units passed increased 248.0% to
approximately 428,000 units at June 30, 1999 from approximately 123,000 units
at June 30, 1998.
Voice sales increased $6,064, or 78.9%, to $13,749 for the quarter ended June
30, 1999 from $7,685 for the quarter ended June 30, 1998. Approximately $5,300
of the increase in voice sales is attributable to higher average connections.
Average advanced fiber voice connections increased approximately 542.9% to
approximately 45,000 for the quarter ended June 30, 1999 (including connections
of the Starpower joint venture) from approximately 7,000 for the quarter ended
June 30, 1998. Average off-net voice connections increased approximately 26.1%
to approximately 58,000 for the quarter ended June 30, 1999 from approximately
46,000 for the quarter ended June 30, 1998. The remaining increase in voice
sales is attributable to higher revenue per connection.
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 $3,128, or 11.2% to $31,010 for the quarter ended June 30,
1999 from $27,882 for the quarter ended June 30, 1998. The increase was
primarily due to approximately 27,000 additional average video connections
for the quarter ended June 30, 1999 as compared to the quarter ended
June 30, 1998. Average on-net video connections grew 83,000 or 395.2% to
104,000 for the quarter ended June 30, 1999 (including connections of the
Starpower joint venture) from 21,000 for the quarter ended June 30, 1998.
Average off-net video connections were approximately 169,000 and 225,000 for
the quarters ended June 30, 1999 and 1998, respectively. Overall higher
average service connections contributed approximately $1,900 to the increase
in video sales and higher average revenue per connection contributed the
remainder.
<PAGE>
Data sales increased $7,178, or 76.3% to $16,591 for the quarter ended June
30, 1999 from $9,413 for the quarter ended June 30, 1998. The increase was
primarily due to approximately 137,000 additional average data connections
for the quarter ended June 30, 1999 as compared to the quarter ended June 30,
1998. Partially accounting for the increase in average data connections was
the inclusion for a full quarter in 1999 of approximately 48,500 total
subscribers acquired from Interport in June 1998 and JavaNet in July 1998.
For the quarter ended June 30, 1999, the Company had approximately 508,000
average off-net data connections and approximately 11,000 average advanced
fiber data connections, including connections of the Starpower joint venture.
For the quarter ended June 30, 1998, the Company had approximately 382,000
average off-net 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 $752, or 15.6% to $5,579 for the quarter ended June 30,
1999 from $4,827 for the quarter ended June 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 June 30, 1999,
the Company's average monthly churn rate was approximately 2.2%.
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 $11,421, or 49.4% to $34,556 for the quarter ended
June 30, 1999 from $23,135 for the quarter ended June 30, 1998. The increase
was principally the result of higher sales and a lower margin on video sales
due to higher franchise fees and programming rates.
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 $21,487, or
59.2% to $57,779 for the quarter ended June 30, 1999 from $36,292 for the
quarter ended June 30, 1998.
<PAGE>
Customer service costs, including order processing, increased approximately
$1,999, or 27.5%, for the quarter ended June 30, 1999 as compared to the
quarter ended June 30, 1998. The increase is primarily personnel related to
support the 31.5% 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 $5,576, or 90.1%, for the quarter ended June 30, 1999 as compared
to the quarter ended June 30, 1998. Technical expense increases of
approximately $6,779 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 $1,110. These
increases were partially offset by an increase of approximately $2,928 in
technical costs capitalized as part of the cost basis of the telecommunications
network.
Sales and marketing costs increased approximately $2,061, or 30.9%, for the
quarter ended June 30, 1999 as compared to the quarter ended June 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.
General and administrative expenses increased approximately $12,001, or 131.1%,
for the quarter ended June 30, 1999 as compared to the quarter ended June 30,
1998. Information technology expenses increased approximately $1,497. 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 $1,500 was associated with the increase
in sales. Operating taxes, primarily property taxes, increased approximately
$634 as a result of expanded operations. External legal expense increased
approximately $549 primarily associated with the procurement of regulatory
approvals for potential future markets. Approximately $4,593 of the increase
in general and administrative expense is attributable to the acquisitions of
Erols, UltraNet, Interport Communications, Inc., JavaNet, Inc. and Lancit
Media, which were included for the full second quarter in 1999. Rent expense
increased approximately $910 primarily related to additional space required to
support the increase in headcount. Employee related expenses increased
approximately $950 over the prior year quarter. The remaining increase
primarily represents additional development and support expenses associated
with expanding operations and new markets.
Advertising costs in the second quarter of 1999 approximated advertising costs
in the second quarter of 1998.
<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 $30,541 for the three month period ending
June 30, 1999 and $18,699 for the three month period ending June 30, 1998.
The increase of $11,842, or 63.3% 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 June 30, 1999 and
1998 was $796,674 and $415,447, respectively. The basis of intangible assets
was $263,194 and $254,460 at June 30, 1999 and 1998, respectively.
Interest income
- ----------------
Interest income was $19,090 and $13,993 for the three month periods ended June
30, 1999 and 1998, respectively. The increase of $5,097, or 36.4%, 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 $1,739,000 at
June 30, 1999 and approximately $1,154,000 at June 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). Also contributing to the increase was
$1,673 attributable to a higher average yield on cash, temporary cash
investments, and short-term investments. These increases were partially offset
by higher capital expenditures and higher working capital.
Interest expense
- ----------------
For the quarter ended June 30, 1999, interest expense was $35,672 as compared
to $26,919, for the quarter ended June 30, 1998. The increase of $8,753 resulted
primarily from higher interest of $4,038 relating to the 11% senior discount
notes which were issued on June 24, 1998. In June 1999, the Company entered
into a Senior Secured Credit Facility (the "Credit Facility") with the Chase
Manhattan Bank (Note 10). On closing, the Company borrowed $500,000 under the
eight-year term loan facility, which contributed an additional $3,417 to the
increase. The remaining increase is due to higher accretion on the 11.125% and
the 9.8% senior discount notes issued in 1997 and 1998, respectively, of $2,028.
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 $1,591.
Gain on the sale of Lancit
- --------------------------
In April 1999, the Company sold its investment in Lancit Media ("Lancit") to
JuniorNet Corporation ("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 2.3% for the
quarter ended June 30, 1999 and a provision of 4.3% for the quarter ended
June 30, 1998. 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 second quarters of 1999 and 1998 minority interest of $5,568 and $3,468,
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 second 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 $89, Starpower of $2,381 and
JuniorNet of $4,143 (from April 28, 1999, the date of acquisition, of its
47.5% ownership interest). For the second 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
$342 and Starpower of $4,139.
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).
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
For the six months ended June 30, 1999, sales increased 49.3% to $134,318
from $89,946 for the same period in 1998. Operating losses before depreciation,
amortization and acquired in-process technology was $(46,854) as compared to
$(17,936) for the same period in 1998.
Sales
- -----
Total sales increased $44,372, or 49.3% to $134,318 for the six months ended
June 30, 1999 from $89,946 for the six months ended June 30, 1998. The increase
was fueled by higher average service connections which increased 73.2% to
approximately 885,000 for the six months ended June 30, 1999 (including
connections of the Starpower joint venture) from approximately 511,000 for the
six months ended June 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 534.8% from
approximately 23,000 for the six months ended June 30, 1998 to approximately
146,000 for the six months ended June 30, 1999. Total advanced fiber
connections increased 260.4% from approximately 48,000 at June 30, 1998 to
approximately 173,000 at June 30, 1999. Advanced fiber units passed increased
248.0% to approximately 428,000 units at June 30, 1999 from approximately
123,000 units at June 30, 1998.
Voice sales increased $15,252, or 122.5%, to $27,707 for the six months ended
June 30, 1999 from $12,455 for the six months ended June 30, 1998.
Approximately $12,800 of the increase in voice sales is attributable to higher
average connections. Average advanced fiber voice connections increased
approximately 680.0% to approximately 34,000 for the six months ended June
30, 1999 (including connections of the Starpower joint venture) from
approximately 5,000 for the six months ended June 30, 1998. Average off-net
voice connections increased approximately 55.0% to approximately 62,000 for
the six months ended June 30, 1999 from approximately 40,000 for the six
months ended June 30, 1998. The remaining increase in voice sales is
principally attributable to higher revenue per connection.
Video sales increased $6,770, or 12.4% to $61,359 for the six months ended June
30, 1999 from $54,589 for the six months ended June 30, 1998. The increase was
primarily due to approximately 25,000 additional average video connections
for the six months ended June 30, 1999 as compared to the six months ended
June 30, 1998. Average on-net video connections grew 79,000 or 438.9% to
approximately 97,000 for the six months ended June 30, 1999 (including
connections of the Starpower joint venture) from approximately 18,000 for the
six months ended June 30, 1998. Average off-net video connections were
approximately 172,000 and 226,000 for the six months ended June 30, 1999 and
1998, respectively. Overall higher service connections contributed
approximately $5,000 to the increase in video sales and higher average revenue
per connection principally contributed the remainder.
<PAGE>
Data sales increased $20,122, or 164.0% to $32,393 for the six months ended June
30, 1999 from $12,271 for the six months ended June 30, 1998. The increase was
primarily due to approximately 293,000 additional average data connections
for the six months ended June 30, 1999 as compared to the six months ended
June 30, 1998. Partially accounting for the increase in average data
connections was the inclusion for a full six 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 six months ended June 30, 1999, the Company had approximately 505,000
average off-net data connections and approximately 10,000 average advanced
fiber data connections, including connections of the Starpower joint venture.
For the six months ended June 30, 1998, the Company had approximately 222,000
average off-net data connections, including connections of the Starpower joint
venture.
Other sales increased $2,225, or 20.9% to $12,859 for the six months ended
June 30, 1999 from $10,634 for the six months ended June 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 to the increase.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the six months ended June 30, 1999,
the Company's average monthly churn rate was approximately 2.2%.
Costs and expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Direct expenses increased $27,022, or 63.9% to $69,318 for the six months ended
June 30, 1999 from $42,296 for the six months ended June 30, 1998. The increase
was principally the result of higher sales and a lower margin on video sales
due to higher franchise fees and programming rates.
Operating, selling, general and administrative costs increased $46,268, or
70.5% to $111,854 for the six months ended June 30, 1999 from $65,586 for the
six months ended June 30, 1998.
<PAGE>
Customer services costs, including order processing, increased approximately
$4,852, or 37.4%, for the six months ended June 30, 1999 as compared to the
six months ended June 30, 1998. The increase is primarily personnel related
to support the 73.2% 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 $9,616, or 77.5%, for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. Technical expense increases of
approximately $12,236 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 $1,819, partially
offset by an increase of approximately $4,578 in technical costs capitalized
as part of the cost basis of the telecommunications network.
Sales and marketing costs increased approximately $3,674, or 29.5%, for the
six months ended June 30, 1999 as compared to the six months ended June 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.
General and administrative expenses increased approximately $27,359, or 178.7%,
for the six months ended June 30, 1999 as compared to the six months ended June
30, 1998. Information technology expenses increased approximately $6,205. 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 $2,483 was associated with the increase
in sales. Operating taxes, primarily property taxes, increased approximately
$947 as a result of expanded operations. External legal expense increased
approximately $2,297 primarily associated with the procurement of regulatory
approvals for potential future markets. Approximately $9,707 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 six
months in 1999. Rent and utility expense increased approximately $1,541
primarily related to additional space required to support the increase in
headcount.
Advertising costs for the six months ended June 30, 1999 approximated
advertising costs for the six months ended June 30, 1998.
<PAGE>
Depreciation and amortization
- -----------------------------
Depreciation and amortization was $62,815 for the six month period ending
June 30, 1999 and $36,830 for the six month period ending June 30, 1998.
The increase of $25,985, or 70.6% 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 June 30, 1999 and
1998 was $796,674 and $415,447, respectively. The basis of intangible assets
was $263,194 and $254,460 at June 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 $32,492 and $26,808 for the six month periods ended June
30, 1999 and 1998, respectively. The increase of $5,684, or 21.2%, 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 $1,739,000 at June 30, 1999 and
approximately $1,154,000 at June 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
approximately $1,846 resulting from a lower average yield, higher capital
expenditures, and higher working capital.
Interest expense
- ----------------
For the six months ended June 30, 1999, interest expense was $67,462 as compared
to $49,654 for the six months ended June 30, 1998. The increase resulted
primarily from higher interest of $8,398 relating to the 11% senior discount
notes issued in June 1998. In June 1999, the Company entered into the Credit
Facility Credit Facility with the Chase Manhattan Bank (Note 10). On closing,
the Company borrowed $500,000 under the eight-year term loan facility,
contributing an additional $3,417 to the increase. The remaining increase is
due to higher accretion on the 11.125% and the 9.8% senior discount notes issued
in 1997 and 1998, respectively of $7,431. 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
$2,605.
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 1.9% and 10.4% for the
six months ended June 30, 1999 and June 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 six months ended June 30, 1999 and 1998 minority interest of $12,106
and $7,054, 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 six months ended June 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 $465, Starpower $5,908 and
JuniorNet of $4,143. For the six months ended June 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
$1,051 and Starpower of $4,923.
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 $700 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 $176 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. BECO has indicated to the Company that it may
make future conversions of its ownership interest in respect of the option to
exchange expiring in September 1999.
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 June 30, 1999 the Company
paid dividends in the amount of $4,083 in the form of additional shares of
Series A Preferred Stock. At June 30, the number of common shares that would
be issued upon conversion of the Series A Preferred Stock was 6,514,949. 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 June 30,
1999 approximately $7,000 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 June 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 June 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 June 30, 1999 the Company had an
aggregate of approximately $1,716,320 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 $1,739,093, and a current ratio of approximately
10.5:1.
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 six months ended June 30, 1999, the Company's net cash used in
operating activities was $(57,278), comprised primarily of a net loss of
($131,536) adjusted by non-cash depreciation and amortization of $62,815, other
non-cash items totaling $44,254, working capital changes of $(21,137). Net cash
used in investing activities of ($638,309) consisted primarily of purchases of
short-term investments of $1,743,668, additions to property, plant and equipment
of $196,231, acquisition costs of $47,131, an investment in an unconsolidated
joint venture of $9,455 partially offset by sales and maturities of short-term
investments of $1,339,955 and the proceeds from the sale of a business segment
of $23,711. Net cash provided by financing activities of $1,016,255 consisted
primarily of proceeds from the issuance of common stock $344,649, the issuance
of preferred stock $239,979, the issuance of long-term debt $500,000, the
contribution from minority interest partner of $49,000, 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 $31,562 and $100,447
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.
To ensure business continuity, and as a contingency strategy, the Company is
renovating the current billing, operational support and customer service systems
which are not already Year 2000 compliant. The Company's switches and head-ends
are also critical systems and are either currently Year 2000 compliant or are
expected to be compliant with the next vendor software upgrade. Most of the
software upgrades are completed, with the last upgrade expected to be installed
by September 30, 1999.
<PAGE>
The Company has completed most renovations critical to its IT systems. The
Company has begun testing of some of its critical systems and expects
thorough integration testing to be completed by September 30, 1999. The Company
completed an inventory of its non-IT systems which must be remediated and is in
the process of developing a specific remediation plan and timetable for those
systems.
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 estimates
that it has approximately 400 critical vendors and has sent surveys regarding
the Year 2000 remediation to those vendors. The Company has received responses
from approximately 80% of these vendors and is in the process of assessing
these responses. The Company is vigorously pursuing the timely receipt of
relevant information from the remaining vendors. The Company will assess its
remediation plans based on those responses. The Company is also working with
integrated providers and will be setting up testing, according to their
communications. The Company will be reviewing the process of risk and
contingency planning associated with noncompliant vendor responses (see "Risk
Assessment and Contingencies" below). 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 would not have a material adverse effect on the
Company's operations and financial condition.
No other IT projects have been deferred due to the Year 2000 remediation
efforts.
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 $5,500. This is
comprised of approximately $3,300 for salaries, facilities and consulting
services; approximately $1,200 for program code remediation; approximately $500
for equipment replacement and approximately $500 for testing. To date,
approximately $1,367 has been incurred of which approximately $967 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
Through current and constant systems reassessment, the Company does not believe
it is exposed to any significant Year 2000 risk with respect to its critical
systems other than would be caused by substantial deviation from the plans and
time frames set forth above, in particular, with respect to our ability to bill
customers, track collections of receivables and provide services for new orders.
The Company is currently in the process of identifying its other systems
requiring remediation and intends to apply its five-step program as outlined
above to these systems based on each system's priority in operations.
The most significant risk posed to the Company due to vendor noncompliance
is a possible disruption of service to cable modem customers associated with
noncompliant software of a critical vendor. The Company has received the
compliant software to replace current cable modems.
<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 four 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.
<PAGE>
Part II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
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. In connection with the transaction Hicks, Muse, Tate
& Furst Equity Fund IV nominated Michael J. Levitt, a Partner of Hicks, Muse,
Tate & Furst, to become a member of RCN's Board of Directors. At June 30, 1999
the Company paid dividends in the amount of $4,083 in the form of additional
shares of Series A Preferred Stock. At June 30, 1999, the number of common
shares that would be issued upon conversion of the Series A Preferred Stock
was 6,514,949. The Series A Preferred Stock was sold without registration
to a single accredited investor in a private placement under section 4(2) of
the Securities Act of 1933.
Item 4. Submission of matters to a vote of security holders
The Annual Meeting of Shareholders was held on May 19, 1999. Matters
submitted to and approved by Shareholders were as follows:
1) The election of Class II Directors to serve a term of three years
Nominee For Withheld
------- ---------- --------
Alfred Fasola 55,365,545 62,618
Bruce C. Godfrey 55,367,745 60,418
Richard R. Jaros 55,367,727 60,436
Michael B. Yanney 55,367,645 60,518
Additional Directors whose term of office as a Director continued after
the meeting included:
James Q. Crowe David C. McCourt
Stuart E. Graham Thomas P. O'Neill, III
Michael J. Levitt Eugene Roth
Michael J. Mahoney Walter Scott, Jr.
Thomas J. May
2) The ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent auditors for the year ending December 31,
1999.
For Against Abstain
---------- ------- -------
55,377,837 29,255 21,071
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(3) Certificate of Designations, Preferences and Rights of Series A
7% Senior Convertible Preferred Stock
(10) Stock Purchase Agreement, dated as of March 18, 1999, between
RCN Corporation and HMTF Live Wire Investors, LLC relating to the
purchase and sale of Series A 7% Senior Convertible Preferred Stock
(10) Amendment No. 1 the Stock Purchase Agreement, dated as of April
7, 1999, among RCN Corporation and HMTF Live Wire Investors, LLC and
HM4 RCN Partners.
(27) Financial Data Schedule
(b.) Reports on Form 8-K
None
<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: August 16, 1999
/s/ Bruce C. Godfrey
------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES A 7% SENIOR CONVERTIBLE PREFERRED STOCK
of
RCN CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, the undersigned, John J. Jones, Executive Vice President, General
Counsel and Corporate Secretary, and Bruce C. Godfrey, Executive Vice President
and Chief Financial Officer, of RCN Corporation, a Delaware corporation
(hereinafter called the "Corporation"), pursuant to the provisions of Sections
103 and 151 of the General Corporation Law of the State of Delaware, do hereby
make this Certificate of Designations and do hereby state and certify that
pursuant to the authority expressly vested in the Board of Directors of the
Corporation by the Certificate of Incorporation, the Board of Directors duly
adopted the following resolutions:
RESOLVED, that, pursuant to Article FOURTH of the Certificate of
Incorporation (which authorizes 25,000,000 shares of preferred stock, $1.00 par
value ("Preferred Stock")), the Board of Directors hereby fixes the powers,
designations, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations and restrictions, of a
series of Preferred Stock.
RESOLVED, that each share of such series of Preferred Stock shall rank
equally in all respects and shall be subject to the following provisions:
1. Number and Designation. 708,000 shares of the Preferred Stock of
the Corporation shall be designated as Series A 7% Senior Convertible Preferred
Stock (the "Series A Preferred Stock") (including 458,000 shares of Series A
Preferred Stock reserved exclusively for the payment of dividends pursuant to
paragraph 4).
2. Definitions. Unless the context otherwise requires, when used
herein the following terms shall have the meaning indicated.
<PAGE>
"Additional Amount" shall have the meaning set forth in paragraph 4(a)
hereof.
"Affiliate" means, with respect to any specified person, any other
person which, directly or indirectly, controls, is controlled by or is under
direct or indirect common control with, such specified person. For the purposes
of this definition, "control" when used with respect to any person means the
power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "affiliated," "controlling," and "controlled" have
meanings correlative to the foregoing.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New York
City, New York generally are authorized or required by law or other governmental
actions to close.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), excluding the Kiewit Holders, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Corporation; or
(b) the Corporation consolidates with, or merges with or into, another person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into the Corporation, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Corporation is
converted into or exchanged for cash, securities or other property, other than
any such transaction where (i) the outstanding Voting Stock of the Corporation
is converted into or exchanged for Voting Stock of the surviving or transferee
corporation or its parent corporation and/or cash, securities or other property
in an amount which could be paid by the Corporation under the terms of the
Corporation's credit and financing agreements and (ii) immediately after such
transaction no "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), excluding the Kiewit
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Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
surviving or transferee corporation, as applicable; or (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
stockholders of the Corporation was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason (other than by action of the Kiewit Holders) to
constitute a majority of the Board of Directors then in office.
"Common Stock" means the Corporation's common stock, par value
$1.00 per share.
"Current Market Price" means the average of the daily Market Prices of
the Common Stock for ten consecutive trading days immediately preceding the date
for which such value is to be computed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute, and the rules and regulations promulgated thereunder.
"Issue Date" means the original date of issuance of shares of Series A
Preferred Stock.
"Kiewit Holders" means Peter Kiewit Sons Inc., Level 3
Communications, Inc. and Level 3 Telecom Holdings, Inc. and any of their
respective controlled Affiliates.
"Liquidation Preference" is an amount equal to $1,000.00 per share of
Series A Preferred Stock.
"Market Price" means, with respect to the Common Stock, on any given
day, (i) the price of the last trade, as reported on the Nasdaq National Market,
not identified as having been reported late to such system, or (ii) if the
Common Stock is so traded, but not so quoted, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market, or (iii)
if the Common Stock is not listed or authorized for trading on the Nasdaq
National Market or any comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected
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from time to time by the Corporation for that purpose. If the Common Stock is
not listed and traded in a manner that the quotations referred to above are
available for the period required hereunder, the Market Price per share of
Common Stock shall be deemed to be the fair value per share of such security as
determined in good faith by the Board of Directors of the Corporation.
"Special Amount" with respect of any share of Series A Preferred Stock
shall mean all dividends and other amounts which have become payable in respect
of such share under paragraph 4(a) but which have not been paid. The Special
Amount with respect to any such share shall be reduced by the amount of any such
dividends and other amounts actually paid in respect of such share under
paragraph 4(c) (including any such amounts paid in shares of Series A Preferred
Stock pursuant to paragraph 4(f)).
"Voting Stock" means, with respect to any person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
3. Rank. (a) Any class or series of stock of the Corporation shall be
deemed to rank:
(i) prior to the Series A Preferred Stock, either as to the
payment of dividends or other amounts or as to distribution of
assets upon liquidation, dissolution or winding up, or both, if
the holders of such class or series shall be entitled by the
terms thereof to the receipt of dividends or other amounts and of
amounts distributable upon liquidation, dissolution or winding
up, in preference or priority to the holders of Series A
Preferred Stock ("Senior Securities");
(ii) on a parity with the Series A Preferred Stock, either as
to the payment of dividends or other amounts or as to
distribution of assets upon liquidation, dissolution or winding
up, or both, whether or not the dividend rates, dividend payment
dates or redemption or liquidation prices per share thereof be
different from those of the Series A Preferred Stock, if the
holders of the Series A Preferred Stock and of such class of
stock or series shall be entitled by the terms thereof to the
receipt of dividends or other amounts or of amounts distributable
upon liquidation, dissolution or winding up, or both, in
proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences (including, but
not limited to preferences as to payment of dividends or other
amounts distributable upon liquidation), without
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preference or priority one over the other and such class of stock
or series is not a class of Senior Securities ("Parity
Securities"); and
(iii) junior to the Series A Preferred Stock, either as to the
payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, or both, if such stock or
series shall be Common Stock or if the holders of the Series A
Preferred Stock shall be entitled by the terms thereof to receipt
of dividends or other amounts, and of amounts distributable upon
liquidation, dissolution or winding up, in preference or priority
to the holders of shares of such stock or series (including, but
not limited to preferences as to payment of dividends or other
amounts distributable upon liquidation) ("Junior Securities").
(b) The respective definitions of Senior Securities, Junior
Securities and Parity Securities shall also include any rights or
options exercisable or exchangeable for or convertible into any of the
Senior Securities, Junior Securities and Parity Securities, as the case
may be.
(c) The Series A Preferred Stock shall be subject to the creation
of Junior Securities and Parity Securities.
4. Dividends and Additional Amounts. (a) The holders of shares of
Series A Preferred Stock shall be entitled to receive with respect to each share
of Series A Preferred Stock, when, as and if declared by the Board of Directors,
out of funds legally available for the payment of dividends, dividends at a rate
per annum equal to seven percent (7%) of the Liquidation Preference per share,
and an additional amount at a rate per annum equal to seven percent (7%) of the
Special Amount with respect to any share of Series A Preferred Stock (an
"Additional Amount"), if any, to be paid in accordance with the terms of this
Section 4. Such dividends and Additional Amounts shall be cumulative from the
Issue Date and shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (unless such day is not a Business
Day, in which event such dividends and Additional Amounts shall be payable on
the next succeeding Business Day) (each such date being a "Dividend Payment
Date" and each such quarterly period being a "Dividend Period"). Each such
dividend and Additional Amount shall be payable to the holders of record of
shares of the Series A Preferred Stock as they appear on the share register of
the Corporation on the corresponding Record Date. As used herein, the term
"Record Date" means, with respect to the dividend payable on March 31, June 30,
September 30 and December 31, respectively of each year, the preceding March 15,
June 15, September 15 and December 15, or such other record date, not more
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than 60 days or less than 10 days preceding the payment dates thereof, as shall
be fixed by the Board of Directors.
(b) The amount of dividends and Additional Amounts payable for each full
Dividend Period for the Series A Preferred Stock shall be computed by dividing
the annual seven percent (7%) rate by four. The amount of dividends and
Additional Amounts payable for the initial Dividend Period, or any other period
shorter or longer than a full Dividend Period, on the Series A Preferred Stock
shall be computed on the basis of twelve 30-day months and a 360-day year.
Holders of shares of Series A Preferred Stock shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of amounts
payable under Section 4(a) hereof (including Special Amounts), on the Series A
Preferred Stock. Except as expressly provided herein, no interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Series A Preferred Stock that may be in arrears.
(c) Accrued and unpaid Special Amounts for any past Dividend Periods may
be declared and paid on any subsequent Dividend Payment Date, to holders of
record on the corresponding Record Date.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividend, except any dividend paid to effectuate a stock split
and except as described in the next succeeding sentence, shall be declared or
paid or set apart for payment on any Parity Securities, nor shall any Parity
Securities be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Parity Securities or
Junior Securities), unless in each case all Special Amounts have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Series A Preferred Stock for
all Dividend Periods terminating on or prior to the date of payment of the
dividend on such class or series of Parity Securities. When Special Amounts are
not paid in full or a sum sufficient for such payment is not set apart, as
aforesaid, all Special Amounts and Additional Amounts declared upon shares of
the Series A Preferred Stock and all dividends and additional amounts declared
upon any other class or series of Parity Securities shall be declared ratably in
proportion to the respective amounts of Special Amounts and Additional Amounts
accumulated and unpaid on the Series A Preferred Stock and dividends and
additional amounts accumulated and unpaid on such Parity Securities.
(e) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of,
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or to effectuate a stock split on, or options, warrants or rights to subscribe
for or purchase shares of, Junior Securities) shall be declared or paid or set
apart for payment or other distribution declared or made upon Junior Securities,
nor shall any Junior Securities be redeemed, purchased or otherwise acquired
(other than a redemption, purchase or other acquisition of shares of Common
Stock made for purposes of an employee incentive or benefit plan of the
Corporation or any subsidiary) (any such dividend, distribution, redemption or
purchase being hereinafter referred to as a "Junior Securities Distribution")
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any shares of any such stock) by the Corporation,
directly or indirectly (except by conversion into or exchange for Junior
Securities), unless in each case (i) all Special Amounts on all outstanding
shares of the Series A Preferred Stock and accrued and unpaid dividends and
additional amounts on any other Parity Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series A
Preferred Stock and all past dividend periods with respect to such Parity
Securities and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend and Additional Amount for the current Dividend Period
with respect to the Series A Preferred Stock and the current dividend period
with respect to such Parity Securities.
(f) The Corporation may pay accrued dividends (including accrued and
unpaid dividends), Additional Amounts (including accrued and unpaid Additional
Amounts) , if any, and Special Amounts at its election, in cash or shares of
Series A Preferred Stock, or any combination thereof. The number of shares of
Series A Preferred Stock to be issued in circumstances when dividends,
Additional Amounts or Special Amounts are paid with additional shares of Series
A Preferred Stock will equal the cash amount of the dividend, Additional Amount,
or Special Amount, as the case may be, payable (but for the operation of this
Section 4(f)), divided by the Liquidation Preference, rounded to the nearest
full share, up or down, after taking into account all shares of Series A
Preferred Stock owned by the holder thereof, provided that if the resulting
fractional share held by such holder equals one-half of a share of Series A
Preferred Stock, such fractional share shall be rounded up to the nearest full
share.
5. Liquidation Preference. (a) In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation (whether
capital or surplus) shall be made to or set apart for the holders of Junior
Securities, the holders of the shares of Series A Preferred Stock shall be
entitled to receive with respect to each share of Series A Preferred Stock an
amount in cash equal to the Liquidation Preference, plus the Special Amount in
respect of such share, plus an amount equal to all dividends and the Additional
Amount accrued and unpaid thereon from the last Dividend Payment Date to the
date of final distribution to
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such holders, but such holders shall not be entitled to any further payment. If,
upon any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, shall be insufficient to pay in full
the preferential amount aforesaid and liquidating payments on all Parity
Securities, then such assets, or the proceeds thereof, shall be distributed
among the holders of shares of Series A Preferred Stock and all such other
Parity Securities ratably in accordance with the respective amounts that would
be payable on such shares of Preferred Stock and any such other Parity
Securities if all amounts payable thereon were paid in full. For the purposes of
this paragraph 5, (i) a consolidation or merger of the Corporation with one or
more corporations, or (ii) a sale or transfer of all or substantially all of the
Corporation's assets, shall not be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities, after
payment shall have been made in full to the holders of the Series A Preferred
Stock, as provided in this paragraph 5, any other series or class or classes of
Junior Securities shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the Series A Preferred Stock and any Parity
Securities shall not be entitled to share therein.
6. Redemption. (a) The Series A Preferred Stock shall not be redeemable
by the Corporation prior to March 31, 2003. On and after March 31, 2003, to the
extent the Corporation shall have funds legally available for such payment, the
Corporation may redeem at its option shares of Series A Preferred Stock, at any
time in whole or from time to time in part, at a redemption price per share
equal to the Liquidation Preference, plus the Special Amount in respect of such
share, plus an amount equal to all dividends and the Additional Amount accrued
and unpaid thereon from the last Dividend Payment Date to the date fixed for
redemption, without interest.
(b) To the extent the Corporation shall have funds legally available for
such payment, on March 31, 2014, the Corporation shall redeem all outstanding
shares of the Series A Preferred Stock, if any, at a redemption price per share
in cash equal to the Liquidation Preference, plus the Special Amount in respect
of such share, plus an amount equal to all dividends and the Additional Amount
accrued and unpaid thereon from the last Dividend Payment Date to such date,
without interest.
(c) Shares of Series A Preferred Stock which have been issued and
reacquired in any manner, including shares purchased or redeemed, shall (upon
compliance with any applicable provisions of the laws of the State of Delaware)
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have the status of authorized and unissued shares of the class of Preferred
Stock undesignated as to series and may be redesignated and reissued as part of
any series of the Preferred Stock; provided that no such issued and reacquired
shares of Series A Preferred Stock shall be reissued or sold as Series A
Preferred Stock.
(d) If the Corporation is unable or shall fail to discharge its
obligation to redeem all outstanding shares of Series A Preferred Stock pursuant
to paragraph 6(b) (the "Mandatory Redemption Obligation"), the Mandatory
Redemption Obligation shall be discharged as soon as the Corporation is able to
discharge such Mandatory Redemption Obligation. If and so long as any Mandatory
Redemption Obligation with respect to the Series A Preferred Stock shall not be
fully discharged, the Corporation shall not (i) directly or indirectly, redeem,
purchase, or otherwise acquire any Parity Security or discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Parity Securities (except in connection with a redemption, sinking fund or other
similar obligation to be satisfied pro rata with the Series A Preferred Stock)
or (ii) declare or make any Junior Securities Distribution, or, directly or
indirectly, discharge any mandatory or optional redemption, sinking fund or
other similar obligation in respect of any Junior Securities.
7. Procedure for Redemption. (a) In the event that fewer than all the
outstanding shares of Series A Preferred Stock are to be redeemed, the number of
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be selected pro rata (with any fractional shares
being rounded to the nearest whole share).
(b) In the event the Corporation shall redeem shares of Series A
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 days nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock register of the Corporation;
provided that neither the failure to give such notice nor any defect therein
shall affect the validity of the giving of notice for the redemption of any
share of Series A Preferred Stock to be redeemed except as to the holder to whom
the Corporation has failed to give said notice or except as to the holder whose
notice was defective. Each such notice shall state: (i) the redemption date;
(ii) the number of shares of Series A Preferred Stock to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the number of
shares to be redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends and Additional Amounts
on the shares to be redeemed will cease to accrue on such redemption date.
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(c) Notice having been mailed as aforesaid, from and after the
redemption date, dividends and Additional Amounts on the shares of Series A
Preferred Stock so called for redemption shall cease to accrue, and all rights
of the holders thereof as stockholders of the Corporation (except the right to
receive from the Corporation the redemption price) shall cease. Upon surrender
in accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such share shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
8. Conversion. (a) Subject to the provisions of this paragraph 8, the
holders of the shares of Series A Preferred Stock shall have the right, at any
time and from time to time, at such holder's option, to convert any or all
outstanding shares (and fractional shares) of Series A Preferred Stock, in whole
or in part, into fully paid and non-assessable shares of Common Stock. The
number of shares of Common Stock deliverable upon conversion of a share of
Series A Preferred Stock, adjusted as hereinafter provided, is referred to
herein as the "Conversion Ratio." The Conversion Ratio as of any date shall be
an amount equal to the sum of (i) the Liquidation Preference, (ii) the Special
Amount and (iii) an amount equal to all dividends and the Additional Amount
accrued thereon from the last Dividend Payment Date to such date, divided by
$39.00, subject to adjustment from time to time pursuant to paragraph 8(g)
hereof. Notwithstanding any call for redemption pursuant to paragraph 6, the
right to convert shares so called for redemption shall terminate at the close of
business on the date immediately preceding the date fixed for such redemption
unless the Corporation shall default in making payment of the amount payable
upon such redemption.
(b) (i) In order to exercise the conversion privilege, the holder
of the shares of Series A Preferred Stock to be converted shall
surrender the certificate representing such shares at the office of the
Corporation, with a written notice of election to convert completed and
signed, specifying the number of shares to be converted. Unless the
shares issuable on conversion are to be issued in the same name as the
name in which such shares of Series A Preferred Stock are registered,
each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the holder or the holder's duly authorized attorney, and an
amount sufficient to pay any transfer or similar tax.
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(ii) As promptly as practicable after the surrender by the holder
of the certificates for shares of Series A Preferred Stock as aforesaid,
the Corporation shall issue and shall deliver to such holder, or on the
holder's written order to the holder's transferee, (x) a certificate or
certificates for the whole number of shares of Common Stock issuable
upon the conversion of such shares in accordance with the provisions of
this paragraph 8, (y) any cash adjustment required pursuant to Section
8(f), and (z) in the event of a conversion in part, a certificate or
certificates for the whole number of Preferred Shares not being so
converted.
(iii) Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the
certificates for shares of Series A Preferred Stock shall have been
surrendered and such notice received by the Corporation as aforesaid,
and the person in whose name or names any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall
be deemed to have become the holder of record of the shares of Common
Stock represented thereby at such time on such date and such conversion
shall be into a number of whole shares of Common Stock equal to the
product of the number of shares of Series A Preferred Stock surrendered
times the Conversion Ratio in effect at such time on such date. All
shares of Common Stock delivered upon conversion of the Series A
Preferred Stock will upon delivery be duly and validly issued and fully
paid and non-assessable, free of all liens and charges and not subject
to any preemptive rights. Upon the surrender of certificates
representing the shares of Series A Preferred Stock to be converted, the
shares to be so converted shall no longer be deemed to be outstanding
and all rights of a holder with respect to such shares surrendered for
conversion shall immediately terminate except the right to receive the
Common Stock and other amounts payable pursuant to this paragraph 8 and
a certificate or certificates representing the shares of Series A
Preferred Stock not converted.
(c) (i) Upon delivery to the Corporation by a holder of shares of
Series A Preferred Stock of a notice of election to convert, the right
of the Corporation to redeem such shares of Series A Preferred Stock
shall terminate, regardless of whether a notice of redemption has been
mailed as aforesaid.
(ii) If a holder of Series A Preferred Stock delivers to the
Corporation a notice of election to convert, the Series A Preferred
Stock to be converted shall cease to accrue dividends and Additional
Amounts pursuant to paragraph 4 but shall continue to be entitled to
receive pro rata
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dividends and Additional Amounts for the period from the last Dividend
Payment Date to the date of delivery of the notice of election to
convert in preference to and in priority over any dividends on any
Junior Securities.
(iii) Except as provided above and in paragraph 8(g), the
Corporation shall make no payment or adjustment for accrued and unpaid
dividends or Additional Amounts on shares of Series A Preferred Stock,
whether or not in arrears, on conversion of such shares or for dividends
in cash on the shares of Common Stock issued upon such conversion.
(d) (i) The Corporation covenants that it will at all times
reserve and keep available, free from preemptive rights, such number of
its authorized but unissued shares of Common Stock as shall be required
for the purpose of effecting conversions of the Series A Preferred
Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of the Series
A Preferred Stock, the Corporation shall comply with all applicable
federal and state laws and regulations which require action to be taken
by the Corporation.
(e) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on conversion of the Series A Preferred Stock pursuant hereto;
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the holder of the Series A
Preferred Stock to be converted and no such issue or delivery shall be made
unless and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(f) In connection with the conversion by a holder of any shares of
Series A Preferred Stock, no fractions of shares of Common Stock shall be
required to be issued to such holder, but in lieu thereof the Corporation shall
pay a cash adjustment in respect of such fractional interest in an amount equal
to such fractional interest multiplied by the Market Price per share of Common
Stock on the business day on which such shares of Series A Preferred Stock are
deemed to have been converted.
(g) (i) In case the Corporation shall at any time after the date of
issue of the Series A Preferred Stock (A) declare a dividend or make a
distribution on Common Stock payable in Common Stock, (B) subdivide or split the
outstanding Common Stock, (C) combine or reclassify the outstanding Common Stock
into a
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smaller number of shares, (D) issue any shares of its Capital Stock in a
reclassification of Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing corporation), or (E) consolidate with, or merge with or into, any
other Person, the Conversion Ratio in effect at the time of the record date for
such dividend or distribution or of the effective date of such subdivision,
split, combination, consolidation, merger or reclassification shall be
proportionately adjusted so that the conversion of the Series A Preferred Stock
after such time shall entitle the holder to receive the aggregate number of
shares of Common Stock or other securities of the Corporation (or shares of any
security into which such shares of Common Stock have been combined,
consolidated, merged or reclassified pursuant to clause 8(g)(i)(C), 8(g)(i)(D)
or 8(g)(i)(E) above) which, if this Series A Preferred Stock had been converted
immediately prior to such time, such holder would have owned upon such
conversion and been entitled to receive by virtue of such dividend,
distribution, subdivision, split, combination, consolidation, merger or
reclassification, assuming such holder of Common Stock of the Corporation (x) is
not a Person with which the Corporation consolidated or into which the
Corporation merged or which merged into the Corporation or to which such
recapitalization, sale or transfer was made, as the case may be ("constituent
person"), or an affiliate of a constituent person and (y) failed to exercise any
rights of election as to the kind or amount of securities, cash and other
property receivable upon such reclassification, change, consolidation, merger,
recapitalization, sale or transfer (provided, that if the kind or amount of
securities, cash and other property receivable upon such reclassification,
change, consolidation, merger, recapitalization, sale or transfer is not the
same for each share of Common Stock of the Corporation held immediately prior to
such reclassification, change, consolidation, merger, recapitalization, sale or
transfer by other than a constituent person or an affiliate thereof and in
respect of which such rights of election shall not have been exercised
("non-electing share"), then for the purpose of this subparagraph 8(g) the kind
and amount of securities, cash and other property receivable upon such
reclassification, change, consolidation, merger, recapitalization, sale or
transfer by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). Such adjustment
shall be made successively whenever any event listed above shall occur.
(ii) In case the Corporation shall issue or sell any Common Stock
(other than Common Stock issued (A) pursuant to the Corporation's
existing or future stock option plans or pursuant to any other existing
or future Common Stock-related director or employee compensation plan of
the Corporation approved by the Board of Directors, (B) as consideration
for the acquisition of a business or of assets, (C) in a firmly
committed underwritten public offering, (D) to the Corporation's joint
venture
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partners in exchange for interests in the relevant joint venture or (E)
upon exercise or conversion of any security the issuance of which caused
an adjustment under paragraph 8(g)(i) or 8(g)(iii) hereof or the
issuance of which did not require adjustment hereunder) without
consideration or for a consideration per share less than the Current
Market Price on the date of such issuance, or shall issue securities
convertible into Common Stock having a conversion price per share less
than the Current Market Price at the date of issuance of such
convertible security, the Conversion Ratio to be in effect after such
issuance or sale shall be determined by multiplying the Conversion Ratio
in effect immediately prior to such issuance or sale by a fraction, (1)
the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to such issuance or sale and
the number of additional shares of Common Stock to be issued or sold
(or, in the case of convertible securities, issued on conversion), and
(2) the denominator of which shall be the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issuance or
sale and (y) the number of shares of Common Stock which the aggregate
consideration receivable by the Corporation for the total number of
additional shares of Common Stock so issued or sold (or issuable on
conversion) would purchase at the Current Market Price in effect
immediately prior to such issuance or sale. In case any portion of the
consideration to be received by the Corporation shall be in a form other
than cash, the fair market value of such noncash consideration shall be
utilized in the foregoing computation. Such fair market value shall be
determined in good faith by the Board of Directors.
(iii) In case the Corporation shall fix a record date for the
issuance of rights, options or warrants (other than rights, options or
warrants issued under a shareholders' rights plan) to the holders of its
Common Stock or other securities entitling such holders to subscribe for
or purchase shares of Common Stock (or securities convertible into
shares of Common Stock) at a price per share of Common Stock (or having
a conversion price per share of Common Stock, if a security convertible
into shares of Common Stock) less than the Current Market Price on such
record date, the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants (or conversion of such
convertible securities) shall be deemed to have been issued and
outstanding as of such record date and the Conversion Ratio shall be
adjusted pursuant to paragraph 8(g)(ii) hereof, as though such maximum
number of shares of Common Stock had been so issued for an aggregate
consideration payable by the holders of such rights, options, warrants
or convertible securities prior to their receipt of such shares of
Common Stock. In case any portion of such consideration shall be in a
form other than cash, the fair market
14
<PAGE>
value of such noncash consideration shall be determined as set forth in
paragraph 8(g)(ii) hereof. Such adjustment shall be made successively
whenever such record date is fixed; and in the event that such rights,
options or warrants are not so issued or expire in whole or in part
unexercised, or in the event of a change in the number of shares of
Common Stock to which the holders of such rights, options or warrants
are entitled (other than pursuant to adjustment provisions therein
comparable to those contained in this paragraph 8(g)), the Conversion
Ratio shall again be adjusted as follows: (A) in the event that all of
such rights, options or warrants expire unexercised, the Conversion
Ratio shall be the Conversion Ratio that would then be in effect if such
record date had not been fixed; (B) in the event that less than all of
such rights, options or warrants expire unexercised, the Conversion
Ratio shall be adjusted pursuant to paragraph 8(g)(ii) to reflect the
maximum number of shares of Common Stock issuable upon exercise of such
rights, options or warrants that remain outstanding (without taking into
effect shares of Common Stock issuable upon exercise of rights, options
or warrants that have lapsed or expired); and (C) in the event of a
change in the number of shares of Common Stock to which the holders of
such rights, options or warrants are entitled, the Conversion Ratio
shall be adjusted to reflect the Conversion Ratio which would then be in
effect if such holder had initially been entitled to such changed number
of shares of Common Stock. Notwithstanding anything herein to the
contrary, no further adjustment to the Conversion Ratio shall be made
upon the issuance or sale of Common Stock upon the exercise of any
rights, options or warrants to subscribe for or purchase Common Stock,
if any adjustment in the Conversion Ratio was made or required to be
made upon the record date for the issuance or sale of such rights,
options or warrants under this clause 8(g)(iii).
(iv) In case the Corporation shall fix a record date for the
making of a distribution to holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which
the Corporation is the continuing corporation) of evidences of
indebtedness, assets or other property (other than (x) dividends payable
in Common Stock or rights, options or warrants referred to in, and for
which an adjustment is made pursuant to, paragraph 8(g)(i) or 8(g)(iii)
hereof, (y) cash dividends paid from the Corporation's retained
earnings, or (z) distributions of stock or assets having an aggregate
fair market value of less than $25 million), the Conversion Ratio to be
in effect after such record date shall be determined by multiplying the
Conversion Ratio in effect immediately prior to such record date by a
fraction, (A) the numerator of which shall be the Current Market Price
on such record date, and (B) the denominator of which shall be the
Current Market Price on
15
<PAGE>
such record date, less the fair market value (determined as set forth in
paragraph 8(g)(ii) hereof) of the portion of the assets, other property
or evidence of indebtedness so to be distributed which is applicable to
one share of Common Stock. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such
distribution is not so made, the Conversion Ratio shall again be
adjusted to be the Conversion Ratio which would then be in effect if
such record date had not been fixed. In addition to the foregoing, an
adjustment to the Conversion Ratio shall be made in respect of dividends
and distributions paid in cash (excluding any dividend or distribution
in connection with the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and any cash that is
distributed upon a merger, consolidation or other transaction for which
an adjustment pursuant to paragraph 8(g)(i) is made) where the sum of
(1) all such cash dividends and distributions made within the preceding
12 months in respect of which no adjustment has been made and (2) any
cash and the fair market value of other consideration paid in respect of
any repurchases of Common Stock by the Corporation or any of its
subsidiaries within the preceding 12 months in respect of which no
adjustment has been made, exceeds 12.5% of the Corporation's market
capitalization (being the product of the then Current Market Price of
the Common Stock times the aggregate number of shares of Common Stock
then outstanding on the record date for such distribution).
(v) No adjustment to the Conversion Ratio pursuant to paragraphs
8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Conversion Ratio; provided however, that any adjustments which by reason
of this paragraph 8(g)(v) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this paragraph 8(g) shall be made to the nearest four
decimal points.
(vi) In the event that, at any time as a result of the provisions
of this paragraph 8(g), a holder of Series A Preferred Stock upon
subsequent conversion shall become entitled to receive any shares of
Capital Stock of the Corporation other than Common Stock, the number of
such other shares so receivable upon conversion of Series A Preferred
Stock shall thereafter be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions contained herein.
16
<PAGE>
(h) All adjustments pursuant to this paragraph 8 shall be notified to
the holders of the Series A Preferred Stock and such notice shall be accompanied
by a schedule of computations of the adjustments
9. Change of Control. (a) Subject to paragraph 9(c) and 9(d) below,
upon the occurrence of a Change of Control (the date of such occurrence being
the "Change of Control Date"), the Corporation shall be required to make an
offer (the "Change of Control Obligation") to each holder of shares of Series A
Preferred Stock to repurchase of such holder's shares of Series A Preferred
Stock, or such portion thereof as may be determined by such holder, at a price
per share in cash equal to the Liquidation Preference plus the Special Amount in
respect of such share, plus an amount equal to all dividends and the Additional
Amount accrued and unpaid thereon from the last Dividend Payment Date to the
date of repurchase; provided, that the holders of Series A Preferred Stock shall
not be entitled to tender any Series A Preferred Stock under this provision
until such time as the Corporation has repurchased such debt securities as are
required to be repurchased by the Corporation upon such event pursuant to
Corporation's credit and financing agreements.
(b) Such offer to purchase (the "Change of Control Offer"), shall take
place on a Business Day (the "Change of Control Payment Date") not later than 60
days following the Change of Control Date. Notice of a Change of Control Offer
shall be given to holders of the Series A Preferred Stock, not less than 25 days
nor more than 45 days before the Change of Control Payment Date. The Change of
Control Offer is required to remain open for at least 20 business days and until
the close of business on the Change of Control Payment Date.
(c) Notwithstanding the foregoing, the Corporation shall not be required
to make a Change of Control Offer following a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements applicable to a Change of Control Offer made by
the Corporation and purchases all shares of Series A Preferred Stock validly
tendered and not withdrawn under such Change of Control Offer.
(d) If the Corporation is required to make a Change of Control Offer,
the Corporation will comply with all applicable tender offer laws and
regulations, including, to the extent applicable, Section 14(e) and Rule 14e-1
under the Securities Exchange Act of 1934, and any other applicable securities
laws and regulations.
10. Voting Rights. (a) The holders of record of shares of Series A
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this paragraph 10 or as otherwise provided by law.
17
<PAGE>
(b) If and whenever six quarterly dividends or Additional Amounts
payable on the Series A Preferred Stock have not been paid in full or if the
Corporation shall have failed to discharge its Mandatory Redemption Obligation
or its Change of Control Obligation, the number of directors then constituting
the Board of Directors shall be increased by one and the holders of shares of
Series A Preferred Stock, voting as a single class, shall be entitled to elect
the additional director to serve on the Board of Directors at any annual meeting
of stockholders or special meeting held in place thereof, or at a special
meeting of the holders of the Series A Preferred Stock called as hereinafter
provided. Whenever all arrears in dividends and Special Amounts on the Series A
Preferred Stock then outstanding shall have been paid and dividends and
Additional Amounts thereon for the current quarterly dividend period shall have
been paid or declared and set apart for payment, or the Company shall have
fulfilled its Mandatory Redemption Obligation or Change of Control Obligation,
as the case may be, then the right of the holders of the Series A Preferred
Stock to elect such additional director shall cease (but subject always to the
same provisions for the vesting of such voting rights in the case of any similar
future arrearage in six quarterly dividends or failure to fulfill any Mandatory
Redemption Obligation or Change of Control Obligation), and the term of office
of any person elected as director by the holders of the Series A Preferred Stock
shall forthwith terminate and the number of the Board of Directors shall be
reduced accordingly. At any time after voting power to elect a director shall
have become vested and be continuing in the holders of Series A Preferred Stock
pursuant to this paragraph, or if a vacancy shall exist in the office of a
director elected by the holders of Series A Preferred Stock, a proper officer of
the Corporation may, and upon the written request of the holders of record of at
least twenty-five percent (25%) of the shares of Series A Preferred Stock then
outstanding addressed to the Secretary of the Corporation shall, call a special
meeting of the holders of Series A Preferred Stock, for the purpose of electing
the director which such holders are entitled to elect. If such meeting shall not
be called by a proper officer of the Corporation within twenty (20) days after
personal service of said written request upon the Secretary of the Corporation,
or within twenty (20) days after mailing the same within the United States by
certified mail, addressed to the Secretary of the Corporation at its principal
executive offices, then the holders of at least twenty-five percent (25%) of the
outstanding shares of Series A Preferred Stock may designate in writing one of
their number to call such meeting at the expense of the Corporation, and such
meeting may be called by the person so designated upon the notice required for
the annual meeting of stockholders of the Corporation and shall be held at the
place for holding the annual meetings of stockholders. Any holder of Series A
Preferred Stock so designated shall have, and the Corporation shall provide,
access to the lists of stockholders to be called pursuant to the provisions
hereof.
18
<PAGE>
(c) Without the written consent of holders of a majority of the
outstanding shares of Series A Preferred Stock or the vote of holders of a
majority of the outstanding shares of Series A Preferred Stock at a meeting of
the holders of Series A Preferred Stock called for such purpose, the Corporation
will not amend, alter or repeal any provision of the Certificate of
Incorporation or this Certificate of Designations so as to adversely affect the
preferences, rights or powers of the Series A Preferred Stock or to authorize
the issuance or issue of any additional shares of Series A Preferred Stock;
provided that any such amendment that changes any dividend or other amount
payable on or the liquidation preference of the Series A Preferred Stock shall
require the written consent of holders of two-thirds of the outstanding shares
of Series A Preferred Stock or the vote of holders of two-thirds of the
outstanding shares of Series A Preferred Stock at a meeting of the holders of
Series A Preferred Stock called for such purpose.
(d) Without the written consent of holders of a majority of the
outstanding shares of Series A Preferred Stock or the vote of holders of a
majority of the outstanding shares of Series A Preferred Stock at a meeting of
such holders called for such purpose, the Corporation will not create, authorize
or issue any Senior Securities.
(e) Without the written consent of holders of a majority of the
outstanding shares of Series A Preferred Stock or the vote of holders of a
majority of the outstanding shares of Series A Preferred Stock at a meeting of
the holders of Series A Preferred Stock called for such purpose, the Corporation
shall not, in a single transaction or series of related transactions,
consolidate or merge with or into, or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets to, any person or
adopt a plan of liquidation unless: either (1) the Corporation is the surviving
or continuing person and the Series A Preferred Stock shall remain outstanding
without any amendment that would adversely affect the preferences, rights or
powers of the Series A Preferred Stock or (2) (i) the person (if other than the
Corporation) formed by such consolidation or into which the Corporation is
merged or the person which acquires by conveyance, transfer or lease the
properties and assets of the Corporation substantially as an entirety or in the
case of a plan of liquidation, the person to which assets of the plan of
liquidation, the person to which assets of the Corporation have been
transferred, shall be a corporation, partnership or trust organized and existing
under the laws of the United States or any State thereof or the District of
Columbia and (ii) the Series A Preferred Stock shall be converted into or
exchanged for and shall become shares of such successor, transferee or resulting
person, having in respect of such successor, transferee or resulting person, the
same powers, preferences and relative participating, optional or other special
rights and the qualifications, limitations or restrictions thereon, that the
Series A Preferred Stock had immediately prior to such transaction. For purposes
19
<PAGE>
of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a
single transaction or series of related transactions) of all or substantially
all of the properties or assets of one or more subsidiaries of the Corporation,
the Capital Stock of which constitutes all or substantially all of the
properties and assets of the Corporation, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Corporation.
(f) In exercising the voting rights set forth in this paragraph 10, each
share of Series A Preferred Stock shall have one vote per share, except that
when any other series of preferred stock shall have the right to vote with the
Series A Preferred Stock as a single class on any matter, then the Series A
Preferred Stock shall have with respect to such matters one vote per $1,000 (or
fraction thereof) of the aggregate Liquidation Preference plus Special Amounts.
Except as otherwise required by applicable law or as set forth herein, the
shares of Series A Preferred Stock shall not have any relative, participating,
optional or other special voting rights and powers and the consent of the
holders thereof shall not be required for the taking of any corporate action.
11. Reports. So long as any of the Series A Preferred Stock is
outstanding, in the event the Corporation is not required to file quarterly and
annual financial reports with the Securities and Exchange Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish
the holders of the Series A Preferred Stock with reports containing the same
information as would be required in such reports.
12. General Provisions. (a) The term "Person" as used herein means
any corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "outstanding", when used with reference to shares of stock,
shall mean issued shares, excluding shares held by the Corporation or a
subsidiary.
(c) The headings of the paragraphs, subparagraphs, clauses and
subclauses of this Certificate of Designations are for convenience of reference
only and shall not define, limit or affect any of the provisions hereof.
(d) Each holder of Series A Preferred Stock, by acceptance thereof,
acknowledges and agrees that payments of dividends, interest, premium and
principal on, and exchange, redemption and repurchase of, such securities by the
Corporation are subject to restrictions on the Corporation contained in certain
credit and financing agreements.
20
<PAGE>
IN WITNESS WHEREOF, RCN Corporation has caused this Certificate of
Designations to be signed and attested by the undersigned this day of April,
1999.
RCN CORPORATION
By:
---------------------------
Name:
Title:
By:
---------------------------
Name:
Title:
STOCK PURCHASE AGREEMENT
dated as of
March 18, 1999
between
RCN CORPORATION
and
HMTF LIVE WIRE INVESTORS, LLC
relating to the purchase and sale
of
Series A 7% Senior Convertible Preferred Stock
of
RCN CORPORATION
<PAGE>
TABLE OF CONTENTS
-------------
PAGE
----
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions....................................................1
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale..............................................4
SECTION 2.02. Closing........................................................4
SECTION 2.03. Certificates for Restricted Securities.........................4
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
SECTION 3.01. Corporate Existence and Power..................................5
SECTION 3.02. Corporate Authorization........................................5
SECTION 3.03. Authorization..................................................5
SECTION 3.04. Noncontravention...............................................5
SECTION 3.05. Capitalization.................................................6
SECTION 3.06. Authorization of Preferred Shares..............................6
SECTION 3.07. Finders' Fees..................................................7
SECTION 3.08. SEC Reports....................................................7
SECTION 3.09. Financial Statements...........................................7
SECTION 3.10. Absence of Certain Changes.....................................7
SECTION 3.11. Litigation.....................................................8
SECTION 3.12. Offering of Preferred Shares...................................8
SECTION 3.13. Accuracy and Completeness of Information Provided..............8
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
SECTION 4.01. Existence and Power............................................9
SECTION 4.02. Authorization..................................................9
SECTION 4.03. Authorization..................................................9
SECTION 4.04. Noncontravention...............................................9
SECTION 4.05. Purchase for Investment........................................9
SECTION 4.06. Litigation....................................................10
SECTION 4.07. Finders' Fees.................................................10
<PAGE>
PAGE
----
ARTICLE 5
COVENANTS OF THE CORPORATION
SECTION 5.01. Access to Information.........................................10
SECTION 5.02. Certificate of Designations...................................10
SECTION 5.03. Restrictions Pending the Closing..............................10
SECTION 5.04. Buyer Director................................................11
SECTION 5.05. Reservation of Rights.........................................12
SECTION 5.06. Other Transfers of Restricted Securities......................12
SECTION 5.07. Venture Capital Operating Company Requirements................12
ARTICLE 6
COVENANTS OF BUYER
SECTION 6.01. Confidentiality...............................................12
SECTION 6.02. Sale or Transfer of Restricted Securities.....................14
ARTICLE 7
COVENANTS OF BUYER AND THE CORPORATION
SECTION 7.01. Reasonable Best Efforts; Further Assurances...................14
SECTION 7.02. Certain Filings...............................................14
SECTION 7.03. Public Announcements..........................................14
SECTION 7.04. Registration Rights Agreement.................................15
ARTICLE 8
CONDITIONS TO CLOSING
SECTION 8.01. Conditions to Obligations of Buyer and the Corporation........15
SECTION 8.02. Conditions to Obligation of Buyer.............................15
SECTION 8.03. Conditions to Obligation of the Corporation...................16
ARTICLE 9
TERMINATION
SECTION 9.01. Grounds for Termination.......................................17
SECTION 9.02. Effect of Termination.........................................17
iii
<PAGE>
PAGE
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ARTICLE 10
SURVIVAL; INDEMNIFICATION
SECTION 10.01. Survival of Representation and Warranties....................17
SECTION 10.02. Indemnification..............................................18
SECTION 10.03. Procedures...................................................18
SECTION 10.04. Inspections; No Other Representations .......................19
SECTION 10.05. Exclusivity..................................................19
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Notices......................................................19
SECTION 11.02. Amendments and Waivers.......................................21
SECTION 11.03. Expenses.....................................................21
SECTION 11.04. Assignment...................................................21
SECTION 11.05. Governing Law................................................21
SECTION 11.06. Jurisdiction.................................................21
SECTION 11.07. Counterparts; Third Party Beneficiaries......................22
SECTION 11.08. Entire Agreement.............................................22
SECTION 11.09. Captions.....................................................22
SECTION 11.10. Severability.................................................22
SECTION 11.11. Specific Performance.........................................23
SECTION 11.12. No Recourse..................................................23
Exhibit A Certificate of Designations, Preferences and Rights
of Series A 7% Senior Convertible Preferred Stock
Exhibit B Registration Rights
iv
<PAGE>
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of March 18, 1999 between RCN Corporation, a
Delaware corporation (the "Corporation"), and HMTF Live Wire Investors, LLC, a
Delaware limited liability company ("Buyer").
WHEREAS, the Corporation desires to sell the Preferred Shares (as
defined herein) to Buyer, and Buyer desires to purchase the Preferred Shares
from the Corporation, upon the terms and subject to the conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and undertakings contained herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein,
have the following meanings:
"Affiliate" means, with respect to any specified person, any other
person which, directly or indirectly, controls, is controlled by or is under
direct or indirect common control with, such specified person. For the purposes
of this definition, "control" when used with respect to any person means the
power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise, and the terms "affiliated," "controlling," and "controlled" have
meanings correlative to the foregoing.
"Board of Directors" means the Board of Directors of the Corporation.
"Closing Date" means the date of the Closing.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
<PAGE>
"HMTF" means Hicks, Muse, Tate & Furst Incorporated, a Texas
corporation.
"HMTF Group" means HMTF and its Affiliates and its and their respective
officers, directors, partners, members, stockholders and employees (and members
of their respective families and trusts for the primary benefit of such family
members).
"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Corporation and its Subsidiaries, taken as whole.
"Person" means an individual, corporation, partnership, limited
liability company, association, trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
"Preferred Shares" means 250,000 shares of Preferred Stock issued on
the Closing Date.
"Preferred Stock" means the Series A 7% Senior Convertible Preferred
Stock of the Corporation.
"Restricted Securities" means (i) the Preferred Stock issued hereunder,
and (ii) any securities issued directly or indirectly with respect to the
securities referred to in clause (i) above upon conversion of the Preferred
Stock, including in connection with a stock split or combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise
pursuant to the terms of the Preferred Stock. As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities when they
have (a) been effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) become eligible
for sale pursuant to Rule 144 (without any volume limitations) or (c) been
otherwise transferred and new certificates for them not bearing the Securities
Act legend set forth in Section 2.03(b) have been delivered by the Corporation.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Subsidiary" means any corporation or other entity (and any predecessor
thereof) of which the securities or other ownership interests having ordinary
2
<PAGE>
voting power to elect a majority of the Board of Directors or other persons
performing similar functions are directly or indirectly owned by the
Corporation.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
Buyer Director 5.04
Closing 2.02
Permitted Transferee 6.02
Purchase Price 2.01
SEC Reports 3.05
Certificate of Designations 3.06
(c) The following definitional provisions shall apply to this Agreement:
(i) The words "hereof", "herein", and "hereunder" and words of
similar import, when used in this Agreement, shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.
(ii) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
(iii) The terms "Dollars" and "$" shall mean United States
Dollars.
(iv) References herein to a specific Section, Subsection or
Schedule shall refer, respectively, to Sections, Subsections or
Schedules of this Agreement, unless the express context otherwise
requires.
(v) Wherever the word "include," "includes," or "including" is
used in this Agreement, it shall be deemed to be followed by the words
"without limitation."
3
<PAGE>
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale. Upon the terms and subject to the
conditions of this Agreement, the Corporation agrees to sell to Buyer, and Buyer
agrees to purchase from the Corporation, the Preferred Shares at the Closing.
The purchase price (the "Purchase Price") for the Preferred Shares is
$250,000,000 in cash. The Purchase Price shall be paid as provided in Section
2.02.
SECTION 2.02. Closing. The closing (the "Closing") of the purchase and
sale of the Preferred Shares hereunder shall take place at the offices of Davis
Polk & Wardwell, 450 Lexington Avenue, New York, New York, as soon as possible,
but no earlier than April 1, 1999 and in no event later than five business days
after satisfaction of the conditions set forth in Article 8.01, or at such other
time or place as Buyer and the Corporation may agree. At the Closing:
(a) following delivery of the certificate described in Section 8.02(d)
and the filing of the Certificate of Designations in accordance with Section
8.02(c), Buyer shall deliver to the Corporation the Purchase Price (less the
amount of a 2% transaction fee payable to Hicks, Muse & Co. Partners, L.P.,
("HM&C")) in immediately available funds by wire transfer to an account of the
Corporation with a bank designated by the Corporation, by notice to Buyer, not
later than two business days prior to the Closing Date.
(b) following delivery of the certificate described in Section 8.03(c),
the Corporation shall deliver to Buyer certificates for the Preferred Shares.
SECTION 2.03. Certificates for Restricted Securities. (a) Each
certificate for Restricted Securities shall bear the following legend for so
long as such securities constitute Restricted Securities:
"The securities represented hereby have not been registered under
the Securities Act of 1933, as amended, and may not be offered,
sold, transferred or otherwise disposed of except in compliance
with such laws."
(b) The Corporation agrees that, at the request of Buyer or any
Permitted Transferee, it will remove the legend contemplated by this Section
from the certificates representing any Restricted Securities in the event that
outside counsel for Buyer or such Permitted Transferee determines that the
transfer of such Preferred Shares is no longer restricted by the Securities Act
and outside counsel for the Corporation reasonably concurs in such
determination.
4
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation represents and warrants to Buyer as of the date hereof
and as of the Closing that:
SECTION 3.01. Corporate Existence and Power. The Corporation is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers required to carry on
its business as now conducted.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance of this Agreement by the Corporation is within the Corporation's
corporate powers and has been duly authorized by all necessary corporate action
on the part of the Corporation. This Agreement constitutes a legal and binding
agreement of the Corporation, enforceable against the Corporation in accordance
with its terms, except (a) as such enforcement is limited by bankruptcy,
insolvency and other similar laws affecting the enforcement of creditors' rights
generally and (b) for limitations imposed by general principles of equity.
SECTION 3.03. Authorization. Except as set forth in Schedule 3.03
hereto, the execution, delivery and performance of this Agreement by the
Corporation requires no action by or in respect of, or filing with, any
governmental or non-governmental body, agency, official or authority other than
(i) compliance with any applicable requirements of the Exchange Act; (ii) with
respect to the Corporation's obligations under Section 7.04, compliance with any
applicable requirements of the Securities Act; (iii) the filing of the
Certificate of Designations in accordance with the laws of Delaware and (iv)
other filings or notifications that are immaterial to the consummation of the
transactions contemplated hereby.
SECTION 3.04. Noncontravention. The execution, delivery and performance
of this Agreement by the Corporation do not and will not (i) violate the
certificate of incorporation or bylaws of the Corporation, (ii) assuming
compliance with the matters referred to in Section 3.03, violate any applicable
law, rule, regulation, judgment, injunction, order or decree binding upon the
Corporation, other than violations that would be immaterial to the Corporation
or Buyer, or (iii) except as to matters which would be immaterial to the
Corporation or Buyer, constitute a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of the
Corporation or to a loss of any benefit to which the Corporation is entitled
under any provision of any
5
<PAGE>
agreement or other instrument binding upon the Corporation or (iv) result in the
creation or imposition of any Lien on any asset of the Corporation except where
such Lien would not have a Material Adverse Effect.
SECTION 3.05. Capitalization. (a) As of the date hereof, the authorized
capital stock of the Corporation consists of: 200,000,000 shares of common
stock, par value $1.00 per share ("Common Stock"); 400,000,000 shares of Class B
common stock, par value $1.00 per share; and 25,000,000 shares of preferred
stock, par value $1.00 per share. As of December 31, 1998, there were 64,920,493
shares of Common Stock issued and outstanding, no shares of Class B common stock
outstanding and no shares of preferred stock outstanding.
(b) All outstanding shares of Common Stock are duly authorized, validly
issued and fully paid and nonassessable. There are no preemptive or other
similar rights available to the existing holders of the capital stock of the
Corporation. As of the date hereof and other than (i) as set forth in the
financial statements contained in the forms, reports and documents filed with
the Commission (the "SEC Reports") (ii) as set forth on Schedule 3.05 (b)
hereto, and (iii) in connection with the transactions contemplated by this
Agreement, there are no outstanding options, warrants, rights, puts, calls,
commitments, or other contracts, arrangements, or understandings issued by or
binding upon the Corporation requiring, and there are no outstanding debt or
equity securities of the Corporation which upon the conversion, exchange or
exercise thereof would require, the issuance, sale or transfer by the
Corporation of any new or additional equity interests in the Corporation (or any
other securities of the Corporation or any of its Subsidiaries which, whether
after notice, lapse of time or payment of monies, are or would be convertible
into or exercisable or exchangeable for equity interests in the Corporation).
Except as set forth in the SEC Reports, there are no voting trusts or other
agreements or understandings to which the Corporation or any of its Subsidiaries
is a party with respect to the voting of capital stock of the Corporation.
SECTION 3.06. Authorization of Preferred Shares. The issuance, sale and
delivery of the Preferred Shares has been duly authorized by all requisite
corporate action of the Corporation and the Preferred Shares issued to Buyer in
accordance with the terms of the Certificate of Designations, Preferences and
Rights of Series A 7% Senior Convertible Preferred Stock (the "Certificate of
Designations") set forth on Exhibit A hereto, when issued and delivered in
accordance with the terms of this Agreement will be validly issued and
outstanding, fully paid and nonassessable free and clear of any Liens and not
subject to preemptive or other similar rights of the stockholders of the
Corporation.
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SECTION 3.07. Finders' Fees. Except for Chase Securities, Inc., whose
fees will be paid by the Corporation, there is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of the Corporation who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement.
SECTION 3.08. SEC Reports. The Corporation has filed all required SEC
Reports when due in accordance with the Exchange Act and delivered or made
available to Buyer copies thereof. As of their respective dates, the SEC Reports
complied in all material respects with all applicable requirements of the
Exchange Act or the Securities Act, as the case may be. As of their respective
dates, none of the SEC Reports contained any untrue statement of a material fact
or omitted to state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
SECTION 3.09. Financial Statements. The consolidated financial
statements of the Corporation contained in the SEC Reports complied as to form
in all material respects with the published rules and regulations of the
Commission with respect thereto, were prepared in accordance with GAAP applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present, in conformity with GAAP (except as may be
indicated in the notes thereto), the consolidated financial position of the
Corporation and its consolidated subsidiaries as of the dates thereof and their
consolidated results of operations and changes in financial position for the
periods then ended (subject to (i) normal year-end adjustments in the case of
any unaudited interim financial statements which will not be material, either
individually or in the aggregate, and (ii) further adjustments that may be
required by the Commission with respect to allocation of the purchase price of
certain assets to in-process research and development as reflected in the
Corporation's pending Registration Statement No. 333-71525). The Corporation has
delivered to Buyer a copy of its consolidated financial statements for the year
ended December 31, 1998, together with footnotes in draft form; such financial
statements were prepared in accordance with GAAP applied on a consistent basis
during the period involved (except as may be indicated in the notes thereto) and
fairly present, in conformity with GAAP (except as may be indicated in the notes
thereto), the consolidated financial position of the Corporation and its
consolidated subsidiaries as of the date thereof and their consolidated results
of operations and changes in financial position for the period then ended
(subject to the adjustments referred to in the preceding sentence.)
SECTION 3.10. Absence of Certain Changes. Since December 31, 1998,
there has not been any event, occurrence or development of a state of
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circumstances or facts that has had or could reasonably be expected to have a
Material Adverse Effect or an adverse effect on the ability of the Corporation
to perform its obligations under this Agreement.
SECTION 3.11. Litigation. Except as set forth in Schedule 3.11, and
except as disclosed in the SEC Reports and the Company's pending Registration
Statement No. 333-71525, there is no action, suit, investigation or proceeding
pending against, or to the knowledge of the Corporation threatened against or
affecting, the Corporation or any Subsidiary before any court or arbitrator or
any governmental body, agency or official which (i) in any manner challenges or
seeks to prevent, enjoin, alter or materially delay the transactions
contemplated by this Agreement or (ii) if resolved adversely to the Corporation
or a Subsidiary would reasonably be likely to have, individually or in the
aggregate, a Material Adverse Effect.
SECTION 3.12. Offering of Preferred Shares. Neither the Corporation nor
any Person acting on its behalf has taken or will take any action (including,
without limitation, any offering of any securities of the Corporation under
circumstances which would require, under the Securities Act, the integration of
such offering with the offering and sale of the Preferred Shares) which might
subject the offering, issuance or sale of the Preferred Shares to the
registration requirements of Section 5 of the Securities Act.
SECTION 3.13. Accuracy and Completeness of Information Provided. To the
Corporation's knowledge, none of the documents or written information delivered
by the Corporation to Buyer in connection with the transactions contemplated by
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein not misleading (for purposes of the preceding sentence, any preliminary
document or written information shall be disregarded if a final version of such
document or written information was delivered by Buyer to the Corporation prior
to the date hereof). There is no fact or information relating to the Corporation
or its subsidiaries that is known to the Corporation that could reasonably be
expected to be material to the Corporation and its subsidiaries taken as a whole
and that has not been disclosed to Buyer.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Corporation as of the date hereof
and as of the Closing that:
SECTION 4.01. Existence and Power. Buyer is a limited liability company
duly formed, validly existing and in good standing under the laws of its
jurisdiction of formation.
SECTION 4.02. Authorization. The execution, delivery and performance of
this Agreement by Buyer are within the Buyer's limited liability company powers
and have been duly authorized by all necessary limited liability company action
on the part of Buyer. This Agreement constitutes a legal, valid and binding
agreement of Buyer, enforceable against Buyer in accordance with its terms,
except (a) as such enforcement is limited by bankruptcy, insolvency and other
similar laws affecting the enforcement of creditors' rights generally and (b)
for limitations imposed by general principles of equity.
SECTION 4.03. Authorization. The execution, delivery and performance of
this Agreement by Buyer requires no action by or in respect of, or filing with,
any governmental or non-governmental body, agency or official or any other
Person other than (i) compliance with any applicable requirements of the
Exchange Act and (ii) other filings or notifications that are immaterial to the
consummation of the transactions contemplated hereby.
SECTION 4.04. Noncontravention. The execution, delivery and performance
of this Agreement by Buyer does not and will not (i) violate the certificate of
formation or limited liability company agreement of Buyer, or, (ii) assuming
compliance with the matters referred to in Section 4.03, violate any applicable
law, rule, regulation, judgment, injunction, order or decree, except for any
such violations which would not have a material adverse effect on the ability of
Buyer to consummate the transactions contemplated hereby.
SECTION 4.05. Purchase for Investment. Buyer is purchasing the Preferred
Shares for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Buyer (either alone or together with
its advisors) has sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the merits and risks of its investment
in the Preferred Shares and is capable of bearing the economic risks of such
investment.
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SECTION 4.06. Litigation. There is no action, suit, investigation or
proceeding pending against, or to the knowledge of Buyer threatened against or
affecting, Buyer before any court or arbitrator or any governmental body, agency
or official which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the transactions contemplated by this Agreement.
SECTION 4.07. Finders' Fees. Except for HM&C, whose transaction fee
shall be paid by the Corporation in accordance with Section 2.02, there is no
investment banker, broker, finder or other intermediary which has been retained
by or is authorized to act on behalf of Buyer who might be entitled to any fee
or commission from the Corporation or any of its Affiliates upon consummation of
the transactions contemplated by this Agreement.
ARTICLE 5
COVENANTS OF THE CORPORATION
The Corporation agrees that:
SECTION 5.01. Access to Information. From the date hereof until the
Closing Date, the Corporation will (i) furnish to Buyer and its authorized
representatives such financial and operating data and other information relating
to the Corporation and its Subsidiaries as such Persons may reasonably request
and (ii) instruct its counsel, independent accountants and financial advisors to
cooperate with Buyer and its authorized representatives in its investigation of
the Corporation. Any investigation pursuant to this Section shall be conducted
in such manner as not to interfere unreasonably with the conduct of the business
of the Corporation. In addition, during any time that Buyer has the right to
designate a Buyer Director pursuant to Section 5.04, the Corporation will
provide Buyer with copies of all financial information, reports and
presentations delivered to the lenders under the Corporation's principal credit
facilities, subject to the confidentiality agreement set forth in Section 6.01.
SECTION 5.02. Certificate of Designations. Prior to the Closing, the
Corporation shall cause to be filed the Certificate of Designations set forth as
Exhibit A hereto as required pursuant to the law of Delaware.
SECTION 5.03. Restrictions Pending the Closing. After the date hereof
and prior to the Closing Date, except as expressly provided for in this
Agreement or as consented to in writing by Buyer, the Corporation will not:
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(i) amend its Certificate of Incorporation or By-laws or similar
organizational documents;
(ii) split, combine or reclassify any shares of the Corporation's
capital stock;
(iii) declare or pay any dividend or distribution (whether in
cash, stock or property) in respect of its capital stock;
(iv) take any action, or knowingly omit to take any action, that
would, or that would reasonably be expected to, result in (A) any of the
representations and warranties of the Corporation set forth in Article 3
becoming untrue or (B) any of the conditions to the obligations of Buyer
set forth in Section 8.02 not being satisfied; or
(v) enter into any agreement or commitment to do any of the foregoing.
SECTION 5.04. Buyer Director. Buyer shall be entitled to designate for
election to the Board of Directors one person (the "Buyer Director"), for so
long as Buyer owns either (i) 50% or more of the Preferred Shares issued and
outstanding on the Closing Date (the "Issued Preferred Shares"), (ii) an amount
of Common Stock issued upon conversion of 50% or more of the Issued Preferred
Shares or (iii) any combination of Issued Preferred Shares and Common Stock
issued upon conversion of Issued Preferred Shares which, taken together,
represent an amount of Common Stock issuable upon conversion of 50% or more of
the Issued Preferred Shares; provided, however, that the right to designate the
Buyer Director under this Section shall be suspended at any time that the
holders of Preferred Stock have the right to designate a person for election to
the Board of Directors under the terms of the Preferred Stock set forth in the
Certificate of Designations. In the event Buyer elects to have the Board of
Directors appoint a Buyer Director, it shall so notify the Corporation in
writing and the Corporation shall (a) increase the size of the Board of
Directors by one and fill the vacancy created thereby by electing the Buyer
Director and (b) in connection with the meeting of shareholders of the
Corporation next following such election, nominate such Buyer Director for
election as director by the shareholders and use its best efforts to cause the
Buyer Director to be so elected. If a vacancy shall exist in the office of a
Buyer Director, Buyer shall be entitled to designate a successor and the Board
of Directors shall elect such successor and, in connection with the meeting of
shareholders of the corporation next following such election, nominate such
successor for election as director by the shareholders and use its best efforts
to cause the successor to be such elected.
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SECTION 5.05. Reservation of Rights. For so long as any of the Preferred
Stock is outstanding, the Corporation shall keep reserved for issuance a
sufficient number of shares of Common Stock to satisfy its conversion
obligations under the Certificate of Designations.
SECTION 5.06. Other Transfers of Restricted Securities. The Corporation
shall take all actions reasonably necessary to enable holders of the Restricted
Securities to sell such securities without registration under the Securities Act
pursuant to Rule 144 under the Securities Act or any successor rule or
regulation, subject in each case to the provisions of this Agreement and,
specifically, the filing on a timely basis of all reports required to be filed
under the Exchange Act.
SECTION 5.07. Venture Capital Operating Company Requirements. The
Corporation agrees that for so long as Buyer has the right to designate a Buyer
Director pursuant to Section 5.04 of this Agreement, Hicks, Muse, Tate & Furst
Equity Fund IV, L.P. and Hicks, Muse, Tate & Furst Private Equity Fund IV, L.P.
(the "Funds") (which upon the Closing will collectively own substantially all of
the membership interests of Buyer) shall have the right: (a) to receive the same
information that is provided to members of the Corporation's board of directors;
(b) upon reasonable request and at reasonable times during normal business
hours, to receive income statements, balance sheets, budgets, business plans and
other financial information and to inspect the books and records of the
Corporation; and (c) upon reasonable request and at reasonable times during
normal business hours, to meet and consult with management with respect to the
business of the Corporation. The foregoing rights are intended to satisfy the
requirement of management rights for purposes of qualifying the Funds' indirect
ownership interests in the Corporation as venture capital investments for
purposes of the Department of Labor's "plan assets" regulations, and in the
event such rights are not satisfactory for such purpose, the Corporation and the
Funds shall reasonably cooperate in good faith to agree upon mutually
satisfactory management rights which satisfy such regulations. The Funds hereby
agree to treat all information received by them pursuant to this Section 5.07 in
accordance with the provisions of Section 6.01.
ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
SECTION 6.01. Confidentiality. (a) Buyer will hold, and will use its
best efforts to cause its officers, directors, members, employees, accountants,
counsel,
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consultants, advisors, financing sources, financial institutions, and agents
(the "Representatives") to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law or national
stock exchange, all confidential documents and information concerning the
Corporation or any of its Affiliates furnished to Buyer, except to the extent
that such information can be shown to have been (i) previously known on a
nonconfidential basis by Buyer, (ii) in the public domain through no fault of
Buyer or (iii) later acquired by Buyer from sources other than the Corporation
or any of its Affiliates not known by Buyer to be bound by any confidentiality
obligation; provided that Buyer may disclose such information to any of the
Representatives in connection with the transactions contemplated by this
Agreement so long as such Persons are informed by Buyer of the confidential
nature of such information and are directed by Buyer to treat such information
confidentially. Buyer shall be responsible for any failure to treat such
information confidentially by such Persons. The obligation of Buyer to hold and
to cause the Representatives to hold any such information in confidence shall be
satisfied if they exercise the same care with respect to such information as
they would take to preserve the confidentiality of their own similar
information. Buyer agrees that it shall not and it shall cause the
Representatives not to use any confidential documents or information for any
purpose other than monitoring and evaluating its investment in the Corporation
and in connection with the transactions contemplated by this Agreement. If this
Agreement is terminated, Buyer will, and will use its reasonable best efforts to
cause its respective officers, directors, employees, accountants, counsel,
consultants, advisors and agents to, destroy or deliver to the Corporation, upon
request, all documents and other materials, and all copies thereof, obtained by
Buyer or on its behalf from the Corporation, or any of the Representatives, in
connection with this Agreement that are subject to such confidence.
(b) In the event Buyer or anyone to whom Buyer transmits confidential
information is requested or required (by oral questions, interrogatories,
requests for information or documents, subpoenas, civil investigative demand or
similar process) to disclose any such information, Buyer will provide the
Corporation with prompt notice so that the Corporation may seek a protective
order or other appropriate remedy and/or waive Buyer's compliance with the
provisions of this Section. In the event that such protective order or other
remedy is not obtained sufficiently promptly so as not to adversely affect Buyer
or those of its officers, directors, employees, accountants, counsel,
consultants, advisors and agents as to whom the information has been requested
or required, or the Corporation waives Buyer's compliance with the provisions of
this Agreement, Buyer will furnish only that portion of such information that
Buyer is advised by counsel is legally required and, at the Corporation's
expense, will exercise its commercially
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reasonable efforts to obtain reliable assurance that confidential treatment will
be accorded such information.
SECTION 6.02. Sale or Transfer of Restricted Securities. Buyer will not
sell, pledge, encumber or otherwise transfer, or agree to sell, pledge, encumber
or otherwise transfer, directly or indirectly, any Restricted Securities;
provided, that Buyer may sell, pledge, encumber or otherwise transfer Preferred
Stock and Common Stock (a) (i) in any transaction in compliance with Rule 144
under the Securities Act or any successor rule or regulation, (ii) in a public
offering, registered under the Securities Act or (iii) in a private transaction
exempt from the registration requirements of the Securities Act and (b) to
Permitted Transferees. A "Permitted Transferee" means a Person that (A) has
agreed in writing to be bound by the terms of Sections 2.03, 6.02, 7.04 and
Exhibit B of this Agreement and (B) is a member of the HMTF Group and any person
investing, directly or indirectly, in or in parallel with HMTF or any Affiliate
of HMTF in connection with the consummation of the transactions contemplated
hereby.
ARTICLE 7
COVENANTS OF BUYER AND THE CORPORATION
SECTION 7.01. Reasonable Best Efforts; Further Assurances. Subject to
the terms and conditions of this Agreement, Buyer and the Corporation will use
their reasonable best efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary or desirable under applicable laws
and regulations to consummate the transactions contemplated by this Agreement.
The Corporation and Buyer agree to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the transactions contemplated by this Agreement.
SECTION 7.02. Certain Filings. The Corporation and Buyer shall cooperate
with one another (i) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is required,
or any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (ii) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
SECTION 7.03. Public Announcements. Prior to the Closing, the parties
agree to consult with each other before issuing any press release or making any
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public statement with respect to this Agreement or the transactions contemplated
hereby and, except as may be required by applicable law or any listing agreement
with any national securities exchange, will not issue any such press release or
make any such public statement prior to such consultation. Following the
Closing, the parties agree to consult with each other before issuing any press
release or making any public filing that describes any terms of this Agreement.
SECTION 7.04. Registration Rights Agreement. The terms set forth in
Exhibit B hereto are hereby incorporated by reference.
ARTICLE 8
CONDITIONS TO CLOSING
SECTION 8.01. Conditions to Obligations of Buyer and the Corporation.
The obligations of Buyer and the Corporation to consummate the Closing are
subject to the satisfaction of the condition that no provision of any applicable
law or regulation and no judgment, injunction, order or decree shall prohibit
the consummation of the Closing.
SECTION 8.02. Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) The Corporation shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or prior to the
Closing.
(b) The representations and warranties of the Corporation contained in
this Agreement shall in each case, if specifically qualified by materiality, be
true and correct and, if not so qualified, be true and correct in all material
respects at and as of the Closing, as if made at and as of such date (except to
the extent such representations and warranties expressly relate to an earlier
date, in which case such representations and warranties shall be true and
correct on and as of such earlier date).
(c) The Certificate of Designations shall have been filed in accordance
with the laws of Delaware.
(d) The Corporation shall have delivered to Buyer (i) a copy of the
resolutions adopted by the Board of Directors, certified by the Secretary of the
Corporation, authorizing this Agreement and (ii) a certificate dated the Closing
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Date, signed by an officer of the Corporation, certifying as to the fulfillment
of the conditions set forth in Sections 8.02(a) and (b).
(e) The Corporation shall have delivered to Buyer an opinion reasonably
acceptable to Buyer from the General Counsel of the Corporation, with respect to
the due incorporation, due authorization, non-contravention, capitalization of
the Corporation and the validity of the Preferred Shares.
(f) The Corporation shall have delivered to Buyer an opinion reasonably
acceptable to Buyer from Davis Polk & Wardwell, special counsel to the
Corporation, with respect to the valid, binding and enforceable nature of this
Agreement.
(g) There shall not have occurred (i) any event, circumstance,
condition, fact, effect, or other matter which has had or could reasonably be
expected to have a material adverse effect (x) on the business, assets,
financial condition, prospects, or results of operations of the Corporation and
its subsidiaries taken as a whole or (y) on the ability of the Corporation and
such subsidiaries to perform on a timely basis any material obligation under
this Agreement or to consummate the transactions contemplated hereby; or (ii)
any material disruption of or material adverse change in financial, banking or
capital market conditions.
SECTION 8.03. Conditions to Obligation of the Corporation. The
obligation of the Corporation to consummate the Closing is subject to the
satisfaction of the following further conditions:
(a) Buyer shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the Closing
Date.
(b) The representations and warranties of Buyer contained in this
Agreement shall be true in all material respects at and as of the Closing Date,
as if made at and as of such date.
(c) The Corporation shall have received a certificate signed by an
appropriate officer of Buyer to the foregoing effect.
(d) Buyer shall have delivered to the Corporation an opinion reasonably
acceptable to Buyer from Weil, Gotshal & Manges LLP, special counsel to Buyer,
with respect to the valid, binding and enforceable nature of this Agreement.
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ARTICLE 9
TERMINATION
SECTION 9.01. Grounds for Termination. This Agreement may be
terminated at any time prior to the Closing:
(a) by mutual written agreement of the Corporation and Buyer;
(b) by either the Corporation or Buyer if the Closing shall not have
been consummated on or before April 30, 1999; or
(c) by either the Corporation or Buyer if consummation of the
transactions contemplated hereby would violate any nonappealable final order,
decree or judgment of any court or governmental body having competent
jurisdiction.
The party desiring to terminate this Agreement pursuant to clauses 9.01(b) or
9.01(c) shall promptly give notice of such termination to the other party.
SECTION 9.02. Effect of Termination. If this Agreement is terminated as
permitted by Section 9.01, such termination shall be without liability of either
party (or any stockholder, director, officer, partner, employee, agent,
consultant or representative of such party) to the other party to this
Agreement; provided that if such termination shall result from the willful (a)
failure of either party to fulfill a condition to the performance of the
obligations of the other party, (b) failure to perform a covenant of this
Agreement or (c) breach by either party hereto of any representation or warranty
or agreement contained herein, such party shall be fully liable for any and all
losses incurred or suffered by the other party as a result of such failure or
breach. The provisions of Sections 6.01, 11.01, 11.03, 11.05, 11.06, 11.07,
11.08, 11.09, 11.10, and 11.12 shall survive any termination hereof pursuant to
Section 9.01.
ARTICLE 10
SURVIVAL; INDEMNIFICATION
SECTION 10.01. Survival of Representation and Warranties. All
representations and warranties contained in this Agreement and all claims with
respect thereto shall terminate upon the expiration of 18 months after the
Closing Date, except that the representations and warranties contained in
Sections 3.01, 3.02, 3.03, 3.06, 4.01, 4.02, and 4.03 shall survive
indefinitely. Notwithstanding
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the preceding sentence, any covenant, agreement, representation or warranty in
respect of which indemnity may be sought under this Agreement shall survive the
time at which it would otherwise terminate pursuant to the preceding sentence,
if notice of the inaccuracy or breach thereof giving rise to such right of
indemnity shall have been given to the party against whom such indemnity may be
sought prior to such time.
SECTION 10.02. Indemnification. (a) The Corporation hereby indemnifies
Buyer against and agrees to hold Buyer harmless from any and all damage, loss,
liability and expense (including, without limitation, reasonable expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
action, suit or proceeding) ("Damages") incurred or suffered by Buyer arising
out of any misrepresentation or breach of warranty, covenant or agreement made
or to be performed by the Corporation pursuant to this Agreement; provided that
(i) the Corporation shall not be liable under this Section 10.02(a) unless the
aggregate amount of Damages with respect to all matters referred to in this
Section 10.02(a) exceeds $5,000,000, in which event the Buyer shall be entitled
to make a claim against the Corporation for the full amount of such Damages and
(ii) the Corporation's maximum liability under this Section 10.02(a) shall not
exceed $200,000,000.
(b) Buyer hereby indemnifies the Corporation against and agrees to hold
the Corporation harmless from any and all Damages incurred or suffered by the
Corporation arising out of any misrepresentation or breach of warranty, covenant
or agreement made or to be performed by Buyer pursuant to this Agreement;
provided that (i) Buyer shall not be liable under this Section 10.02(b) unless
the aggregate amount of Damages with respect to all matters referred to in this
Section 10.02(b) exceeds $5,000,000, in which event the Corporation shall be
entitled to make a claim against the Buyer for the full amount of such Damages
and (ii) Buyer's maximum liability under this Section 10.02(b) shall not exceed
$200,000,000.
SECTION 10.03. Procedures. The party seeking indemnification under
Section 10.02 (the "Indemnified Party") agrees to give prompt notice to the
party against whom indemnity is sought (the "Indemnifying Party") of the
assertion of any claim, or the commencement of any suit, action or proceeding in
respect of which indemnity may be sought under such Section. The Indemnifying
Party may at the request of the Indemnified Party participate in and control the
defense of any such suit, action or proceeding at its own expense. The
Indemnifying Party shall not be liable under Section 10.02 for any settlement
effected without its consent of any claim, litigation or proceeding in respect
of which indemnity may be sought hereunder.
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SECTION 10.04. Inspections; No Other Representations . Buyer is an
informed and sophisticated purchaser, and has undertaken such investigation and
has been provided with and has evaluated such documents and information as it
has deemed necessary to enable it to make an informed and intelligent decision
with respect to the execution, delivery and performance of this Agreement. Buyer
will undertake prior to the Closing such further investigation and request such
additional documents and information as it deems necessary. Buyer agrees to
accept the Preferred Shares based upon its own inspection, examination and
determination with respect thereto as to all matters, and without reliance upon
any express or implied representations or warranties of any nature made by or on
behalf of or imputed to the Corporation, except as expressly set forth in this
Agreement. Without limiting the generality of the foregoing, Buyer acknowledges
that the Corporation makes no representation or warranty with respect to (i) any
projections, estimates or budgets delivered to or made available to Buyer of
future revenues, future results of operations (or any component thereof), future
cash flows or future financial condition (or any component thereof) of the
Corporation and the Subsidiaries or the future business and operations of the
Corporation and the Subsidiaries or (ii) any other information or documents made
available to Buyer or its counsel, accountants or advisors with respect to the
Company or the Subsidiaries or their respective businesses or operations, except
as expressly set forth in this Agreement.
SECTION 10.05. Exclusivity. Except as specifically set forth in this
Agreement and except in the case of fraud, effective as of the Closing Buyer
waives any rights and claims Buyer may have against the Corporation, whether in
law or in equity, relating to the Corporation or the Preferred Shares or the
transactions contemplated hereby. The rights and claims waived by Buyer include,
without limitation, claims for breach of contract, breach of representation or
warranty, negligent misrepresentation and all other claims for breach of duty.
After the Closing, Section 10.02 will provide the exclusive remedy for any
misrepresentation, breach of warranty, covenant or other agreement or other
claim arising out of this Agreement or the transactions contemplated hereby,
except in the case of fraud.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing and shall be deemed duly given,
effective (i) three Business Days later, if sent by registered or certified
mail, return receipt requested, postage prepaid, (ii) when sent if sent by
telecopier or fax,
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provided that the telecopy or fax is promptly confirmed by telephone
confirmation thereof, (iii) when served, if delivered personally to the intended
recipient, and (iv) one Business Day later, if sent by overnight delivery via a
national courier service, and in each case, addressed,
if to Buyer, to:
HMTF Live Wire Investors, LLC
c/o Hicks, Muse, Tate & Furst Incorporated
1325 Avenue of the Americas
25th Floor
New York, New York 10019
Attention: Michael Levitt
Fax: (212) 424-1450
with a copy to:
Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court
Suite 1600
Dallas, Texas 75201
Attention: Lawrence D. Stuart, Jr., Esq.
Fax: (212) 740-7313
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Simeon Gold, Esq.
Fax: (212) 310-8007
if to the Corporation, to:
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
Attention: John J. Jones, Esq.
Fax: (609) 734-3830
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with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: William L. Taylor, Esq.
Fax: (212) 450-4800
Any party may change the address to which notices or other communications
hereunder are to be delivered by giving the other party notice in the manner
herein set forth.
SECTION 11.02. Amendments and Waivers. Any provision of this Agreement
may be amended or waived if, but only if, such amendment or waiver is in writing
and is signed, in the case of an amendment, by each party to this Agreement, or
in the case of a waiver, by the party against whom the waiver is to be
effective. No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative.
SECTION 11.03. Expenses. All costs and expenses incurred in connection
with this Agreement shall be paid by the party incurring such cost or expense.
SECTION 11.04. Assignment. The rights and obligations of the parties
hereunder cannot be assigned or delegated except (i) that Buyer may assign any
or all of its rights and obligations under this Agreement to any one or more of
its Affiliates and (ii) that Buyer may assign its rights and obligations under
Sections 2.03, 6.02, 7.04 and Exhibit B of this Agreement to any one or more
Permitted Transferees.
SECTION 11.05. Governing Law. This Agreement shall be governed by
and construed in accordance with the law of the State of New York, without
regard to the conflicts of law rules of such state.
SECTION 11.06. Jurisdiction. Except as otherwise expressly provided in
this Agreement, the parties hereto agree that any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby may only
be brought in the United States District Court for the Southern District of New
York or any other New York State court sitting in New York City, and each of the
parties hereby consents to the jurisdiction of such courts (and of the
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appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 11.01 shall be deemed
effective service of process on such party.
SECTION 11.07. Counterparts; Third Party Beneficiaries. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other party hereto. No
provision of this Agreement is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder, except for rights provided to
Permitted Transferees under Section 7.04.
SECTION 11.08. Entire Agreement. This Agreement (including the Exhibits
hereto) and the Certificate of Designations constitute the entire agreement
between the parties with respect to the subject matter of this Agreement and
supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter of this Agreement (except
for the letter agreement dated March 9, 1999 with respect to confidential
treatment of information provided by the Corporation, which remains in effect).
SECTION 11.09. Captions. The captions herein are included for
convenience of reference only and shall be ignored in the construction or
interpretation hereof.
SECTION 11.10. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or entity
or any circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons, entities or circumstances shall not be affected by
such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or
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enforceability of such provision, or the application thereof, in any other
jurisdiction.
SECTION 11.11. Specific Performance. The parties hereto agree that the
remedy at law for any breach of this Agreement will be inadequate and that any
party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competition jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by applicable law, each party waives any
objection to the imposition of such relief.
SECTION 11.12. No Recourse. Notwithstanding any of the terms or
provisions of this Agreement, (i) the Corporation agrees that neither it nor any
person acting on its behalf may assert any claims or cause of action against any
officer, director, partner, member or stockholder of the Buyer or any of its
Affiliates in connection with or arising out of this Agreement or the
transactions contemplated hereby and (ii) the Buyer agrees that neither it nor
any person acting on its behalf may assert any claims or cause of action against
any officer, director, partner, member or stockholder of the Corporation or any
of its Affiliates in connection with or arising out of this Agreement or the
transactions contemplated hereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
RCN CORPORATION
By:
----------------------------------
Name:
Title:
HMTF LIVE WIRE INVESTORS, LLC
By:
----------------------------------
Name:
Title:
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS
This constitutes Exhibit B to the Stock Purchase Agreement (as it may
be amended from time to time, the "Stock Purchase Agreement") dated as of March
18, 1999 between RCN Corporation, a Delaware corporation (the "Corporation") and
HMTF Live Wire Investments, LLC, a Delaware limited liability company ("Buyer").
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. Terms defined in the Stock Purchase
Agreement are used herein as therein defined. In addition, the following terms,
as used herein, have the following meanings:
"Commission" means the Securities and Exchange Commission.
"Demand Registration Statement" means the Demand Registration Statement
as defined in Section 2.01.
"Holder" means a person who owns Registrable Securities and is either
(a) the Buyer or (b) a direct or an indirect transferee of the Buyer who has
agreed in writing to be bound by the terms of Sections 2.03(b), 6.02 and 7.04 of
the Stock Purchase Agreement and this Exhibit B.
"Piggyback Registration" means a Piggyback Registration as defined in
Section 2.02.
"Registrable Common Stock" means the shares of Common Stock issued upon
conversion of the Preferred Stock, including any additional shares of Common
Stock issued the respect thereof in connection with a stock split, stock
dividend or similar event with respect to the Common Stock.
"Registrable Securities" means (a) the Preferred Stock and (b) the
Registrable Common Stock. As to any particular Registrable Securities, such
Registrable Securities shall cease to be Registrable Securities as soon as they
(i)
<PAGE>
have been sold or otherwise disposed of pursuant to a registration statement
that was filed with the Commission and declared effective under the Securities
Act, (ii) are eligible for sale pursuant to Rule 144 without being subject to
applicable volume limitations thereunder, (iii) have been otherwise sold,
transferred or disposed of by a Holder to any Person that is not a Holder, or
(iv) have ceased to be outstanding.
"Rule 144" means Rule 144 (or any successor rule of similar effect)
promulgated under the Securities Act.
"Selling Holder" means any Holder who is selling Registrable Securities
pursuant to a public offering registered hereunder.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal and not as part of such dealer's market-making
activities.
SECTION 1.02. Internal References. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Exhibit B, and
references to the parties shall mean the parties to the Stock Purchase
Agreement.
ARTICLE 2
REGISTRATION RIGHTS
SECTION 2.01. Demand Registration. (a) The Buyer, on its own behalf and
on behalf of the other Holders, may make up to four written requests for
registration under the Securities Act of all or any part of the Registrable
Securities held by the Holders (each, a "Demand Registration"); provided that
(i) no Demand Registration may be requested within 180 days after the preceding
request for a Demand Registration, and (ii) each Demand Registration must be (x)
in respect of Registrable Securities with a fair market value of at least
$50,000,000 or (y) in respect of all remaining Registrable Securities and have a
fair market value of at least $5,000,000. Such request will specify the
aggregate number of shares of Registrable Securities proposed to be sold and
will also specify the intended method of disposition thereof. A registration
will not count as a Demand Registration until it has become effective. Should a
Demand Registration not become effective due to the failure of a Holder to
perform its obligations under this Exhibit B or the inability of the requesting
Holders to reach agreement with the underwriters for the proposed sale (the
"Underwriters") on price or other customary terms for such transaction, or in
the event the requesting
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Holders withdraw or do not pursue the request for the Demand Registration (in
each of the foregoing cases, provided that at such time the Corporation is in
compliance in all material respects with its obligations under this Exhibit B),
then such Demand Registration shall be deemed to have been effected (provided
that if the Demand Registration does not become effective because of a material
adverse change in the condition (financial or otherwise), business, assets or
results of operations of the Corporation and its subsidiaries taken as a whole
that occurs subsequent to the date of the written request made by the requesting
Holders, then the Demand Registration shall not be deemed to have been
effected).
(b) In the event that Buyer withdraws or does not pursue a request for
a Demand Registration and, pursuant to Section 2.01(a) hereof, such Demand
Registration is deemed to have been effected, the Holders may reacquire such
Demand Registration (such that the withdrawal or failure to pursue a request
will not count as a Demand Registration hereunder) if the Selling Holders
reimburse the Corporation for any and all Registration Expenses incurred by the
Corporation in connection with such request for a Demand Registration; provided
that the right to reacquire a Demand Registration may be exercised a maximum of
two times.
(c) If the Selling Holders so elect, the offering of such Registrable
Securities pursuant to such Demand Registration shall be in the form of an
underwritten offering. A majority in interest of the Selling Holders shall have
the right to select the managing Underwriters and any additional investment
bankers and managers to be used in connection with any offering under this
Section 2.01, subject to the Corporation's approval, which approval shall not be
unreasonably withheld.
(d) The Selling Holders will inform the Corporation of the time and
manner of any disposition of Registrable Common Stock, and agree to reasonably
cooperate with the Corporation in effecting the disposition of the Registrable
Common Stock in a manner that does not unreasonably disrupt the public trading
market for the Common Stock.
(e) The Corporation will have the right to preempt any Demand
Registration with a primary registration by delivering written notice (within
five business days after the Corporation has received a request for such Demand
Registration) of such intention to the Buyer indicating that the Corporation has
identified a specific business need and use for the proceeds of the sale of such
securities and the Corporation shall use commercially reasonable efforts to
effect a primary registration within 60 days of such notice. In the ensuing
primary registration, the Holders will have such piggyback registration rights
as are set forth in Section 2.02 hereof. Upon the Corporation's preemption of a
requested Demand Registration, such requested registration will not count as the
Holders'
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Demand Registration; provided that a Demand Registration will not be deemed
preempted if the Holders are permitted to sell all requested securities in
connection with the ensuing primary offering by exercising their piggyback
registration rights as set forth in Section 2.02. The Corporation may exercise
the right to preempt only twice in any 360-day period; provided, that during any
360 day period there shall be a period of at least 120 consecutive days during
which the Selling Holders may effect a Demand Regulation.
SECTION 2.02. Piggyback Registration. If the Corporation proposes to
file a registration statement under the Securities Act with respect to an
offering of Common Stock for its own account or for the account of another
Person (other than a registration statement on Form S-4 or S-8 or pursuant to
Rule 415 (or any substitute form or rule, respectively, that may be adopted by
the Commission)), the Corporation shall give written notice of such proposed
filing to the Holders at the address set forth in the share register of the
Corporation as soon as reasonably practicable (but in no event less than 10 days
before the anticipated filing date), undertaking to provide each Holder the
opportunity to register on the same terms and conditions such number of shares
of Registrable Common Stock as such Holder may request (a "Piggyback
Registration"). Each Holder will have five business days after receipt of any
such notice to notify the Corporation as to whether any it wishes to participate
in a Piggyback Registration; provided that should a Holder fail to provide
timely notice to the Corporation, such Holder will forfeit any rights to
participate in the Piggyback Registration with respect to such proposed
offering. In the event that the registration statement is filed on behalf of a
Person other than the Corporation, the Corporation will use its best efforts to
have the shares of Registrable Common Stock that the Holders wish to sell
included in the registration statement. If the Corporation shall determine in
its sole discretion not to register or to delay the proposed offering, the
Corporation may, at its election, provide written notice of such determination
to the Holders and (i) in the case of a determination not to effect the proposed
offering, shall thereupon be relieved of the obligation to register such
Registrable Common Stock in connection therewith, and (ii) in the case of a
determination to delay a proposed offering, shall thereupon be permitted to
delay registering such Registrable Common Stock for the same period as the delay
in respect of the proposed offering. As between the Corporation and the Selling
Holders, the Corporation shall be entitled to select the Underwriters in
connection with any Piggyback Registration.
SECTION 2.03. Reduction of Offering. Notwithstanding anything contained
herein, if the managing Underwriter of an offering described in Section 2.01 or
2.02 states in writing that the size of the offering that Holders, the
Corporation and any other Persons intend to make is such that the inclusion of
the Registrable Securities would be likely to materially and adversely affect
the price, timing or
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distribution of the offering, then the amount of Registrable Securities to be
offered for the account of Holders shall be reduced to the extent necessary to
reduce the total amount of securities to be included in such offering to the
amount recommended by such managing Underwriter; provided that in the case of a
Piggyback Registration, if securities are being offered for the account of
Persons other than the Corporation, then the proportion by which the amount of
Registrable Securities intended to be offered for the account of Holders is
reduced shall not exceed the proportion by which the amount of securities
intended to be offered for the account of such other Persons (other than any
Person exercising a demand registration right) is reduced; provided further that
in the case of a Demand Registration, the amount of Registrable Securities to be
offered for the account of the Holders making the Demand Registration shall be
reduced only after the amount of securities to be offered for the account of the
Corporation and any other Persons has been reduced to zero.
SECTION 2.04. Preservation of Rights. The Corporation will not grant
any registration rights to third parties which contravene the rights granted
hereunder.
ARTICLE 3
REGISTRATION PROCEDURES
SECTION 3.01. Filings; Information. In connection with the registration
of Registrable Securities pursuant to Section 2.01 and Section 2.02 hereof, the
Corporation will use its reasonable best efforts to effect the registration of
such Registrable Securities as promptly as is reasonably practicable, and in
connection with any such request:
(a) The Corporation will expeditiously prepare and file with the
Commission a registration statement on any form for which the
Corporation then qualifies and which counsel for the Corporation shall
deem appropriate and available for the sale of the Registrable
Securities to be registered thereunder in accordance with the intended
method of distribution thereof, and use its reasonable best efforts to
cause such filed registration statement to become and remain effective
for such period, not to exceed 60 days, as may be reasonably necessary
to effect the sale of such securities; provided that if the Corporation
shall furnish to the Buyer a certificate signed by the Corporation's
Chairman, President or any Vice-President stating that in his or her
good faith judgment it would be detrimental or otherwise
disadvantageous to the Corporation or its shareholders for such a
registration statement to be filed as expeditiously
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as possible (because the sale of Registrable Securities covered by such
Registration Statement or the disclosure of information in any related
prospectus or prospectus supplement would materially interfere with any
acquisition, financing or other material event or transaction which is
then intended or the public disclosure of which at the time would be
materially prejudicial to the Corporation), the Corporation may
postpone the filing or effectiveness of a registration statement for a
period of not more than 120 days; provided, that during any 360 day
period there shall be a period of at least 120 consecutive days during
which the Corporation will make a registration statement available
under this Exhibit B; and provided further, that if (i) the effective
date of any registration statement filed pursuant to a Demand
Registration would otherwise be at least 45 calendar days, but fewer
than 90 calendar days, after the end of the Corporation's fiscal year,
and (ii) the Securities Act requires the Corporation to include audited
financials as of the end of such fiscal year, the Corporation may delay
the effectiveness of such registration statement for such period as is
reasonably necessary to include therein its audited financial
statements for such fiscal year.
(b) The Corporation will, if requested, prior to filing such
registration statement or any amendment or supplement thereto, furnish
to the Selling Holders, and each applicable managing Underwriter, if
any, copies thereof, and thereafter furnish to the Selling Holders and
each such Underwriter, if any, such number of copies of such
registration statement, amendment and supplement thereto (in each case
including all exhibits thereto and documents incorporated by reference
therein) and the prospectus included in such registration statement
(including each preliminary prospectus) as the Selling Holders or each
such Underwriter may reasonably request in order to facilitate the sale
of the Registrable Securities by the Selling Holders.
(c) After the filing of the registration statement, the
Corporation will promptly notify the Selling Holders of any stop order
issued or, to the Corporation's knowledge, threatened to be issued by
the Commission and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(d) The Corporation will use its reasonable best efforts to
qualify the Registrable Securities for offer and sale under such other
securities or blue sky laws of such jurisdictions in the United States
as the Selling Holders reasonably request; provided that the
Corporation will not be required to (i) qualify generally to do
business in any jurisdiction where it would not otherwise be required
to qualify but for this paragraph 3.01(d),
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(ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction.
(e) The Corporation will as promptly as is practicable notify the
Selling Holders, at any time when a prospectus relating to the sale of
the Registrable Securities is required by law to be delivered in
connection with sales by an Underwriter or dealer, of the occurrence of
any event requiring the preparation of a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading and promptly make available to the Selling Holders, and
to the Underwriters any such supplement or amendment. Upon receipt of
any notice of the occurrence of any event of the kind described in the
preceding sentence, Selling Holders will forthwith discontinue the
offer and sale of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until receipt by the
Selling Holders and the Underwriters of the copies of such supplemented
or amended prospectus and, if so directed by the Corporation, the
Selling Holders will deliver to the Corporation all copies, other than
permanent file copies then in the possession of Selling Holders, of the
most recent prospectus covering such Registrable Securities at the time
of receipt of such notice. In the event the Corporation shall give such
notice, the Corporation shall extend the period during which such
registration statement shall be maintained effective as provided in
Section 3.01(a) hereof by the number of days during the period from and
including the date of the giving of such notice to the date when the
Corporation shall make available to the Selling Holders such
supplemented or amended prospectus.
(f) The Corporation will enter into customary agreements
(including an underwriting agreement in customary form) and take such
other actions as are required in order to expedite or facilitate the
sale of such Registrable Securities.
(g) At the request of any Underwriter in connection with an
underwritten offering the Corporation will furnish (i) an opinion of
counsel, addressed to the Underwriters, covering such customary matters
as the managing Underwriter may reasonably request and (ii) a comfort
letter or comfort letters from the Corporation's independent public
accountants covering such customary matters as the managing Underwriter
may reasonably request.
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(h) The Corporation will make generally available to its security
holders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act and
the rules and regulations of the Commission thereunder.
(i) The Corporation will use its commercially reasonable efforts
to cause all such Registrable Common Stock and, in the event of a
public offering of Series A Preferred Stock, the Series A Preferred
Stock (subject to applicable listing requirements) to be listed on each
securities exchange or quoted on each inter-dealer quotation system on
which the Common Stock is then listed or quoted.
The Corporation may require Selling Holders promptly to furnish in
writing to the Corporation such information regarding such Selling Holders, the
plan of distribution of the Registrable Securities and other information as the
Corporation may from time to time reasonably request or as may be legally
required in connection with such registration.
SECTION 3.02. Registration Expenses. In connection with any Demand
Registration, the Corporation shall pay the following expenses incurred in
connection with such registration (the "Registration Expenses"): (i)
registration and filing fees with the Commission and the National Association of
Securities Dealers, Inc., (ii) fees and expenses of compliance with securities
or blue sky laws (including reasonable fees and disbursements of counsel in
connection with blue sky qualifications of the Registrable Securities), (iii)
printing expenses, (iv) fees and expenses incurred in connection with the
listing or quotation of the Registrable Securities, (v) fees and expenses of
counsel to the Corporation and the reasonable fees and expenses of independent
certified public accountants for the Corporation (including fees and expenses
associated with the special audits or the delivery of comfort letters) and (vi)
the reasonable fees and expenses of any additional experts retained by the
Corporation in connection with such registration. In connection with any
Piggyback Registration, the Corporation shall pay the Registration Expenses set
forth in clauses (ii) through (vi) of the preceding sentence. The Selling
Holders shall pay (i) any underwriting fees, discounts or commissions
attributable to the sale of Registrable Securities, (ii) fees and expenses of
counsel for the Selling Holders and (iii) any out-of-pocket expenses of the
Selling Holders. In connection with any Piggyback Registration, the Selling
Holders shall pay, in addition to items (i) through (iii) of the preceding
sentence, registration and filing fees with the Commission and National
Association of Securities Dealers Inc., in proportion to the ratio that the
number of
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shares of Registrable Common Stock being registered for the account of the
Selling Holders bears to the aggregate number of shares of Common Stock being
included in the applicable registration statement.
ARTICLE 4
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.01. Indemnification by the Corporation. The Corporation
agrees to indemnify and hold harmless each Selling Holder and its Affiliates and
their respective officers, directors, partners, stockholders, members,
employees, agents and representatives and each Person (if any) which controls a
Selling Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities, costs and expenses (including reasonable attorneys' fees)
caused by, arising out of resulting from or related to any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or prospectus relating to the Registrable Securities (as amended or
supplemented if the Corporation shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by or contained in or
based upon any information furnished in writing to the Corporation by or on
behalf of such Selling Holder or any Underwriter expressly for use therein or by
the Selling Holder or Underwriter's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Corporation has furnished the Buyer or Underwriter with copies of the
same. The Corporation also agrees to indemnify any Underwriters of the
Registrable Securities, their officers and directors and each person who
controls such Underwriters on substantially the same basis as that of the
indemnification of the Selling Holders provided in this Section 4.01.
SECTION 4.02. Indemnification by the Buyer. Each Selling Holder agrees
to indemnify and hold harmless the Corporation, its officers and directors, and
each Person, if any, which controls the Corporation within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act to the same
extent as the foregoing indemnity from the Corporation to each Selling Holder,
but only with reference to information furnished in writing by or on behalf of
such Selling Holder expressly for use in any registration statement or
prospectus relating to the Registrable Securities, or any amendment or
supplement thereto, or
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any preliminary prospectus. Each Selling Holder also agrees to indemnify and
hold harmless any Underwriters of the Registrable Securities, their officers and
directors and each person who controls such Underwriters on substantially the
same basis as that of the indemnification of the Corporation provided in this
Section 4.02.
SECTION 4.03. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any Person in respect of which indemnity may be sought pursuant to
Section 4.01 or Section 4.02, such Person (the "Indemnified Party") shall
promptly notify the Person against whom such indemnity may be sought (the
"Indemnifying Party") in writing and the Indemnifying Party, upon the request of
the Indemnified Party, shall retain counsel reasonably satisfactory to such
Indemnified Party to represent such Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnified Party and the Indemnifying Party and, in the written
opinion of counsel for the Indemnified Party, representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the Indemnifying Party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
of attorneys (in addition to any local counsel) at any time for all such
Indemnified Parties, and that all such fees and expenses shall be reimbursed as
they are incurred. In the case of any such separate firm for the Indemnified
Parties, such firm shall be designated in writing by the Indemnified Parties.
The Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent (not to
be unreasonably withheld), or if there be a final judgment for the plaintiff,
the Indemnifying Party shall indemnify and hold harmless such Indemnified
Parties from and against any loss or liability (to the extent stated above) by
reason of such settlement or judgment.
SECTION 4.04. Contribution. If the indemnification provided for in this
Article 4 is unavailable to an Indemnified Party in respect of any losses,
claims, damages or liabilities in respect of which indemnity is to be provided
hereunder, then each such Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall to the fullest extent permitted by law contribute to
the amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages or
10
<PAGE>
liabilities in such proportion as is appropriate to reflect the relative fault
of such party in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the Corporation, a Selling
Holder and the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Corporation and each Selling Holder agrees that it would not be
just and equitable if contribution pursuant to this Section 4.04 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article 4, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and each Selling
Holder shall not be required to contribute any amount in excess of the amount by
which the net proceeds of the offering (before deducting expenses) received by
such Selling Holder exceeds the amount of any damages which such Selling Holder
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
ARTICLE 5
MISCELLANEOUS
SECTION 5.01. Participation in Underwritten Registrations. No Person
may participate in any underwritten registered offering contemplated hereunder
unless such Person (a) agrees to sell its securities on the basis provided in
any
11
<PAGE>
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements, (b) completes and executes all questionnaires, powers of
attorney, custody arrangements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements
and this Exhibit B and (c) furnishes in writing to the Corporation such
information regarding such Person, the plan of distribution of the Registrable
Securities and other information as the Corporation may from time to time
request or as may be legally required in connection with such registration.
SECTION 5.02. Rule 144. The Corporation covenants that it will file any
reports required to be filed by it under the Securities Act and the Exchange Act
and that it will take such further action as the Holders may reasonably request
to the extent required from time to time to enable the Holders to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission. Upon the request of the Buyer, the
Corporation will deliver to the Buyer a written statement as to whether it has
complied with such reporting requirements.
SECTION 5.03. Holdback Agreements. Each Holder agrees, in the event of
an underwritten offering for the Corporation (whether for the account of the
Corporation or otherwise) not to offer, sell, contract to sell or otherwise
dispose of any Registrable Securities, or any securities convertible into or
exchangeable or exercisable for such securities, including any sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
offering), during the 14 days prior to, and during the 180-day period (or such
lesser period as the lead or managing underwriters may require) beginning on,
the effective date of the registration statement for such underwritten offering
(or, in the case of an offering pursuant to an effective shelf registration
statement pursuant to Rule 415, the pricing date for such underwritten
offering).
SECTION 5.04. Termination. The registration rights granted under this
Agreement will terminate on March 31, 2014; provided, however, that if the
shares of Preferred Stock outstanding on such date shall not have been redeemed
in full in accordance with Section 6(b) of the Certificate of Designations, this
Agreement shall remain in full force and effect with respect to such shares (and
the shares of Common Stock issuable upon the conversion of such shares) until
such time as such shares have been so redeemed in full.
12
AMENDMENT NO. 1
TO
STOCK PURCHASE AGREEMENT
dated as of
April 7, 1999
among
RCN CORPORATION
and
HMTF LIVE WIRE INVESTORS, LLC
and
HM4 RCN PARTNERS
<PAGE>
TABLE OF CONTENTS
---------------
PAGE
----
SECTION 1. Definitions; References..........................................1
SECTION 2. Representations and Warranties of Buyer..........................1
SECTION 3. Representations and Warranties of Assignee.......................1
SECTION 4. Covenants of the Assignee........................................2
SECTION 5. Amendment to Article 3...........................................2
SECTION 6. Amendment to Article 5...........................................2
SECTION 7. Certificate of Designations......................................2
SECTION 8. Amendments.......................................................2
SECTION 9. Governing Law....................................................2
SECTION 10. Counterparts.....................................................2
Exhibit A Certificate of Designations, Preferences and Rights
of Series A 7% Senior Convertible Preferred Stock
<PAGE>
AMENDMENT NO. 1 TO
STOCK PURCHASE AGREEMENT
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT dated as of April 7, 1999
among RCN Corporation, a Delaware corporation (the "Corporation"), HMTF Live
Wire Investors, LLC, a Delaware limited liability company ("Buyer") and HM4 RCN
Partners, a Texas general partnership ("Assignee").
WHEREAS, the Corporation and Buyer have entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") dated as of March 18, 1999;
WHEREAS, Buyer and Assignee have entered into an Assignment and
Assumption Agreement (the "Assignment Agreement") dated as of April 7, 1999, in
accordance with Section 11.04 of the Stock Purchase Agreement, pursuant to which
Buyer assigned and Assignee assumed all of Buyers rights and obligations under
the Stock Purchase Agreement (and the Corporation acknowledged such assignment
and assumption);
WHEREAS, the Corporation, Buyer and Assignee have agreed to amend the
Stock Purchase Agreement as set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Stock Purchase
Agreement shall have the meaning assigned to such term in the Stock Purchase
Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and
each other similar reference and each reference to "this Agreement" and each
other similar reference contained in the Stock Purchase Agreement shall from and
after the date hereof refer to the Stock Purchase Agreement as amended hereby.
SECTION 2. Representations and Warranties of Buyer. Buyer represents
and warrants to the Corporation as of the date hereof that Assignee is an
Affiliate of Buyer.
SECTION 3. Representations and Warranties of Assignee. Assignee
represents and warrants to the Corporation as of the date hereof that each
representation and warranty of Buyer set forth in Article 4 of the Stock
Purchase Agreement is true and correct as of the date hereof with respect to
Assignee (except that references to limited liability company status, power and
authority in
<PAGE>
Sections 4.01, 4.02 and 4.04 shall be deemed references to general partnership
status, power and authority).
SECTION 4. Covenants of the Assignee. The Assignee agrees with the
Corporation that, pursuant to the Assignment Agreement, it will perform all of
the obligations of Buyer under the Stock Purchase Agreement subject to and in
accordance with the terms and conditions of the Stock Purchase Agreement.
SECTION 5. Amendment to Article 3. Section 3.03 of the Stock Purchase
Agreement is amended by (i) deleting "Except as set forth in Schedule 3.03
hereto, the" and (ii) inserting "The" in its place.
SECTION 6. Amendment to Article 5. Section 5.04 of the Stock Purchase
Agreement is amended by adding the following sentence to the end of such
section:
"At such time as Buyer ceases to hold the minimum amount of Preferred
Shares or Common Stock that would entitle Buyer to designate a Buyer
Director under this Section 5.04, then Buyer's right to designate such
additional director shall cease and, upon notice of termination from the
Corporation to Buyer, the term of office of the Buyer Director shall
forthwith terminate and the size of the Board of Directors shall be
reduced accordingly."
SECTION 7. Certificate of Designations. The form of Certificate of
Designations attached to the Stock Purchase Agreement as Exhibit A thereto is
amended and restated in its entirety to read as set forth on Exhibit A attached
hereto.
SECTION 8. Amendments. Except as expressly set forth herein, the
amendments contained herein shall not constitute an amendment of any term or
condition of the Stock Purchase Agreement and all such terms and conditions
shall remain in full force and effect and are hereby ratified and confirmed in
all respects.
SECTION 9. Governing Law. This Amendment shall be governed by and
construed in accordance with the law of the State of New York, without regard to
the conflicts of law rules of such state.
SECTION 10. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. This
2
<PAGE>
Amendment shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
RCN CORPORATION
By:
----------------------------------
Name:
Title:
HMTF LIVE WIRE INVESTORS, LLC
By:
----------------------------------
Name:
Title:
HM4 RCN PARTNERS
By: HM4 RCN Qualified Fund, L.P., its
managing partner
By: Hicks, Muse GP Partners IV, L.P., its
general partner
By: Hicks, Muse Fund IV LLC, its
general partner
By:
----------------------------------
Name: Andrew Rosen
Title: Principal
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 440,794
<SECURITIES> 1,298,299
<RECEIVABLES> 46,766
<ALLOWANCES> 8,889
<INVENTORY> 9,633
<CURRENT-ASSETS> 1,836,917
<PP&E> 796,674
<DEPRECIATION> 184,620
<TOTAL-ASSETS> 2,860,450
<CURRENT-LIABILITIES> 174,461
<BONDS> 1,716,005
0
254
<COMMON> 76,421
<OTHER-SE> 765,437
<TOTAL-LIABILITY-AND-EQUITY> 2,860,450
<SALES> 0
<TOTAL-REVENUES> 134,318
<CGS> 0
<TOTAL-COSTS> 128,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,361
<INTEREST-EXPENSE> 67,462
<INCOME-PRETAX> (135,236)
<INCOME-TAX> (2,534)
<INCOME-CONTINUING> (135,195)
<DISCONTINUED> 0
<EXTRAORDINARY> (424)
<CHANGES> 0
<NET-INCOME> (135,619)
<EPS-BASIC> (2.01)
<EPS-DILUTED> (2.01)
</TABLE>
