This prospectus is filed
pursuant to rule 424(b)(3)
of the Securities Act
of 1933.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED MAY 13, 1998
RCN Corporation
Common Stock, par value $1.00 per share
Attached are RCN Corporation's Unaudited Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Prior to September 30, 1997, RCN was operated as part of C-TEC.
The following unaudited pro forma consolidated statements of operations set
forth the historical statements of operations of RCN for the year ended
December 31, 1997 and the nine months ended September 30, 1998 and as adjusted
for the following:
o the September 1997 spin-off transaction whereby C-TEC
distributed all of the shares of RCN to the holders of C- TEC
common equity;
o RCN's acquisition in March 1997 of the 19.9% minority
interest in Freedom New York LLC that it did not already own;
o RCN's October 1997 issuance of its 10% Senior Notes and
11(1)/(8)% Senior Discount Notes, both due 2007 (together,
the "1997 Notes");
o RCN's acquisition of Erols in February 1998;
o RCN's issuance in 1998 of its 9.80% Senior Discount Notes due
2008 (the "9.80% Notes"); and
o RCN's June 1998 issuance and sale of 6,098,355 shares of
Common Stock (the "Stock Offering") and its 11% Senior
Discount Notes due 2008 (the "11% Notes").
and the related transactions and events described in the notes thereto, as if
such transactions and events had been consummated on the first day of each
respective period.
Management believes that the assumptions used provide a
reasonable basis on which to present such unaudited pro forma statements of
operations. The unaudited pro forma statements of operations should be read in
conjunction with the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the RCN 10-K and
RCN September 10-Q.
The unaudited pro forma statements of operations are provided
for information purposes only and should not be construed to be indicative of
RCN's results of operations had the spin-off and the transactions and events
described above been consummated on the dates assumed, may not reflect the
results of operations or financial condition which would have resulted had RCN
been operated as a separate, independent company during such period, and are
not necessarily indicative of RCN's future results of operations or financial
condition.
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments
Liberty/ Adjustments for the Stock
Adjustments Freedom for the 1997 Acquisition Offering and
RCN for Acquisition Notes and Erols Adjustments the 11%
Historical Spin-off Adjustments 9.8% Notes Historical(8) For Erols Notes Pro Forma
---------- ---------- ----------- ----------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales............ $127,297 $36,528 $(22,552)(9) $ 141,273
Cost and
expenses
excluding
depreciation
and
amortization... 134,967 49,829 (30,764)(9) 154,032
Nonrecurring
charges........ 10,000 10,000
Depreciation and
amortization .. 53,205 $ 1,250 (1) 6,360 606 (10) 61,421
-------- -------- ------- -------- -------- ------- ------- ---------
Operating (loss)
income......... (70,875) -- (1,250) (19,661) 7,606 -- (84,180)
Interest income.. 22,824 $(8,686)(2) 14,138
Interest expense. (25,602) (5,654)(3) $(85,179)(4) (162) 100 $(18,719)(13) (124,756)
10,460 (5)
Other (expense)
income, net.... 131 (49) 82
-------- -------- ------- -------- -------- ------- ------- ---------
(Loss) income
before income
taxes.......... (73,522) (3,880) (1,250) (85,179) (19,872) 7,706 (18,719) (194,716)
(Benefit) for
income taxes... (20,849) (1,358)(6) (437)(7) (29,812)(4) (9,338)(11) (13) (61,794)
-------- -------- ------- -------- -------- ------- ------- ---------
(Loss) income
before equity in
unconsolidated
entities and
minority
interest....... (52,673) (2,522) (813) (55,367) (19,872) 17,044 (18,719) (132,922)
Equity in (loss) of
unconsolidated
entities....... (3,804) (13,420)(9) (17,224)
Minority interest
in loss of
consolidated
entities....... 7,296 7,296
-------- ------- ----- -------- -------- -------- -------- ---------
(Loss) income
before
extraordinary
charge......... $(49,181) $(2,522) $(813) $(55,367) $ (19,872) $ 3,624 $(18,719) $(142,850)
======== ======= ===== ======== ========= ======== ======== =========
Unaudited pro
forma (loss)
before
extraordinary
charge per
common share .. $ (.89) $ (2.52)
Weighted average
number of
common shares
and common
stock
equivalents
outstanding.... 54.965,716 1,730,648 (12) 56,696,364
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1998
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments
for the 1997 Erols Adjustments for
Notes Offering Historical Acquisition the Stock
RCN and the 9.8% 1/1/98- Adjustments Offering and
Historical Notes 2/28/98(8) for Erols the 11% Notes Pro Forma
---------- -------------- ---------- ----------- ------------- ---------
`
<S> <C> <C> <C> <C> <C> <C>
Sales................ $148,118 $ 8,700 $ (5,371)(9) $ 151,447
Cost and expenses,
excluding
depreciation and
amortization....... 182,632 8,388 (5,179)(9) 185,841
Nonrecurring
acquisition
costs: In-process
technology......... 51,667 -- -- 51,667
Depreciation and
amortization....... 57,199 1,478 (340)(10) 58,337
---------- --------- ---------- --------- --------- ---------
Operating (loss)
income............. (143,380) -- (1,166) 148 -- (144,398)
Interest income...... 43,232 -- 43,232
Interest expense..... (80,811) $ (3,492)(4) (164) 101 $ (8,580)(13) (92,946)
Other (expense), net. (1,947) (5) -- (1,952)
---------- --------- ---------- --------- --------- ---------
(Loss) income before
income taxes....... (182,906) (3,492) (1,335) 249 (8,580)(13) (196,064)
(Benefit) for income
taxes.............. (9,923) -- -- -- (11) (9,923)
---------- --------- ---------- --------- --------- ---------
(Loss) income before
equity in
unconsolidated
entities and
minority interest.. (172,983) (3,492) (1,335) 249 (8,580)(13) (186,141)
Equity in (loss) of
unconsolidated
entities........... (8,169) -- (1,702)(9) (9,871)
Minority interest in
loss of
consolidated
entities........... 11,545 11,545
--------- --------- ---------- --------- --------- ---------
Net loss............. $(169,607) $ (3,492) $ (1,335) $ (1,453) $ (8,580) $(184,467)
========= ========= ========== ========= ========= =========
Unaudited pro forma
net loss per
average common
shares.............. $ (2.83) $ (3.08)
Weighted average
number of common
shares and common
stock equivalents
outstanding......... 59,905,854 59,905,854
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statement of Operations
assumes that RCN was an autonomous entity rather than a wholly owned
subsidiary of C-TEC for the periods shown. The pro forma adjustments, as
described below, are keyed to the corresponding amounts shown in the relevant
statement. All share and per share data of RCN common stock have been restated
to reflect the stock dividend paid in April 1998.
(1) Adjustment to reflect the additional depreciation and
amortization of $1,250 in 1997 resulting from the acquisition of the minority
interest of Freedom New York LLC ("Freedom") in March 1997 and to present the
information as if the acquisition of the minority interest of Freedom had
occurred at the beginning of 1997. See Note 4 to the Consolidated Financial
Statements in the RCN 10-K.
A summary of the transaction is as follows:
Cash paid............................ $30,000
Reduction of
minority interest................... (3,812)
-------
Fair value of assets
acquired............................ $26,188
=======
The fair value of assets acquired was allocated to goodwill with an
amortization period of six years.
(2) Adjustment to eliminate interest income of $8,686 for the
year ended December 31, 1997, and related income taxes of $(3,040) on
outstanding intercompany notes payable owed to RCN of which $110,000 was repaid
and the remaining balance was treated as capital contributions from RCN to the
borrower.
(3) Adjustment to reflect interest expense and amortization of
debt issuance costs of $5,654 for the year ended December 31, 1997, and
related income taxes of $(1,979) on new third party debt of $110,000 which was
incurred. The interest rate on the debt is based on either a LIBOR or Base
Rate Option, at the election of RCN. A (1)/(8)% change in interest rates
would result in a change in annual interest expense of approximately $138.
(4) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 1997 Notes and 9.8% Notes
aggregating $3,492 and $85,179 for the nine months ended September 30, 1998 and
for the year ended December 31, 1997, respectively, and related income taxes
of $29,812 for the year ended December 31, 1997. A pro forma adjustment was
not assumed for income tax benefits associated with the pro forma adjustment
for additional interest expense for the nine months ended September 30, 1998
because the realization of such benefit would be uncertain. Interest expense
on the 1997 Notes is already included in RCN's historical results for the
entire nine months ended September 30, 1998, therefore the pro forma
adjustment is correspondingly lower than the ratable portion of the adjustment
for the year ended December 31, 1997.
(5) Adjustment to eliminate interest expense and amortization
of debt issuance costs of $10,460 for the year ended December 31, 1997 and
related income taxes of $3,661 on existing outstanding third party debt that
was repaid and on outstanding intercompany notes payable owned by RCN which
were treated as capital contributions to RCN from the borrower.
(6) Income tax effects for the adjustments relating to the
spin-off are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
Benefit
(Provision)
---------------
<S> <C>
Elimination of interest expense and amortization of debt issuance costs on existing outstanding
third party debt (see Note 5)............................................................................. $ 3,661
Incurrence of interest expense and amortization of debt issuance costs on new third party debt (see
Note 3)................................................................................................... (1,979)
Elimination of interest income on outstanding intercompany notes (see Note 2).............................. (3,040)
--------
Total..................................................................................................... $(1,358)
========
</TABLE>
(7) Adjustments to income taxes of $(437) relating to
additional depreciation and amortization in 1997 due to the acquisition of a
19.9% minority interest in Freedom in March 1997.
(8) On February 20, 1998, RCN completed the acquisition of
Erols, Washington, D.C.'s largest Internet service provider, for $29,200 in
cash, 1,730,648 newly issued shares of RCN common stock plus the assumption
and repayment of $5,100 of debt. Additionally, RCN converted approximately
999,000 stock options for Erols common stock into options to purchase 699,104
shares of RCN common stock at an average exercise price of $3.424 per share.
RCN accounted for this transaction under the purchase method of accounting and
accordingly, the financial statements of Erols are not consolidated with RCN's
historical financial statements as of and for the year ended December 31,
1997. In 1998, the financial results of Erols also are not consolidated with
RCN's historical financial statements for the period prior to February 20,
1998. The financial information relating to Erols was provided by Erols.
A summary of the transaction is as follows:
Cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt of
approximately 5,100)........................... $ 36,000
Fair value of RCN stock issued.................... 45,000
Liabilities assumed............................... 55,000
-----------
Fair value of assets acquired..................... $ 136,000
===========
A fair value of assets acquired was preliminarily allocated as follows:
Contributing to joint venture............ $ 77,000
In-process technology.................... 35,000
Property, plant & equipment.............. 4,000
Current Assets........................... 2,000
Other Assets............................. 1,000
Intangible Assets........................ 17,000
-----------
$ 136,000
===========
Because the fair value study is still in progress, allocation
to specific intangible assets is not possible at this time. However, because
of the nature of the business acquired, the Company believes that such
intangible assets will primarily include customer lists, goodwill and work
force.
(9) Such adjustments include a pro forma allocation of
historical operating results of Erols to the joint venture with PEPCO (see
below) based upon the relationship of the number of subscribers expected to be
contributed to the joint venture to the total number of subscribers acquired
in the merger. RCN's share of such operating results, including the
depreciation and amortization effects of the allocation of a portion of the
total purchase price to the joint venture, representing the assumed value of
the subscribers to be contributed to the joint venture, are included in the
adjustment for "equity in the loss of unconsolidated entities."
A subsidiary of RCN is a party to a joint venture with a
subsidiary of PEPCO, to provide the greater Washington, D.C. area residents
and businesses local and long-distance telephone, cable television, and
Internet services as a package from a single source. As a result of this joint
venture, RCN expects to contribute to the joint venture the subscribers
acquired in the merger with Erols which are located in the relevant joint
venture market. The joint venture partners of Starpower are currently
negotiating the terms of such contribution. The value of such contribution
for accounting purposes is estimated to be approximately $51,937. The joint
venture is accounted for under the equity method of accounting. Additionally,
RCN expects that Starpower will assume the liability for the unearned revenue
related to the subscribers contributed to Starpower.
(10) Such adjustment reflects the change in depreciation and
amortization for the effect of the fair value adjustment of the net assets of
Erols acquired. Amortization of such excess over a five-year period has been
assumed, although a shorter life may result based on the study discussed
below. A one year change in the amortization period is expected to result in
corresponding changes in depreciation and amortization of approximately $5,000
and equity in unconsolidated entities (joint venture with PEPCO described in
Note 9) of approximately $15,000. Also, as discussed below, at least $35,478
is expected to be allocated to certain in-process technology projects which
has resulted in a ratable reduction of pro forma amortization expense. RCN
allocated the purchase price for Erols (see Note 8) on the basis of the fair
market value of the assets acquired and liabilities assumed. RCN has
undertaken a study to determine such fair market values, including in-process
technology. Such fair market values may differ from the allocations assumed in
the pro forma financial statements. The impact on deferred tax balances was
included in the above-referenced fair value adjustments. Erols' historical
property, plant and equipment has been adjusted to its estimated fair value
based upon its depreciated cost. The remaining excess of consideration over
the historical book value of Erols net assets acquired has been preliminarily
allocated to subscriber base, goodwill and other intangible assets. The
amounts preliminarily allocated to subscriber base, goodwill and other
intangible assets have been ratably reduced by the portion of the purchase
price preliminarily allocated to in-process technology of $35,478, which was
recognized as a charge for the six months ended June 30, 1998. The final
allocation to in-process technology may differ from the preliminary estimate.
An amortization period of five years has been assumed for intangible assets,
although a shorter life may result based on the study discussed above. A one
year change in the amortization period is estimated to result in corresponding
changes in depreciation and amortization of approximately $5,000 and equity in
unconsolidated entities (joint venture with PEPCO, see Note 9) of
approximately $15,000.
(11) A pro forma adjustment was not assumed for income tax
benefits associated with the pro forma adjustments for the historical results
of operations of Erols because the realization of such benefit would be
uncertain.
(12) Represents adjustment for shares to be issued in
connection with the acquisition of Erols. (See Note 8.)
(13) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 11% Notes aggregating
$8,580 and $18,719 for the nine months ended September 30, 1998 and for the
year ended December 31, 1997, respectively. Pro forma adjustments were not
assumed for income tax benefits associated with the pro forma adjustments for
additional interest expense because the realization of such benefits would be
uncertain.
