As filed with the Securities and Exchange Commission on November 30, 1998
Registration No. 333-61223
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
AMENDMENT NO. 1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3498533
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
John Jones
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
Julia Cowles
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
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Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
November __, 1998 [GRAPHIC OMITTED]
396,442 Shares
RCN Corporation
Common Stock
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This prospectus relates to the sale of up to 396,442 shares of common
stock, par value $1.00 per share, of RCN Corporation by certain shareholders of
RCN Corporation. All of the shares were originally issued by RCN Corporation in
connection with its acquisition of Interport Communications Corp.
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The common stock is included for quotation in The Nasdaq National Market
under the symbol "RCNC." On November 24, 1998, the last sale price of the
common stock was $15.625 per share.
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Investing in common stock involves certain risks. See "Risk Factors"
beginning on Page 8.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
AVAILABLE INFORMATION
RCN Corporation files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). You may read and copy any document that RCN Corporation
files at the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-800-SEC-0330. You may also
inspect RCN Corporation's filings at the regional offices of the Commission
located at Citicorp, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, New York, New York 10048 or over the Internet
at the Commission's home page at http://www.sec.gov.
This prospectus constitutes part of a Registration Statement on Form S-3
filed with the Commission under the Securities Act of 1933 (the "Securities
Act"). It omits some of the information contained in the Registration
Statement, and reference is made to the Registration Statement for further
information with respect to RCN Corporation and the shares of common stock
offered hereby. Any statement contained in this prospectus concerning the
provisions of any document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission is not necessarily complete, and in each
instance reference is made to the copy of the document filed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by RCN Corporation pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act") are incorporated into this prospectus
by reference:
(a) Annual Report on Form 10-K for the year ended December 31, 1997,
as amended (the "RCN 10-K");
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(the "RCN March 10-Q");
(c) Current Report on Form 8-K dated May 8, 1998 (the "RCN 8-K");
(d) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(the "RCN June 10-Q"); and
(e) Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 (the "RCN September 10-Q")
RCN Corporation also incorporates by reference any future filings made
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act until such time as it sells all of the shares of common stock
offered under this prospectus. You may request a copy of these filings at no
cost, by writing or telephoning the office of Valerie Haertel, RCN Corporation,
105 Carnegie Center, Princeton, N.J. 08540-6215, telephone number (609) 734
- -3700.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this
prospectus constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act,
including statements made with respect to the following:
o plans to develop networks and upgrade facilities;
o opportunities presented by target markets;
o plans to connect certain wireless video, resale telephone and Internet
service customers to advanced fiber optic networks;
o development of existing businesses;
o current and future markets for services and products;
o anticipated capital expenditures;
o impact of the Year 2000 issue;
o anticipated sources of capital; and
o effects of regulatory reform and competitive and technological
developments.
These forward-looking statements are subject to risks, uncertainties and
other factors which could cause actual results to differ materially from
future results expressed or implied by such statements.
SUMMARY
You should read the following summary together with the more detailed
information incorporated into and appearing elsewhere in this prospectus.
Unless the context indicates otherwise, "RCN" or the "Company" means RCN
Corporation and its subsidiaries and joint ventures (including unconsolidated
entities).
THE COMPANY
RCN is developing advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance telephone, video
programming and data services (including high speed Internet access), primarily
to residential customers in selected markets with high levels of population
density. RCN believes that its capability to deliver multiple services
(telephone, video programming and Internet access) to any given customer on its
networks will provide it with competitive advantages. RCN's strategy is to
become the leading single-source provider of voice, video and data services to
residential customers in each of its markets by offering individual or bundled
service options, superior customer service and competitive prices. RCN believes
that it is the only publicly-traded facilities-based provider of bundled voice,
video and data services to focus on the residential market in the U.S., and
believes that it will be the first competitive provider in its target markets.
RCN's initial advanced fiber optic networks have been established in
selected markets in the Boston to Washington, D.C. corridor, including New York
City, Boston and its surrounding communities, and in the Washington, D.C. area.
In the Boston market RCN operates its advanced fiber optic network through a
joint venture with the Boston Edison Company ("BECO"). In the Washington, D.C.
market RCN is developing an advanced fiber optic network through a joint
venture named Starpower Communications, LLC ("Starpower") with Pepco
Communications, L.L.C. ("Pepco Communications"), an indirect wholly owned
subsidiary of Potomac Electric Power Company ("PEPCO"). RCN believes that these
joint ventures provide it with a number of important advantages including
access to rights of way and the use of existing fiber optic facilities, the
ability to enter its target markets quickly and efficiently and a reduction in
the up-front capital investment required to develop its networks. In addition,
RCN's joint venture partners provide access to additional assets, equity
capital and established customer bases. RCN also benefits from its relationship
with its largest shareholder, Level 3 Communications, Inc. ("Level 3"), and
from the experience gained by certain of RCN's key employees who participated
in the development of MFS Communications Company, Inc.
Because it delivers multiple services, RCN reports the total number of its
various service connections (for local telephone, video programming and
Internet access) rather than the number of customers. See "Business--RCN
Services--Connections." As of September 30, 1998, RCN had approximately 808,000
connections which were delivered through a variety of owned and leased
facilities including hybrid fiber/coaxial cable systems, a wireless video
system and advanced fiber optic networks. RCN is deploying advanced fiber optic
networks specifically designed to provide high speed, high capacity
telecommunications services for all new network facilities. RCN also intends to
upgrade certain of its hybrid fiber/coaxial cable systems to enable them to
provide the same range of voice, video and data services, including bundled
service options. At September 30, 1998, RCN had approximately 82,800 total
connections attributable to customers connected to advanced fiber optic
networks and had approximately 725,000 connections attributable to customers
served through other facilities . See "Business--RCN Services." As a result of
RCN's acquisitions of UltraNet Communications, Inc. ("UltraNet"), Erols
Internet, Inc. ("Erols") and Interport Communications Corp. ("Interport") in
1998, RCN is a leading Internet service provider in the Boston to Washington,
D.C. corridor.
RCN seeks to exploit competitive opportunities in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a
particularly attractive opportunity to develop advanced fiber optic networks.
RCN continues to evaluate new market areas both within and outside of the
Boston to Washington, D.C. corridor and, in June 1998, announced its intention
to develop advanced fiber optic networks in the western United States,
Initially In The San Francisco Bay area. See "Business -- West Coast
Expansion." RCN believes that its experience in the Northeast will provide it
with a key strategic advantage when it enters new markets.
Business Strategy
RCN believes that the opportunity to effectively deploy advanced fiber
optic networks and to compete with incumbent telephone and cable television
Service Providers in certain markets within the United States exists for
several key reasons, including the broad deregulation of the telecommunications
industry pursuant to the Telecommunications Act of 1996, the need for more
advanced, higher capacity networks to meet growing consumer demands for new
communications products and services and the superior technology of RCN's
networks. In order to achieve its goal of becoming the leading provider of
telecommunications, video and data services to residential customers in its
target markets, RCN is pursuing the following key strategies:
o Developing Advanced Fiber Optic Networks
o Focusing on Residential Customers in High-Density Markets
o Implementing a Subscriber-Driven Investment Strategy
o Utilizing Strategic Alliances and Existing Facilities to Speed and
Reduce Cost of Entry
o Offering Bundled Voice, Video and Data Services
o Providing Superior Customer Service
The Spin-off
Prior to September 30, 1997, RCN was operated as a wholly-owned subsidiary
of C-TEC Corporation ("CTEC"). On September 30, 1997, C-TEC completed a
spin-off transaction by distributing all of the shares of its subsidiaries, RCN
and Cable Michigan, Inc. ("Cable Michigan"), to the holders of C-TEC's common
stock and Class B common stock (the "spin-off"). After this transaction was
completed, C-TEC changed its name to Commonwealth Telephone Enterprises Inc.
("Commonwealth Telephone"). RCN and Commonwealth Telephone are parties to
certain agreements governing various ongoing relationships between the
companies, including a distribution agreement and a tax sharing agreement, each
of which is filed as an exhibit to the registration statement relating to this
offering. In November 1998, all of the outstanding stock of Cable Michigan was
acquired by Avalon Cable of Michigan Holdings Inc. The new merged entity is
Avalon Cable of Michigan Inc. RCN has agreed to provide various customer
related billing and programming services to Avalon Cable of Michigan Inc. for a
transitional period after completion of the merger.
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RCN Corporation's principal executive offices are located at 105 Carnegie
Center, Princeton, New Jersey, and its telephone number is (609) 734-3700. RCN
maintains a web site at http://www.rcn.com where general information about RCN
is available. Reference to the website shall not be deemed to incorporate the
contents of the website into this prospectus.
THE OFFERING
Common stock offered by selling shareholders......... 396,442
Common stock outstanding as of September 30, 1998.... 65,201,765
NASDAQ symbol........................................ RCNC
Use of proceeds...................................... RCN will not receive any
proceeds from the sale
of the shares being
offered hereby.
RISK FACTORS
Prospective investors should carefully consider all of the information in
this prospectus and, in particular, should evaluate the specific risk factors
set forth under "Risk Factors," beginning on page 8.
RISK FACTORS
In addition to the other information contained in this prospectus, you
should carefully review the following factors.
Limited Operating History; Negative Cash Flow; Operating Losses
RCN has only recently begun operating a voice, video and data services
business and, accordingly, this business has a limited operating history upon
which investors may base an evaluation of its performance. In connection with
entering this business, RCN has incurred operating and net losses and negative
cash flows and expects to continue to do so for the next five to seven years as
it expands its network and customer base. The extent to which RCN continues to
experience negative cash flow in the future will be affected by a variety of
factors including:
o the pace of its entry into new markets;
o the time and expense required for building out its planned network;
o its success in marketing its services;
o the intensity of competition; and
o the availability of additional capital to pursue its business plans.
RCN had operating losses after depreciation and amortization and
nonrecurring charges of $70,875,000, $13,078,000 and $5,342,000 for the years
ended December 31, 1997, 1996 and 1995 and $143,380,000 for the nine months
ended September 30, 1998. There can be no assurance that RCN will achieve or
sustain profitability or positive cash flows from operating activities in the
future.
Further Capital Requirements
RCN expects that it will require a substantial amount of capital to fund
the network development and operations in its target markets, including funding
the development of its advanced fiber optic networks, upgrading its hybrid
fiber/coaxial plant and funding operating losses and debt service requirements.
RCN currently estimates that its capital expenditure requirements for the
period from January 1, 1998 through 1999 will be approximately $850 million,
which represents capital expenditures (including connection costs which will
only be incurred as RCN obtains revenue-generating customer connections) of
approximately $300 million in 1998 and approximately $550 million in 1999.
Additional funds will be required to fund operating losses during this period.
RCN is accelerating its capital expenditure program due to deployment of its
fiber optic network ahead of schedule, recent acquisitions of several Internet
service providers and the anticipated development of new markets outside the
Boston to Washington, D.C. corridor. These capital expenditures do not include
amounts to be funded by RCN's joint venture partners in connection with the
Boston and Washington, D.C. joint ventures. RCN is obligated to fund its
portion of any capital contributions required by the joint ventures' annual
budget or capital contribution schedule. Failure by its joint venture
partner(s) to make anticipated capital contributions could have a material
adverse effect on RCN.
RCN expects to have sufficient liquidity to meet its capital requirements
through early 2000. RCN's principal sources of liquidity are its cash and
temporary cash investments (approximately $439.8 million at September 30, 1998)
and short-term investments (approximately $668 million at September 30, 1998).
RCN's cash balances and short term investments were funded by aggregate net
proceeds of approximately $1,161 million from three offerings of debt and
equity securities completed between October 1997 and June 1998. At September
30, 1998, RCN's only committed source of available borrowing was $20 million
available under the credit agreement (the "Credit Agreement") dated as of July
1, 1997 between certain subsidiaries of RCN and a group of lenders for whom
First Union National Bank acts as agent.
The actual timing and amount of capital required for the rollout of RCN's
network and to fund operating losses may vary materially from RCN's estimates
and additional funds will be required in the event of significant departures
from the current business plan, unforeseen delays (including those associated
with adverse weather conditions), cost overruns, engineering design changes and
other technological risks or to meet other unanticipated expenses. RCN will
continue to require additional capital for planned increases in network
coverage and other capital expenditures, working capital, debt service
requirements and anticipated further operating losses. The proposed development
of new networks in selected markets in the western United States will
substantially increase RCN's capital requirements. RCN's initial network
development plan for expansion into its target markets in the western United
States will require funding of approximately $350 million (including operating
losses) through the year 2000; however, the actual timing and amount of capital
required may vary materially from RCN's initial estimates. Sources of funding
for RCN's further financing requirements may include vendor financing, public
offerings or private placements of equity and/or debt securities, and bank
loans. There can be no assurance that additional financing will be available to
RCN or, if available, that it can be obtained on a timely basis and on
acceptable terms. Failure to obtain such financing could result in the delay or
curtailment of RCN's development and expansion plans and expenditures. Any of
these events could impair RCN's ability to meet its debt service requirements
and could have a material adverse effect on its business.
Substantial Indebtedness; Effect of Financial Leverage
RCN has indebtedness that is substantial in relation to its shareholders'
equity and cash flow. As of September 30, 1998, RCN had an aggregate of
approximately $1,249 million of indebtedness outstanding and had the ability to
borrow up to an additional $20 million under the Credit Agreement. The Credit
Agreement contains customary covenants for facilities of this nature, including
covenants limiting debt, liens, investments, consolidations, mergers,
acquisition and sales of the assets, payment of dividends and other
distributions, making of capital expenditures and transactions with affiliates.
As a result of RCN's substantial indebtedness, its fixed charges are expected
to exceed its earnings for the forseeable future and there can be no assurance
that its operating cash flow will be sufficient to pay principal and interest
on its various debt securities. In addition, RCN will require substantial
additional indebtedness, particularly in connection with the buildout of its
networks and the introduction of its telecommunications services to new
markets. The extent of RCN's leverage may have the following consequences:
o limit its ability to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements or
other purposes;
o require that a substantial portion of its cash flows from operations
be dedicated to the payment of principal and interest on its
indebtedness and therefore not be available for other purposes;
o limit its flexibility in planning for, or reacting to, changes in its
business;
o place it at a competitive disadvantage as compared with less
leveraged competitors; and
o render it more vulnerable in the event of a downturn in its business.
Ability to Manage Growth; Risks Related to Acquisitions
The expansion and development of RCN's operations (including the
construction and development of additional networks) will depend on, among
other things, RCN's ability to access markets, design fiber optic network
backbone routes, install or lease fiber optic cable and other facilities,
including switches, and obtain rights-of-way, building access rights and any
required government authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. In
addition to markets presently being developed, RCN is continually evaluating
other potential markets, both within the Boston to Washington, D.C. corridor
and in non-contiguous areas. As is the case in its present markets, RCN intends
to evaluate potential markets in terms of population density and favorable
demographics, and to apply a strategy of building network facilities to meet
the needs of targeted subscribers in new markets. There can be no assurance
that RCN will be able to expand its existing network or to identify and develop
new markets. Furthermore, RCN's ability to manage its expansion effectively
will also require it to continue to implement and improve its operating and
administrative systems and attract and retain qualified management and
professional and technical personnel. If RCN were not able to manage its
planned expansion effectively, it could have a material adverse effect on RCN.
RCN recently announced its intention to commence developing advanced fiber
optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor, initially in the San Francisco Bay Area. The
proposed expansion into non-contiguous markets could place additional strain on
management resources. Furthermore, although RCN believes that its experience in
the Northeast will provide it with strategic advantages in developing new
markets, there can be no assurance that RCN's experience in the Boston to
Washington, D.C. corridor will be replicated in the western United States.
RCN has experienced significant growth through acquisitions and will
continue to consider acquisition opportunities that arise from time to time.
Such acquisitions may place a significant strain on RCN's resources, and could
subject RCN to additional expenses during the integration process. For
instance, the process of integrating the Internet service provider businesses
acquired in 1998 may take a significant period of time and require significant
expenditure (including costs to upgrade the systems and controls of these
businesses). As a result, there can be no assurance that RCN will be able to
successfully integrate these businesses successfully or in a timely manner.
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant
changes in technology. While RCN believes that for the foreseeable future these
changes will neither materially affect the continued use of fiber optic
telecommunications networks nor materially hinder its ability to acquire
necessary technologies, the effect of technological changes on the business of
RCN cannot be predicted. There can be no assurance that technological
developments in telecommunications will not have a material adverse effect on
RCN.
Dependence on Strategic Relationships; Terms of Joint Venture Arrangements
RCN has entered into a number of strategic alliances and relationships in
order to provide it with early entry into the market for telecommunications
services. As RCN's network is further developed, it will be dependent on these
arrangements to provide the full range of its telecommunications service
offerings. RCN's key strategic relationships include:
o its arrangements with MFS Communications Company, Inc.
("MFS/WorldCom") (a subsidiary of WorldCom, Inc.) to, among other
things, lease portions of MFS/WorldCom's fiber optic network in New
York City and Boston;
o the joint venture with BECO under which RCN has access to BECO's
extensive fiber optic network in Greater Boston; and
o the joint venture with Pepco Communications to develop and operate an
advanced fiber optic network in the Washington, D.C. market.
In addition, any disruption of RCN's relationships or arrangements with
incumbent local exchange carriers, such as resale or interconnection
agreements, could have a material adverse effect on RCN. There can be no
assurance that RCN will successfully negotiate agreements with the incumbent
local exchange carrier in new markets or renewals of existing agreements. The
failure to negotiate or renew required interconnection and resale agreements
could have a material adverse effect on RCN.
The agreements governing RCN's joint ventures with BECO and Pepco
Communications contain material provisions for the management, governance and
ownership of the Greater Boston and Washington, D.C. businesses, respectively.
As a result of these agreements, certain matters beyond RCN's control, such as
a change of control of RCN or an inability to agree on certain proposed
actions, could result in RCN being forced to sell its interest in the relevant
joint venture or buy out the interest of the other joint venturer. In addition,
although certain covenants contained in the indentures applicable to RCN's debt
securities are applicable to the joint venture companies, neither the joint
venture companies nor RCN's joint venture partners are parties to these
indentures and accordingly are not bound to comply with their terms. A
disagreement with its joint venture partners over certain business actions,
including actions related to compliance with these indentures, could impede
RCN's ability to conduct its business and give rise to a deadlock event
triggering buy/sale provisions in the joint venture agreements.
Competition
RCN competes with a wide range of service providers for each of the
services that it provides. Virtually all markets for voice, video and data
services are extremely competitive, and RCN expects that competition will
intensify in the future. In each of the markets in which it offers voice and
video programming services, RCN faces significant competition often from
larger, better-financed incumbent local telephone carriers and cable companies,
and RCN often competes directly with incumbent providers which have
historically dominated their respective local telephone and cable television
markets.
Other new technologies may become competitive with services that RCN
offers. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors to RCN. RCN cannot predict whether competition from such developing
and future technologies or from such future competitors will have a material
impact on its operations. For additional information on the competitive
environment in which RCN operates, see "Business -- Competition."
Regulation
The telephone and video programming transmission services offered by RCN
are subject to federal, state, and local government regulation which are
subject to change. There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities in order to convert its wireless video subscribers to an
advanced fiber optic network. In addition, it is possible that changes in
existing regulations could have an adverse impact on RCN. For additional
information on the regulatory environment in which RCN operates, see "Business
- -- Regulation."
Ability to Procure Programming Services
RCN's video programming services are dependent upon management's ability
to procure programming that is attractive to its customers at reasonable
commercial rates. RCN is dependent upon third parties for the development and
delivery of programming services. These programming suppliers charge RCN for
the right to distribute the channels to its customers. The costs to RCN for
programming services is determined through negotiations with these programming
suppliers. Management believes that the availability of sufficient programming
on a timely basis will be important to RCN's future success. There can be no
assurance that RCN will have access to programming services or that management
can secure rights to such programming on commercially acceptable terms.
Liabilities for Unearned Revenues
Erols offered one, two and three-year subscriptions for Internet access,
which generally are paid for in advance. Such subscriptions are subject to
cancellation with a full refund for the first 30 days and to cancellation with
a pro-rated refund thereafter. Such revenues will be recognized over the term
of each such subscription, resulting in material short-and long-term
liabilities for unearned revenues. As of December 31, 1996, Erols had short-
and long-term liabilities for unearned revenues of approximately $12.9 million
and $3.4 million, respectively and, as of December 31, 1997, of approximately
$25.6 million and $8.9 million, respectively. Cancellation by a significant
number of the subscribers under such contracts could require cash payment of
material sums.
Risks Relating to Provision of Internet Services
Dependence on the Internet; Uncertain Acceptance of the Internet as a
Medium of Commerce and Communication. RCN's Internet business will depend in
part upon the continuing development and expansion of the Internet and the
market for Internet access. Important issues concerning business and personal
use of the Internet (including security, reliability, cost, ease of use, access
and quality of service) remain unresolved and may significantly affect the
growth of Internet use. A diminution in the growth of demand for Internet
services or an absolute decrease in such demand could have a material adverse
effect on RCN's Internet business.
Evolving Industry Standards; Contractual Arrangements. New industry
standards have the potential to replace or provide lower-cost alternatives to
existing services. The adoption of such new industry standards could render
RCN's existing services obsolete and unmarketable or require reduction in the
fees charged for services. Internet service providers participate in the
Internet through contractual "peering arrangements" with Internet companies.
These contractual arrangements are not subject to regulation and could be
subject to revision in terms, conditions or costs over time.
Constraints on Capacity and Supply of Equipment. RCN's ability to provide
Internet service will depend in part on its ability to provide sufficient
capacity, both at the level of particular point of presence (affecting only
subscribers attempting to use that point of presence) and in connection with
system-wide services (such as e-mail and news services, which can affect all
subscribers). In addition, RCN will be dependent in part on the availability of
equipment such as modems, servers and other equipment. Any shortage of such
equipment or capacity of servers could result in a strain on incoming access
lines during peak times, causing busy signals and/or delays for subscribers.
Reliance on Network Infrastructure; Risk of System Failure; Security
Risks. Internet network infrastructure is vulnerable to computer viruses and
other similar disruptive problems. Computer viruses and other problems could
lead to interruptions of, delays in, or cessation of service by RCN, as well as
corruption of RCN's or its subscribers' computer systems. In addition, there
can be no assurance that subscribers or others will not assert claims of
liability against RCN as a result of events such as computer viruses, other
inappropriate uses or security breaches.
Reciprocal Compensation. RCN's interconnection agreements with Bell
Atlantic and other incumbent local exchange carriers entitle it, among other
things, to collect reciprocal compensation payments from the incumbent local
exchange carriers for local telephone calls terminating on RCN's facilities (as
well as obligating RCN to make similar payments for outbound local calls it
delivers to the incumbent local exchange carriers). However, Bell Atlantic and
other incumbent local exchange carriers have challenged the application of
these reciprocal compensation provisions to calls terminating at Internet
service provider points of presence, based on the argument that Internet
traffic is inherently interstate, not local, in nature. To date, 18 state
public utility commissions have issued final orders on this issue (some of
which are subject to court appeals), and every such order has affirmed (based
on prior Federal Communications Commission decisions) that local calls to
Internet service providers are subject to reciprocal compensation. In the Bell
Atlantic region, the New York, Pennsylvania, Maryland, and Virginia public
utility commissions have issued such orders, and a similar case is pending in
Massachusetts. However, there can be no assurance that other state public
utility commissions will not issue contrary rulings, or that the Federal
Communications Commission decisions on which the favorable rulings are based
will not be changed as a result of regulatory, legislative, or judicial action.
In addition, there can be no assurance that the current reciprocal compensation
arrangements will be renewed on their existing terms when they expire (in most
cases, in mid-1999).
State and Local Taxes on Internet Services. RCN is currently subject to
certain state and local taxes on certain of its telecommunications, data and
Internet access services. It may become subject to additional state and local
taxes on such services as it continues to expand and develop more services to
customers throughout the United States and as more state and local taxing
authorities become familiar with such services.
Government Regulation and Legal Uncertainties. Few laws or regulations are
directly applicable to access or commerce on the Internet. However, a number of
legislative and regulatory proposals are under consideration by federal, state,
local and foreign governmental organizations and, as a result, a number of laws
or regulations may be adopted with respect to Internet user privacy, taxation,
infringement, pricing, quality of products and services and intellectual
property ownership. It is also uncertain as to how existing laws will be
applied to the Internet in areas such as property ownership, copyright,
trademark, trade secret, obscenity and defamation. The adoption of new laws or
the adaptation of existing laws to the Internet may decrease the growth in the
use of the Internet, which could in turn have a material adverse effect on
RCN's Internet business.
Control by Level 3 Telecom Holdings, Inc.; Conflicts of Interest
Level 3 Telecom beneficially owns approximately 46% of the common stock
of RCN. Consequently, Level 3 Telecom effectively has the power to elect a
majority of RCN's directors and to determine the outcome of substantially all
matters to be decided by a vote of shareholders. This may tend to deter
non-negotiated tender offers or other efforts to obtain control of RCN and
thereby deprive shareholders of opportunities to sell shares at prices higher
than those prevailing in the market. Moreover, a disposition by Level 3 Telecom
of a significant portion of RCN's common stock, or the perception that such a
disposition may occur, could affect the trading price of such common stock and
could affect the control of RCN. The common stock of Level 3 Telecom is owned
90% by Level 3 Communications Inc. ("Level 3") and 10% by David C. McCourt, the
Chairman and Chief Executive Officer of RCN. Mr. McCourt has been a member of
the Board of Directors and President of Level 3 Telecom since September 1992.
Based upon a review of documents filed with the Commission, RCN believes that
as of September 30, 1998, 24.2% of the common stock of Level 3 was owned by
directors and executive officers thereof, five of whom (Walter Scott, Jr.,
Richard R. Jaros, David C. McCourt, James Q. Crowe and Michael B. Yanney) are
executive officers or directors of RCN. The remaining shares of Level 3 common
stock are owned by persons none of whom own more than 5% of outstanding shares.
As a result of the September 30, 1997 spin-off of shares of RCN to holders
of common equity of C-TEC, there exist relationships that may lead to conflicts
of interest. Level 3 Telecom effectively controls both RCN and Commonwealth
Telephone. In addition, the majority of RCN's named executive officers are also
directors and/or executive officers of Commonwealth Telephone. The success of
RCN may be affected by the degree of involvement of its officers and directors
in RCN's business and the abilities of RCN's officers, directors and employees
in managing both RCN and the operations of Commonwealth Telephone. Potential
conflicts of interest will be dealt with on a case-by-case basis taking into
consideration relevant factors including the requirements of Nasdaq and
prevailing corporate practices.
In connection with the spin-off of RCN, Commonwealth Telephone has agreed
to provide or cause to be provided to RCN certain specified services for a
transitional period. The fees for such services will be an allocated portion
(based on relative usage) of the cost incurred by Commonwealth Telephone to
provide such services to both RCN and Commonwealth Telephone. These
arrangements were not the result of arm's length negotiation between unrelated
parties as RCN and Commonwealth Telephone have certain common officers and
directors. Although the transitional service arrangements are designed to
reflect arrangements that would have been agreed upon by parties negotiating at
arm's length, there can be no assurance that RCN would not be able to obtain
better terms from unrelated third parties. Additional or modified agreements,
arrangements and transactions may be entered into between RCN and Commonwealth
Telephone, which will be negotiated at arm's length.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares
being offered hereby.
DIVIDENDS
The Company anticipates that future revenues will be used principally to
support operations and finance growth of the business and, thus, RCN does not
intend to declare or pay cash dividends on the RCN common stock in the
foreseeable future. The declaration or payment of any cash dividends in the
future will be at the discretion of RCN's Board of Directors. The declaration
of any dividends and the amount thereof will depend on a number of factors,
including RCN's financial condition, capital requirements, funds from
operations, future business prospects and such other factors as RCN's Board of
Directors may deem relevant. RCN is a holding company and its ability to pay
cash dividends is dependent on its ability to receive cash dividends, advances
and other payments from its subsidiaries. The Credit Agreement into which
certain subsidiaries of RCN have entered contains restrictions on the payment
of dividends by those subsidiaries. RCN has entered into the Indentures which
restrict RCN's and certain of its subsidiaries' ability to pay dividends.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth selected historical consolidated financial data
for RCN. Prior to September 30, 1997, RCN operated as part of C-TEC. The
historical consolidated financial data presented below reflect periods during
which RCN did not operate as an independent company and, accordingly, certain
assumptions reflect the results of operations or the financial condition which
would have resulted if RCN had operated as a separate, independent company
during such periods, and are not necessarily indicative of RCN's future results
of operation or financial condition.
The selected historical consolidated financial data for the years ended
December 31, 1994 and 1993 and as of December 31, 1995, 1994 and 1993 and
September 30, 1997 are derived from RCN's unaudited historical consolidated
financial statements not included in this prospectus. The selected historical
consolidated financial data of RCN for the years ended December 31, 1997, 1996
and 1995 and as of December 31, 1997 and 1996 are derived from and should be
read in conjunction with RCN's audited historical consolidated financial
statements (the "Financial Statements") incorporated herein by reference to the
RCN 10-K. The selected historical consolidated financial data for the nine
month periods ended September 30, 1997 and 1998 and as of September 30, 1998
are derived from and should be read in conjunction with RCN's unaudited
historical consolidated financial statements incorporated herein by reference
to the RCN September 10-Q. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the RCN 10-K and RCN
September 10-Q.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------ ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- -------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 49,504 $ 59,500 $ 91,997 $ 104,910 $ 127,297 $ 91,854 $ 148,118
Costs and expenses, excluding
depreciation and amortization... 30,821 49,747 75,003 79,107 134,967 91,183 182,632
Nonrecurring charges(1)............ -- -- -- -- 10,000 10,000 51,667
Depreciation and amortization...... 9,922 9,803 22,336 38,881 53,205 39,135 57,199
--------- --------- --------- --------- ---------- --------- ---------
Operating (loss) income............ 8,761 (50) (5,342) (13,078) (70,875) (48,464) (143,380)
Interest income.................... 17,882 21,547 29,001 25,602 22,824 13,442 43,232
Interest expense................... (17,127) (16,669) (16,517) (16,046) (25,602) (10,460) (80,811)
Other (expense) income, net........ 1,195 1,343 (304) (546) 131 229 (1,947)
(Benefit) provision for income (9,923)
taxes........................... 167 2,340 1,119 979 (20,849) (11,907)
Equity in loss of unconsolidated (8,169)
entities........................ -- -- (3,461) (2,282) (3,804) (2,650)
Minority interest in loss (income) (95)
of consolidated entities........ (85) (144) 1,340 7,296 3,931 11,545
Extraordinary charge- debt
prepayment penalty, net of tax
of $1,728....................... -- -- -- -- (3,210) (3,210) --
Cumulative effect of changes in
accounting principles........... 1,628 (83) -- -- -- -- --
--------- --------- --------- --------- ---------- --------- ---------
Net (loss) income.................. $ 12,087 $ 3,653 $ 2,114 $ (5,989) $ (52,391) $ (35,275) $(169,607)
========= ========= ========= ========= ========== ========= =========
Balance Sheet Data (at end
of period):
Total assets....................... $ 291,634 $ 568,586 $ 649,610 $ 628,085 $1,150,992 $ 598,679$ 1,890,447
Long-term debt..................... 181,500 154,000 135,250 131,250 686,103 110,000 1,248,681
Shareholders' equity............... 74,329 372,847 394,069 390,765 356,584 373,760 401,821
Other Data:
EBITDA before nonrecurring
charges(2)...................... 18,683 9,753 16,994 25,803 (7,670) 671 (34,514)
Cashed Provided by
(Used in):
Operating Activities............... N/A N/A 48,559 23,831 1,661 202 28,046
Investing Activities............... N/A N/A (146,203) (9,377) (475,860) (21,270) (478,013)
Financing Activities............... N/A N/A (31,203) 9,391 635,266 142,562 666,874
</TABLE>
- -------------------
(1) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to
RCN's wireless video services, and in 1998 represent nonrecurring costs of
$51,667 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.
(2) EBITDA before nonrecurring charges represents earnings before interest,
depreciation and amortization, and income taxes. Because of the capital
intensive nature of the business and resulting large non-cash charges for
depreciation, EBITDA is commonly used in the communications industry by
management, investors, and analysts to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA is not intended to
represent cash flows for the period and should not be considered as an
alternative to cash flows from operating, investing or financing
activities as determined in accordance with U.S. GAAP. EBITDA is not a
measurement under U.S. GAAP and may not be comparable with other similarly
titled measures of other companies. Certain of the Company's debt
agreements contain certain covenants that, among other things, limit the
ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock,
engage in transactions with stockholders and affiliates, create liens,
sell assets and engage in mergers and consolidations.
Supplemental Unaudited Financial Data
RCN conducts portions of its business through joint ventures, including
its joint venture with BECO (which is consolidated in RCN's historical results
of operations) and Starpower (which is accounted for under the equity method in
RCN's historical results of operations). The supplemental unaudited financial
information set forth below presents RCN's results of operations as if all
domestic joint ventures were fully consolidated (hereinafter referred to as
"Pro Forma Total RCN"), and shows the ownership share of its domestic joint
venture partners as minority interests. RCN believes that this supplemental
unaudited financial data provides useful disclosure in analyzing its business.
<TABLE>
<CAPTION>
Pro Forma Total RCN (as defined above)
----------------------------------------------------------------
Year Ended Nine Months Ended
December 31, September 30,
----------------------------------- ---------------------------
1995 1996 1997 1997 1998
---------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Sales:
Voice.................................. $ 237 $ 830 $ 4,007 $ 1,869 $ 15,963
Video.................................. 65,699 87,470 103,371 76,896 83,389
Data................................... -- 4 41 25 47,520
Commercial and other................... 26,061 16,606 19,878 13,064 24,258
-------- -------- -------- ------- --------
Total sales............................... 91,997 104,910 127,297 91,854 171,130
Costs and expenses, excluding
depreciation and amortization:
Direct expenses........................ 39,604 35,226 51,757 35,113 76,719
Operating, selling, general and
administrative...................... 35,399 43,881 83,422 56,070 127,176
-------- -------- -------- ------- --------
EBITDA before nonrecurring charges........ 16,994 25,803 (7,882) 671 (32,765)
Depreciation and amortization............. 22,336 38,881 53,205 39,135 71,813
Nonrecurring charges......................
-- -- 10,000 10,000 51,667
-------- -------- -------- ------- --------
Operating (loss).......................... (5,342) (13,078) (71,087) (48,464) (156,245)
Interest income........................... 29,001 25,602 22,824 13,442 43,808
Interest expense.......................... (16,517) (16,046) (25,602) (10,460) (80,811)
Other income (expense), net............... (304) (546) 131 229 (1,978)
-------- -------- -------- ------- --------
(Loss) income before income taxes......... 6,838 (4,068) (73,734) (45,253) (195,226)
(Benefit) provision for income taxes...... 1,119 979 (20,849) (11,907) (9,923)
-------- -------- -------- ------- --------
(Loss) income before equity in
unconsolidated entities, minority
interest and extraordinary item........ 5,719 (5,047) (52,885) (33,346) (185,303)
Equity in loss of unconsolidated
entities............................... (3,461) (2,282) (3,698) (2,650) (2,008)
Minority interest in loss (income) of
consolidated entities.................. (144) 1,340 7,402 3,931 17,704
-------- -------- -------- ------- --------
Loss (income) before extraordinary
item.................................. 2,114 (5,989) (49,181) (32,065) (169,607)
Extraordinary charge--debt
prepayment penalty..................... -- -- (3,210) (3,210) --
-------- -------- -------- -------- ----------
Net (loss) income......................... $ 2,114 $ (5,989) $(52,391) $(35,275) $(169,607)
======== ======== ======== ======== ==========
Balance sheet data:
Cash, temporary cash investments and
short-term investments................. $158,485$ 108,674 $638,513 $ 183,337 $1,117,238
Property, plant and equipment............. $173,373$ 220,357 $307,920 $ 273,960 $ 533,250
Accumulated depreciation.................. $ 71,293$ 84,529 $107,419 $ 101,544 $ 152,293
Net property, plant and equipment......... $102,080$ 135,828 $200,501 $ 172,416 $ 380,957
Long-term debt (including current 131,250
portion)............................... $161,000$ $686,103 $ 110,000 $1,248,681
</TABLE>
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 by 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 111/8%
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>
Liberty/ Adjustments
Adjustments Freedom for the 1997
RCN for Acquisition Notes and
Historical Spin-off Adjustments 9.8% Notes
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales...................... $127,297
Cost and expenses
excluding depreciation and
amortization.............. 134,967
Nonrecurring charges....... 10,000
Depreciation and
amortization ............. 53,205 $ 1,250 (1)
---------- ---------- ---------- ----------
Operating (loss) income.... (70,875) -- (1,250)
Interest income............ 22,824) $ (8,686)(2)
Interest expense........... (25,602) (5,654)(3) $ (85,179)(4)
10,460 (5)
Other (expense) income,
net....................... 131
---------- ---------- ---------- ----------
(Loss) income before income
taxes..................... (73,522) (3,880) (1,250) (85,179)
(Benefit) for income
taxes..................... (20,849) (1,358)(6) (437)(7) (29,812)(4)
---------- ---------- ---------- ----------
(Loss) income before equity
in unconsolidated
entities and minority
interest.................. (52,673) (2,522) (813) (55,367)
Equity in (loss) of
unconsolidated entities... (3,804)
Minority interest in loss
of consolidated entities... 7,296
---------- ---------- ---------- ----------
(Loss) income before
extraordinary charge...... $ (49,181) $ (2,522) $ (813) $ (55,367)
========== ========== ========== ==========
Unaudited pro forma (loss)
before extraordinary
charge per common share .. $ (.89)
Weighted average number of
common shares and
common stock equivalents
outstanding............... 54,965,716
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
<TABLE>
<CAPTION>
Adjustments
for the Stock
Acquisition Offering and
Erols Adjustments the 11%
Historical(8) For Erols Notes Pro Forma
------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Sales...................... $ 36,528 $ (22,552)(9) $141,273
Cost and expenses
excluding depreciation and
amortization.............. 49,829 (30,764)(9) 154,032
Nonrecurring charges....... 10,000
Depreciation and
amortization ............. 6,360 606 (10) 61,421
----------- --------- -------- ---------
Operating (loss) income.... (19,661) 7,606 -- (84,180)
Interest income............ 14,138
Interest expense........... (162) 100 $ (18,719)(13) (124,756)
Other (expense) income,
net....................... (49) 82
----------- --------- -------- ---------
(Loss) income before income
taxes..................... (19,872) 7,706 (18,719) (194,716)
(Benefit) for income
taxes..................... (9,338)(11) (13) (61,794)
----------- --------- -------- ---------
(Loss) income before equity
in unconsolidated
entities and minority
interest.................. (19,872) 17,044 (18,719) (132,922)
Equity in (loss) of
unconsolidated entities... (13,420)(9) (17,224)
Minority interest in loss
of consolidated entities... 7,296
----------- --------- -------- ---------
(Loss) income before
extraordinary charge...... $ (19,872) $ 3,624 $(18,719) $(142,850)
=========== ========= ======== =========
Unaudited pro forma (loss)
before extraordinary
charge per common share .. $ (2.52)
Weighted average number of
common shares and
common stock equivalents
outstanding............... 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
<PAGE>
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:
Year Ended
December 31,
1997
Benefit
(Provision)
-----------
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)
............................................ ========
(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 workforce.
(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.
BUSINESS
Overview
RCN is developing advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance telephone, video
programming and data services (including high speed Internet access), primarily
to residential customers in selected markets with high levels of population
density. RCN believes that its capability to deliver multiple services
(telephone, video programming and Internet access) to any given customer on its
networks will provide it with competitive advantages. RCN's strategy is to
become the leading single-source provider of voice, video and data services to
residential customers in each of its markets by offering individual or bundled
service options, superior customer service and competitive prices. RCN believes
that it is the only publicly-traded facilities-based provider of bundled voice,
video and data services to focus on the residential market in the U.S., and
believes that it will be the first competitive provider in its target markets.
RCN's initial advanced fiber optic networks have been established in
selected markets in the Boston to Washington, D.C. corridor, including New York
City, Boston and its surrounding communities and in the Washington, D.C. area.
In the Boston market RCN operates its advanced fiber optic network through a
joint venture with BECO. The venture is managed and 51% owned by RCN and is
accounted for on a consolidated basis. RCN and BECO are presently in discussions
with respect to the conversion of a portion of BECO's interest in the BECO joint
venture into RCN common stock. In the Washington, D.C. market, RCN is developing
an advanced fiber optic network through a joint venture named Starpower with
Pepco Communications, an indirect wholly owned subsidiary of PEPCO. Starpower is
owned 50% by RCN and 50% by Pepco Communications and is accounted for under the
equity method of accounting. RCN believes that these joint ventures provide it
with a number of important advantages including access to rights of way and the
use of existing fiber optic facilities, the ability to enter its target markets
quickly and efficiently and a reduction in the up-front capital investment
required to develop its networks. In addition, RCN's joint venture partners
provide access to additional assets, equity capital and established customer
bases. RCN also benefits from its relationship with its largest shareholder,
Level 3, and from the experience gained by certain of RCN's key employees who
participated in the development of MFS Communications Company, Inc.
Because it delivers multiple services, RCN reports the total number of its
various service connections (for local telephone, video programming and Internet
access) rather than the number of customers. See "Business--RCN
Services--Connections." As of September 30, 1998, RCN had approximately 808,000
connections which were delivered through a variety of owned and leased
facilities including hybrid fiber/coaxial cable systems, a wireless video system
and advanced fiber optic networks. RCN is deploying advanced fiber optic
networks specifically designed to provide high speed, high capacity
telecommunications services for all new network facilities. RCN also intends to
upgrade certain of its hybrid fiber/coaxial cable systems to enable them to
provide the same range of voice, video and data services, including bundled
service options. At September 30, 1998, RCN had approximately 82,800 total
connections attributable to customers connected to advanced fiber optic networks
("on-net" connections) and had approximately 725,000 connections attributable to
customers served through other facilities ("off-net" connections). See "--RCN
Services." RCN gained approximately 398,500 Internet service customers upon
completion of the acquisitions of UltraNet, Erols and Interport in 1998. As a
result of acquisitions completed in 1998, RCN is a leading Internet service
provider ("ISP") in the Boston to Washington, D.C. corridor. See "--Recent
Acquisition Transactions."
RCN's extensive operating experience in both the telephone and video
industries and in the design and development of telecommunications facilities
provides it with expertise in systems operation and development, an established
infrastructure for customer service and billing for both voice and video
services and established relationships with providers of equipment and video
programming. In addition, RCN's management team and board of directors benefit
from experience gained in connection with the management of C-TEC, which prior
to September 30, 1997 owned and operated RCN. C-TEC has 100 years of experience
in the telephone business and nearly 25 years of experience in the cable
television business. Both C-TEC and certain members of management also
have extensive experience in the design and development of advanced
telecommunications facilities.
RCN seeks to exploit competitive opportunities in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a particularly
attractive opportunity to develop advanced fiber optic networks. RCN continues
to evaluate new market areas both within and outside of the Boston to
Washington, D.C. corridor. RCN believes that its experience in the Northeast
will provide it with a key strategic advantage when it enters new markets.
West Coast Expansion
On June 4, 1998 RCN announced its intention to commence developing advanced
fiber optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor. RCN expects that its initial west coast network will
be developed in the San Francisco Bay Area, a market that benefits from high
density, high per capita income and the highest Internet usage in the United
States. RCN has received competitive local exchange carrier ("CLEC") status in
California, has obtained an "open video system" ("OVS") certification from the
Federal Communications Commission (the "FCC") for the City of San Francisco and
surrounding counties and has held initial meetings with several municipalities
in the San Francisco Bay Area to discuss network deployment. RCN also expects
its expansion to include selected markets in or near Southern California, Las
Vegas and Phoenix. As is the case in its existing markets, RCN intends to focus
on high density markets with favorable demographics, and to apply a subscriber-
driven investment strategy, in developing new markets. RCN believes that its
experience in the Northeast will provide it with a key strategic advantage.
Subject to obtaining requisite regulatory approvals, RCN expects to commence
initial network construction in the San Francisco Bay Area in 1999.
Business Strategy
The Company believes that the opportunity to deploy effectively advanced
fiber optic networks and to compete with incumbent telephone and cable
television service providers results from several key factors, including the
broad demand for of the telecommunications industry pursuant to the
Telecommunications Act of 1996, the need for more advanced, higher capacity
networks to meet growing consumer demands for new communications products and
services and the superior technology of RCN's networks. In order to achieve its
goal of becoming the leading provider of telecommunications, video and data
services to residential customers in its target markets, RCN is pursuing the
following key strategies:
Developing Advanced Fiber Optic Networks. RCN's advanced fiber optic
networks are specifically designed to provide a single source for high speed,
high capacity voice, video programming and data services. RCN expects that the
substantial growth of the Internet and demand for high speed data service will
play an important role in the demand for its fiber optic networks. RCN believes
that its high capacity advanced fiber optic networks provide RCN with certain
competitive advantages such as increased capacity (including the ability to
offer bundled voice, video and data services) and generally superior signal
quality and network reliability relative to the typical networks of the
incumbent service providers. By using advanced fiber optic networks capable of
delivering multiple services, RCN is able to address a larger number of
potential subscriber connections in its target markets than incumbent service
providers which typically provide only single or limited services. The migration
of customers to the advanced fiber network will allow RCN to gain additional
revenue and higher margins by facilitating the delivery of multiple services to
customers over RCN's own switches, thereby allowing RCN to gain additional
revenue (and larger margins) from originating and terminating access fees.
Focusing on Residential Customers in High-Density Markets. RCN seeks to be
the first operator of an advanced fiber optic network providing voice, video and
data services to residential customers in each of its target markets. RCN
believes that it is unique in its markets in offering a wide range of bundled
voice, video and data services to customers in residential areas and in striving
to connect residential customers directly to its advanced fiber optic networks.
RCN estimates that RCN's loop lengths are a small fraction of that of the
incumbents'. RCN also believes that residential customers will be
attracted to lower prices, broader service offerings, enhanced levels of
customer care and consumer choice. Although RCN's primary focus is on
residential customers, RCN also serves certain commercial accounts which
are located on or in close proximity to its networks.
Implementing Subscriber-Driven Investment Strategy. RCN attempts to deploy
efficiently its capital by tying facility development to the procurement of
customer connections. In order to promote its presence in its markets and to
develop a subscriber base for its advanced fiber optic networks, RCN may provide
selected services to customers located near its advanced fiber networks
utilizing existing facilities that are available in advance of network
construction. For example, RCN markets Internet services and provides resold
telephone services in advance of constructing or extending its networks. RCN
also provides wireless video services to approximately 31,400 customers in New
York City (as of September 30, 1998) with a view to extending the advanced fiber
optic network to service many of these existing customers.
Utilizing Strategic Alliances and Existing Facilities to Speed and Reduce
Cost of Entry. By utilizing strategic alliances, RCN is able to enter the market
quickly and efficiently and to reduce the up-front capital investment required
to develop its networks. Through alliances with companies such as BECO, Pepco
Communications and MFS/WorldCom, which provide or are expected to provide RCN
with extensive fiber optic networks or other assets, by utilizing certain
components of its own existing cable television infrastructure, and through
strategic acquisitions, RCN has been able to expedite and reduce the cost of
market entry and business development and has created the opportunity to
leverage existing customer relationships. In addition, RCN recently entered into
an agreement with Qwest under which it will lease fiber lines from Qwest tying
RCN's local networks from Boston to Washington, D.C.
Offering Bundled Voice, Video and Data Services. RCN believes that, as a
full service voice, video and data programming provider, it will be able to
offer a single-source package of voice, video and data services, individually or
on a bundled basis, which is not yet generally available from any incumbent
telephone, cable or other service provider. In addition, services provided over
RCN's advanced fiber optic networks are generally priced at competitive rates as
compared to the incumbent service providers.
Providing Superior Customer Service. RCN seeks to provide superior customer
service as compared to incumbent service providers, with service features such
as a 24-hour-a-day call center and quality control system, on-time service
guarantees and bundled service offerings, providing the consumer with added
choice and convenience.
RCN Services
RCN provides a wide range of local and long distance telephone, video
programming and data services, both individually and in bundled service options.
RCN provides these services through a range of facilities including its
advanced fiber optic networks in New York City and Boston, a wireless video
system in New York City, its hybrid fiber/coaxial cable systems in the states of
New York (outside New York City), New Jersey and Pennsylvania, and resale local
and long distance telephony services.
Connections. The following table summarizes the development of RCN's
subscriber base:
As of
------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/89 9/30/98
------- -------- ------- ------- -------
Service Connections(1)
Advanced Fiber:
Voice............... 1,909 3,214 4,473 11,428 20,857
Video............... 4,870 11,784 15,599 35,196 58,324
Data................ 326 150 267 1,588 3,661
-------- ------- ------- ------- ------
Subtotal On-Net........ 7,105 15,148 20,339 48,212 82,842
Other(2):
Voice(3)............ 10,953 24,900 40,447 49,052 58,093
Video(4)............ 229,198 227,619 227,558 214,164 196,776
Data................
-- -- 370,271 398,560 470,466
Subtotal Off-Net....... -------- ------- ------- ------- -------
240,151 252,519 638,276 661,776 725,335
-------- ------- ------- ------- -------
Total Service
Connections........... 247,256 267,667 658,615 709,988 808,177
======== ======= ======= ======= =======
Advanced Fiber Units
Passed................ 26,083 44,045 63,386 122,977 213,983
Marketable Homes(5) -- -- -- 111,187 181,353
- -------------------
(1) Because RCN delivers multiple services, RCN accounts for its customer
activity by the number of individual local telephone, video programming
or Internet access services, or "connections," purchased. Consequently, a
single customer purchasing local telephone, video programming and Internet
access constitutes three connections.
(2) RCN classifies connections within the "Other" category until the relevant
network is capable of providing voice, video and data services, including
local telephone service through an RCN switch.
(3) In August 1997, RCN commenced offering resold local phone service, long
distance and Internet access to customers in the area served by its
Hybrid Fiber/Coaxial Cable Systems in the Lehigh Valley area.
(4) Includes approximately 31,400 wireless connections. "Other" also includes,
among other things, wireline video connections serving the University of
Delaware (4,000 connections at September 30, 1998).
(5) As of September 30, 1998, RCN began to report marketable homes, which
represents that segment of homes passed which are being marketed the full
suite of advanced fiber optic network products. The distinction between
homes passed and marketable homes recognizes the transition from network
construction to service penetration.
Set forth below is a brief description of RCN's services:
Voice. RCN offers full-featured local exchange telephone service, including
standard dial tone access, enhanced 911 access, operator services and directory
assistance in competition with the incumbent local exchange providers and CLECs.
In addition, RCN offers a wide range of value-added services, including call
forwarding, call waiting, conference calling, speed dial, calling card,
800-numbers and voice mail. RCN also provides Centrex service and associated
features. RCN's local telephone rates are generally competitive with the rates
charged by the incumbent providers. At September 30, 1998, RCN had approximately
20,857 telephone service connections on its advanced fiber optic networks and
approximately 58,093 customers for resold telephone service.
RCN Long Distance Company provides long distance telephone services,
including outbound, inbound, calling card and operator services. These services
are offered to residential and business customers. As of September 30, 1998, RCN
Long Distance Company had approximately 11,300 customers. In the future RCN
intends to offer long distance telephone service predominantly to customers whom
it expects will eventually be connected to its own facilities.
Video Services. RCN offers a diverse line-up of high quality basic, premium
and pay-per-view video programming. Depending on the system, RCN offers from 61
to 110 channels. RCN's basic video programming package provides extensive
channel selection featuring all major cable and broadcast networks. RCN's
premium services include HBO, Cinemax, Showtime and The Movie Channel, as well
as supplementary channels such as HBO 2, HBO 3 and Cinemax 2. RCN's StarCinema,
available on RCN's advanced fiber optic networks, utilizes the latest
"impulse" technology allowing convenient impulse pay-per-view ordering of
the latest hit movies and special events instantly from the customer's
remote. RCN's "Music Choice" offers 30 different commercial-free music
channels delivered to the customer's stereo in digital CD quality sound.
As of September 30, 1998, RCN had approximately 58,300 subscribers for its
video programming services provided over advanced fiber optic networks. As of
such date, RCN also had approximately 31,400 connections attributable to the
wireless video system and approximately 161,200 connections attributable to the
hybrid fiber/coaxial cable systems.
Internet Access and Data Transmission. RCN's StarPass Internet service
provides access for personal computers to RCN's advanced fiber optic network for
a reliable high speed connection to provide access to electronic mail, World
Wide Web, Internet chat lines and newsgroups and remote access and file transfer
services. RCN provides data transmission services over its advanced fiber optic
network either via two-way dial-up modem over traditional telephone lines or via
cable modem utilizing RCN's high capacity network. RCN expects to commence
offering a high-speed Internet access service in certain markets during the
second quarter of 1998. RCN also offers private line point- to-point data
transmission services such as DS-1 and DS-3 with the capability to provide
higher speed connections as well. Following the recent acquisitions, RCN
believes it is the largest regional provider of Internet services in the
Northeast. As of September 30, 1998, RCN had approximately 474,000 Internet
subscribers.
Migration of Customers to Advanced Fiber Networks
RCN provides wireless video services to customers located near its advanced
fiber optic network in New York City and provides internet services and resale
telephone service with a view to extending the advanced fiber optic network and
fully activating RCN's own telephone switches to service many of those
customers. As RCN's advanced fiber optic network is extended into these areas or
buildings, customers receiving wireless video service in New York City will be
switched to the advanced fiber optic network from the wireless video network,
and the wireless video equipment will be used to provide service to other
customers in off-network premises. Similarly, as the advanced fiber optic
network is developed and switches are deployed, voice customers will be switched
to the advanced fiber optic network from resale accounts, thereby allowing RCN
to gain additional revenue (and larger margins) from originating and terminating
access fees and to control the related services and service quality.
Strategic Relationships
RCN has entered into a number of strategic alliances and relationships in
order to provide it with early entry and to reduce the cost of entry into the
market for telecommunications services. RCN expects to continue to pursue
opportunities that may be afforded by entering into strategic alliances to
facilitate network expansion and entry into new markets.
Recent Acquisition Transactions
On January 21, 1998, RCN entered into an Agreement and Plan of Merger among
RCN, Erols, Erol Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands
corporation, and ENET Holding, Inc., a Delaware corporation and a wholly owned
subsidiary of RCN, to acquire all of the outstanding shares of common stock of
Erols, a leading regional ISP serving residential and business subscribers in
targeted markets, including New York City, Philadelphia, Washington, D.C. and
Boston. The approximate total consideration was $29,200 in cash, 1,730,648
shares of RCN common stock plus the assumption and repayment of approximately
$5,100 of debt. Additionally, RCN converted certain Erols stock options to RCN
stock options. The transaction was completed in February 1998. See the RCN 8-K
and note 17 to the unaudited financial statements in the RCN September 10-Q.
On January 21, 1998, RCN, UNET Holdings, Inc. and UltraNet entered into an
Agreement and Plan of Merger whereby RCN agreed to acquire all of the
outstanding shares of common stock of UltraNet, a leading ISP in the Boston
area serving residential and business customers in New England. The total
consideration for the acquisition was approximately $7,000 in cash, 890,384
shares of RCN common stock, and $3,000 in deferred compensation. Additionally,
RCN converted certain UltraNet stock options to RCN stock options. The
transaction was completed in February 1998. See note 18 to the unaudited
financial statements in the RCN September 10-Q.
On February 27, 1998, RCN entered into an Agreement and Plan of Merger with
Lancit Media Entertainment Ltd. ("Lancit") and LME Acquisition Corporation
whereby RCN agreed to acquire all of the outstanding shares of common stock of
Lancit, a producer of high quality children's programming. The total
consideration for the transaction was $1 in cash and 366,596 in shares of RCN
common stock. All options to purchase Lancit common stock were cancelled. In
addition, certain warrants to purchase Lancit common stock became, by their
terms, warrants to purchase RCN common stock. The transaction was completed in
June 1998. See note 7 to the unaudited financial statements in the RCN September
10-Q.
On June 1, 1998, RCN entered into the Interport Merger Agreement with
Interport and INET Holding, Inc. and the individual shareholders of Interport
whereby RCN agreed to acquire all of the outstanding shares of common stock of
Interport. The total consideration for the transaction was $1,025 in cash and
396,442 shares of RCN common stock. In addition, Interport stock options were
converted into options to purchase shares of RCN Common Stock and units granting
the right to deferred delivery of shares of RCN common stock were issued. The
transaction was completed in June 1998. See note 8 to the unaudited financial
statements in the RCN September 10-Q.
On June 30, 1998, RCN entered into the JavaNet Merger Agreement with
JavaNet, David Epstein, Zachary Julius, JNET Holding Inc. and (with respect to
certain provisions only) John Halpern whereby RCN agreed to acquire all of the
outstanding shares of common stock of JavaNet, an Internet service provider with
approximately 32,000 subscribers in Connecticut, Maine and Massachusetts (at the
time of the acquisition). In connection with the transaction, RCN paid $2,370 in
cash and issued approximately 569,000 shares of RCN common stock to JavaNet
stockholders. All options to purchase JavaNet common stock were cancelled. The
transaction was completed on July 23, 1998. See note 9 to the unaudited
financial statements in the RCN September 10-Q.
Hybrid Fiber/Coaxial Cable Systems
RCN's hybrid fiber/coaxial cable systems were operated by C-TEC prior to
the spin-off. The following table summarizes the development of the hybrid
fiber/coaxial cable systems over the last five years:
As of
September
As of December 31, 30,
------------------------------------------- -------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
[S] [C] [C] [C] [C] [C] [C]
Homes Passed......... 118,216 119,761 282,836 283,940 290,612 242,614
Basic Subscribers.... 87,660 92,140 176,131 179,932 184,938 161,176
The service areas for these cable television networks enjoy favorable
customer demographics. The New York and New Jersey systems primarily serve
affluent bedroom communities in suburban New York City. The system in New York
State serves ten municipalities in Duchess, Putnam and Westchester Counties,
approximately 45 miles north of New York City. The New Jersey system serves 31
contiguous municipalities in Hunterdon, Mercer, Morris and Somerset Counties,
approximately 50 miles west of Manhattan. The Pennsylvania system, which is the
largest competitive cable television system in the United States, serves
Pennsylvania's Lehigh Valley area including the cities of Allentown, Bethlehem
and Easton, and virtually all of Lehigh and Northampton Counties, and is located
less than 10 miles west of RCN's New Jersey system. Certain of RCN's Hybrid
Fiber/Coaxial Cable systems are being upgraded to enable such networks to
provide voice, video and data services, including local telephone service,
through an RCN switch. When such conversion is completed, customers served by
such networks will be included within the "on- net connections" category. In
August 1997, RCN commenced offering resold local phone service, long distance
and Internet access to customers in the area served by its Hybrid Fiber/Coaxial
Cable System in the Lehigh Valley area. RCN expects that certain customers
served by such system will be migrated to "on-net" connections over time.
International
The Company owns a 40% interest in Megacable, the second largest cable
television provider in Mexico. Megacable owns 22 wireline cable systems, and one
multi-channel multipoint distribution service ("MMDS") cable system, in Mexico,
principally on the Pacific and Gulf coasts and including Guadalajara, the second
largest city in Mexico, Hermosillo, the largest city in the state of Sonora and
Veracruz, the largest city in the state of Veracruz. At September 30, 1998,
their wireline systems passed approximately 685,000 homes and served
approximately 210,000 subscribers. Megacable had revenues of $30.4 million
and $23.2 million for the years ended December 31, 1997 and 1996,
respectively and $27.9 million for the nine months ended September 30,
1998.
Additionally, Megacable presently holds a 99% interest in Megacable
Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license from the
Mexican government to allow it to build a fiber optic network in Mexico City,
Monterrey and Guadalajara. MCM intends to use this network to provide local
voice and high-speed data service in these cities, principally to commercial
customers in Mexico City.
Competition
Overview
RCN competes with a wide range of service providers for each of the
services that it provides. Virtually all markets for voice and video services
are extremely competitive, and RCN expects that competition will intensify in
the future. In each of the markets in which it offers voice and video
programming services, RCN faces significant competition often from larger,
better-financed incumbent local telephone carriers and cable companies, and RCN
often competes directly with incumbent providers which have historically
dominated their respective local telephone and cable television markets. These
incumbents presently have numerous advantages as a result of their historic
monopoly control of their respective markets. However, RCN believes that most
existing and potential competitors will, at least initially, provide narrower
service offerings over limited delivery platforms as compared to the wide range
of voice, video and data services that will be provided over RCN's fiber-based
networks, thereby providing RCN with an opportunity to achieve important market
penetration.
With respect to local telephone services, RCN competes with the incumbent
LECs, and alternative service providers including CLECs. Commercial mobile radio
services providers, including cellular carriers (such as Bell Atlantic Mobile
Services), personal communications services ("PCS") carriers (such as Sprint
Spectrum), and enhanced specialized mobile radio services ("ESMRS") providers
(such as NexTel), may also become a source of competitive local and long
distance telephone service. However, RCN believes these operators may primarily
use competitive access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the incumbent LECs with
whom they compete.
With respect to long distance telephone services, RCN faces, and expects to
continue to face, significant competition from the IXCs, including AT&T, Sprint
and MCI, which account for the majority of all long distance revenue. The major
long distance service providers benefit from established market share and from
established trade names brought about by nationwide advertising. RCN, however,
regards its long-distance service as a complementary service rather than a
principal source of revenue. Certain IXCs, including AT&T, MCI and Sprint, have
also announced their intention to offer local services in major U.S. markets
using their existing infrastructure in combination with resale of incumbent LEC
service, lease of unbundled local loops or other providers' services.
All of RCN's video services face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders. Among
the alternative video distribution technologies are home satellite dish
earth stations ("HSDs") which enable individual households to receive many
of the satellite-delivered program services formerly available only to
cable subscribers. Furthermore, the 1992 Act contains provisions, which
the FCC has implemented with regulations, to enhance the ability of cable
competitors to purchase and make available to HSD owners certain satellite-
delivered cable programming at competitive costs. RCN faces additional
competition from private satellite master antenna television ("SMATV")
systems that serve condominiums, apartment and office complexes and private
residential developments. The FCC and Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to RCN's various video distribution systems. These
technologies include, among others, DBS service whereby signals are
transmitted by satellite to receiving facilities located on customer
premises. RCN expects that its video programming services will face
growing competition from current and new DBS service providers. RCN also
competes with wireless program distribution services such as MMDS which use
low-power microwave frequencies to transmit video programming over-the-air
to subscribers. RCN is unable to predict whether wireless video services
will have a material impact on its operations.
Other new technologies, including Internet-based services, may become
competitive with services that RCN can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. Thus, it is not possible to
predict the effect that ongoing or future developments might have on the voice,
video and data industries or on the operations of RCN.
RCN believes that among the existing competitors, the incumbent LECs,
incumbent cable providers and the CLECs provide the most direct competition to
RCN in the delivery of "last mile" connections for voice and video services.
Incumbent LECs
In each of its target markets for advanced fiber optic networks, RCN faces,
and expects to continue to face, significant competition from the incumbent LECs
(including Bell Atlantic in New York City and Boston), which currently dominate
their local telephone markets. RCN competes with the incumbent LECs in its
markets for local exchange services on the basis of product offerings (including
the ability to offer bundled voice and video services), reliability,
state-of-the-art technology and superior customer service, as well as price. RCN
believes that its advanced fiber optic networks provide superior technology for
delivering high-speed, high-capacity voice, video and data services as compared
to the primarily copper wire based networks of the incumbent LECs. However, the
incumbent LECs (which have long-standing relationships with their customers)
have begun to expand the amount of fiber facilities in their networks and to
prepare to re-enter the long distance telephone service market. The recently
announced merger between SBC and Ameritech may also potentially increase the
competitive environment in the Boston and Washington, D.C. corridor if SBC
continues to pursue a nationwide strategy.
In addition, under the 1996 Act, and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
introduction of such competition, however, also establishes the predicate for
the incumbent RBOCs, such as Bell Atlantic, to provide in-region interexchange
long distance services. The incumbent RBOCs are currently allowed to offer
"incidental" long distance service in-region and to offer out-of-region long
distance service. Once the incumbent RBOCs are allowed to offer in-region long
distance services, they will also be in a position to offer single source local
and long distance service similar to that offered by RCN and proposed by the
three largest IXCs (AT&T, MCI and Sprint). RCN expects that the increased
competition made possible by regulatory reform will result in certain pricing
and margin pressures in the telecommunications services business.
RCN has sought, and will continue to seek, to provide a full range of local
voice services in competition with incumbent LECs in its service areas. RCN
expects that competition for local telephone services will be based primarily on
quality, capacity and reliability of network facilities, customer service,
response to customer needs, service features and price, and will not be based on
any proprietary technology. As a result of the comparatively recent installation
of RCN's advanced fiber optic networks, its dual path architecture and the
state-of-the-art technology used in its networks, RCN may have capital cost
and service quality advantages over some currently available local networks
relied upon by the incumbent LECs, as well as the competitive advantage
provided by the ability to deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a wide
variety of video services directly to subscribers in competition with RCN.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. RCN cannot predict the likelihood of success of video
service ventures by LECs or the impact on RCN of such competitive ventures.
Incumbent Cable Television Service Providers
Certain of RCN's video service businesses compete with incumbent wireline
cable companies in their respective service areas. In particular, RCN's advanced
fiber optic networks compete for cable subscribers with the major wireline cable
operators in New York City and Boston, primarily Time-Warner Cable in New York
City and Cablevision in Boston. RCN's wireless video service in New York City
competes primarily with Time-Warner Cable. RCN believes that the expanded
capacity and fiber-to-node architecture of its advanced fiber optic networks in
New York City and Boston make it better equipped to provide high-capacity
communications services than coaxial cable based networks utilizing "tree and
branch" architecture. RCN's Pennsylvania hybrid fiber/coaxial cable television
system competes with an alternate service provider, Service Electric, which also
holds a franchise for the relevant service area.
Since cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis, and the 1992 Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable systems, well-financed
businesses from outside the cable industry (such as the public utilities that
own certain of the poles on which cable is attached) may become competitors for
franchises or providers of competing services.
CLECs and Other Competitors
RCN also faces, and expects to continue to face, competition from other
potential competitors in certain of the markets in which RCN offers its
services. Other CLECs, such as Teleport Communications Group, compete for local
telephone services, although they have to date focused primarily on the market
for commercial customers rather than residential customers. In addition,
potential competitors capable of offering private line and special access
services also include other smaller long distance carriers, cable television
companies, electric utilities, microwave carriers, wireless telephone system
operators and private networks built by large end-users, including Winstar,
Dualstar and New Vision. However, RCN believes that, at least initially, it is
relatively unique in its markets in offering bundled voice, video and data
services to customers in residential areas, and in striving to connect
residential customers directly to its advanced fiber optic network.
Internet Services
The market for Internet access services is extremely competitive and highly
fragmented. No significant barriers to entry exist, and accordingly competition
in this market is expected to intensify. RCN competes (or in the future may
compete) directly or indirectly with (i) national and regional ISPs; (ii)
established online services; (iii) computer software and technology companies;
(iv) national telecommunications companies; (v) LECs; (vi) cable operators; and
(vii) nonprofit or educational ISPs, and some of these present or potential
future competitors have or can be expected to have substantially greater market
presence and financial, technical, marketing and other resources than RCN.
Certain of RCN's online competitors, including America Online, the Microsoft
Network and Prodigy, have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also introduced
competitive flat-rate pricing for unlimited access (without a set-up fee for at
least some period of time). Bell Atlantic has recently filed with the FCC a
petition for an exemption from a regulation prohibiting it from building a
high-speed network. Bell Atlantic's petition requests that such network,
which would serve as an Internet backbone, not be subject to pricing and
other regulatory restriction. The network would span the states from Maine
to Virginia. There can be no assurance that competition will not lead to
pricing pressures in the Internet business. For additional information on
the competitive environment in which RCN operates, see "Business--
Competition."
Other new technologies may become competitive with services that RCN can
offer. Cellularvision, a provider of LMDS, recently began offering wireless
Internet and video programming services in New York City and has announced plans
to offer telephone service in the future. Advances in communications technology
as well as changes in the marketplace and the regulatory and legislative
environment are constantly occurring. In addition, a continuing trend toward
business combinations and alliances in the telecommunications industry may also
create significant new competitors to RCN. RCN cannot predict whether
competition from such developing and future technologies or from such future
competitors will have a material impact on its operations.
Regulation
The telephone and video programming transmission services offered by RCN
are subject to federal, state and local government regulation. The 1996 Act,
which became effective in February 1996, introduced widespread changes in the
regulation of the communications industry, including the local telephone, long
distance telephone, data services, and television entertainment segments in
which RCN operates. The 1996 Act was intended to promote competition and
decrease regulation of these segments of the industry. The law delegates to both
the FCC and the states broad regulatory and administrative authority to
implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telephone and video programming communications businesses,
preempts many of the state barriers to local telephone service competition that
previously existed in state and local laws and regulations, and sets basic
standards for relationships between telecommunications providers.
Among other things, the 1996 Act removes barriers to entry in the local
exchange telephone market by preempting state and local laws that restrict
competition and by requiring LECs to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, and long distance companies. In addition, the 1996
Act provides relief from the earnings restrictions and price controls that have
governed the local telephone business for many years. The 1996 Act will also,
once certain thresholds are met, allow incumbent RBOCs to enter the long
distance market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require LECs to open
their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local exchange
services. Numerous parties appealed certain aspects of these regulations, and
the appeals were consolidated in the United States Court of Appeals for the
Eighth Circuit. On July 18, 1997, the Eighth Circuit found constitutional
challenges to certain practices implementing cost provisions of the
Telecommunications Act that were ordered by certain state PUCs to be premature;
vacated significant portions of the FCC's nationwide pricing rules; and confined
the use of combined unbundled network elements to instances where the requesting
carrier itself would do the combining. On October 14, 1997, the Eighth Circuit
issued a decision vacating additional FCC rules that will likely have the effect
of increasing the cost of obtaining the use of combinations of an incumbent
LEC's unbundled network elements. On January 26, 1998, the Supreme Court granted
a writ of certiorari under which it will review the July 18 Eighth Circuit
decision; it is expected (but not yet certain) that the Court will hear
arguments on this case in the fall of 1998. The Eighth Circuit decisions create
uncertainty about the rules governing pricing and terms and conditions of
interconnection agreements, and could make negotiating and enforcing such
agreements more difficult and protracted and may require renegotiation of
existing agreements. Prior to the Eighth Circuit decisions, RCN had
entered into interconnection agreements with Bell Atlantic, covering all of
its target market area, that are generally consistent with the FCC
guidelines, and those agreements remain in effect notwithstanding the
reversal of the FCC rules. There can be no assurance, however, that RCN
will be able to obtain or enforce future interconnection agreements, or
obtain renewal of existing agreements, on terms acceptable to RCN.
Certain RBOCs have also raised constitutional challenges to restrictions in
the 1996 Act preventing BOCs from entering the long distance market in their
home region. On December 31, 1997, the U.S. District Court for the Northern
District of Texas issued the SBC Decision finding that Sections 271 to 275 of
the 1996 Act are unconstitutional. These sections of the Act impose restrictions
on the lines of business in which the RBOCs may engage, including establishing
the conditions they must satisfy before they may provide in- region interLATA
telecommunications services. The District Court has stayed the SBC Decision
pending appeal. If the stay is lifted, the RBOCs (including Bell Atlantic, which
was permitted to intervene in the case) would be able to provide interLATA
services immediately without satisfying the statutory conditions. Although RCN
believes the factual assumptions and legal reasoning in the SBC Decision are
erroneous and therefore the decision will likely be reversed on appeal, there
can be no assurance of this outcome. If the SBC Decision were upheld on appeal
it may have an unfavorable effect on RCN's business for at least two reasons.
First, RBOCs currently have an incentive to foster competition within their
service areas so that they can qualify to offer interLATA services. The SBC
Decision removes this incentive by allowing RBOCs to offer interLATA service
without regard to their progress in opening their local markets to competition.
However, the SBC Decision would not affect other provisions of the Act which
create legal obligations for all incumbent LECs to offer interconnection and
network access, and therefore will not impair RCN's ability to compete in local
exchange markets. Second, RCN is legally able to offer its customers both long
distance and local exchange services, which the RBOCs currently may not do. This
ability to offer "one-stop shopping" gives RCN a marketing advantage that it
would no longer enjoy if the SBC Decision were upheld on appeal. RCN cannot
predict either the outcome of these or future challenges to the 1996 Act, any
related appeal of regulation or court decision, or the eventual effect on its
business or the industry in general.
The 1996 Act also makes far-reaching changes in the regulation of the video
programming transmission services offered by RCN, including changes to the
regulations applicable to video operators, the elimination of restrictions on
telephone company entry into the video business, and the establishment of a new
OVS regulatory structure for telephone companies and others to offer such
services. Under the 1996 Act, local telephone companies, including both
incumbent LECs such as Bell Atlantic, and CLECs such as RCN, may provide service
as traditional cable television operators subject to municipal cable television
franchises, or they may opt to provide their programming over non- franchised
open video systems subject to certain conditions, including, but not limited to,
making available a portion of their channel capacity for use by unaffiliated
program distributors and satisfying certain other requirements, including
providing capacity for public, educational and government channels, and payment
of a gross receipts fee equivalent to the franchise fee paid by the incumbent
cable television operator. RCN is one of the first CLECs to provide television
programming over an advanced fiber optic network pursuant to the OVS regulations
implemented by the FCC under the 1996 Act. As discussed below, RCN is currently
providing OVS service in the City of Boston, in the City of New York and in a
number of communities surrounding Boston. Starpower is negotiating similar
agreements in Washington and surrounding communities.
Need to Obtain and Maintain Permits, Building Access Agreements and Rights-
of-Way
In order to develop its networks, RCN must obtain local franchises and
other permits, as well as building access agreements and rights to utilize
underground conduit and pole space and other rights-of-way and fiber capacity
from entities such as incumbent local exchange carriers and other utilities,
railroads, long distance companies, state highway authorities, local governments
and transit authorities. There can be no assurance that RCN will be able to
maintain its existing franchises, permits and rights or to obtain and maintain
the other franchises, permits, building access agreements and rights needed to
implement its business plan on acceptable terms. Although RCN does not believe
that any of the existing arrangements will be canceled or will not be renewed
as needed in the near future, cancellation or non-renewal of certain of such
arrangements could materially adversely affect RCN's business in the affected
area. In addition, the failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under development, may affect RCN's ability to acquire or develop that network.
Regulation of Voice Services
RCN's voice business is subject to regulation by the FCC at the federal
level with respect to interstate telephone services (i.e., those that originate
in one state and terminate in a different state). State regulatory commissions
have jurisdiction over intrastate communications (i.e., those that originate and
terminate in the same state).
State Regulation of Intrastate Local and Long Distance Telephone Services.
RCN's intrastate telephone services are regulated by the public service
commissions or comparable agencies of the various states in which these services
are offered. RCN subsidiaries have received either permanent or interim
authority to offer intrastate telephone services, including local exchange
service, in Massachusetts, Delaware, New Jersey, New York, Pennsylvania,
Maryland, the District of Columbia, and Virginia (as well as in some neighboring
jurisdictions where RCN does not currently operate but may expand in the future)
and RCN has applied for authority to offer such services in New Hampshire.
Starpower has separately obtained similar authority in Maryland, Virginia and
the District of Columbia. RCN's resale agreements with Bell Atlantic have been
approved, pursuant to Section 252 of the Communications Act, by state regulatory
commissions in Delaware, the District of Columbia, Maine, Maryland,
Massachusetts, New York, New Jersey, New Hampshire, Pennsylvania, Rhode Island,
Vermont, and Virginia.
RCN Long Distance Company is authorized to offer intrastate long distance
services in Pennsylvania, New York, Massachusetts and 45 other states
nationwide. Pursuant to such authorizations, RCN Long Distance Company is
permitted to resell intrastate long distance services both to other carriers,
including RCN's local operating subsidiaries and Starpower for resale to their
end user subscribers, and to its own end user customers.
FCC Regulation of Interstate and International Telephone Services. RCN,
through several of its subsidiaries, including RCN Long Distance Company, may
also provide domestic interstate telephone services nationwide pursuant to
tariffs on file at the FCC, and has been authorized by the FCC under Section 214
of the 1996 Act to offer worldwide international services as well.
Local Regulation of Telephone Services. Municipalities also regulate
limited aspects of RCN's voice business by, for example, imposing various zoning
requirements and, in some instances, requiring telecommunications licenses,
franchise agreements and/or installation permits for access to local streets and
rights-of-way. In New York City, for example, RCN will be required to obtain a
telephone franchise in order to provide voice services using its advanced fiber
optic network facilities located in the streets of New York City (although
services may be provided over certain leased or resold facilities pending
receipt of a franchise).
Regulation of Video Services
Open Video Systems. In February 1997, RCN subsidiaries were certified to
operate OVS networks in the five boroughs of New York City and, as part of the
BECO joint venture, in Boston and 47 surrounding communities. Initiation of OVS
services is subject to completion of an open enrollment period for non-
affiliated video programmers to seek capacity on the systems and upon
negotiation of certain agreements with local governments. The initial open
enrollment period for both the New York City and Boston area systems has
expired. RCN executed an agreement with the City of Boston on June 2, 1997, and
initiated OVS service in the City on that day. Pursuant to its agreement with
the City of Boston, RCN will be required to pay a fee to the City equal to 5% of
video revenues. RCN has entered into similar OVS agreements or is in the process
of negotiating agreements with certain other Boston-area municipalities, either
to offer OVS services or franchised cable television services. RCN executed
an agreement with the City of New York on December 29, 1997 and has initiated
OVS service in the Borough of Manhattan pursuant to that agreement.
In areas where it offers video programming services as an OVS operator, RCN
is required to hold a 90-day open enrollment period every three years, during
which times RCN will be required to offer capacity on its network to other VPPs.
Under the OVS regulations, RCN must offer at least two-thirds of its capacity to
unaffiliated parties, if demand for such capacity exists during the open
enrollment period. In certain areas, RCN is in discussions with local municipal
authorities to explore the feasibility of obtaining a cable franchise in lieu of
an OVS agreement, and will consider providing RCN video service pursuant to
franchise agreements rather than OVS certification, if franchise agreements can
be obtained on terms and conditions acceptable to RCN. RCN will consider the
relative benefits of OVS certification versus local franchise agreements,
including the possible imposition of universal service requirements, before
making any such decisions. In addition, the current FCC rules concerning OVS are
subject to appeal in the United States Court of Appeals for the Fifth Circuit;
if certain aspects of the FCC's rules are overturned on appeal, the
determination of whether to operate as an OVS provider versus as a franchised
cable television operator may be affected. Moreover, the incumbent cable
television provider in Boston, Cablevision Systems, has requested that the FCC
permit it to obtain capacity on and information about RCN's Boston area OVS
network, and Time Warner, the incumbent cable television provider in certain
communities in the Boston area, has made a similar filing at the FCC with
respect to its request for capacity on and information about the Boston OVS
network. In a Memorandum Opinion Order released on April 28, 1998, the FCC's
Cable Services Bureau granted in part and denied in part Time Warner's petition.
RCN has sought review of certain aspects of this order. RCN will continue to
oppose these requests, but to the extent that the FCC were to grant any such
request(s), such a result would likely affect RCN's determination as to whether
to operate as an OVS provider versus as a franchised cable television operator.
Prior to its certification as an OVS provider, RCN offered limited video
programming services using the VDT services offered by MFS/WorldCom in Manhattan
and the City of Boston. In February 1997, the FCC held that MFS/WorldCom's
facilities did not qualify as video dialtone facilities entitled to an extension
of time to comply with the newly adopted OVS rules; nonetheless, the FCC did not
direct MFS/WorldCom and RCN to cease video programming distribution operations
over the MFS/WorldCom platform. One of the incumbent cable television companies
in New York City has filed a complaint with the New York Public Service
Commission challenging the former (pre-OVS) operations of RCN and WorldCom under
the VDT framework, which remains pending before that commission.
Wireless Video Services. RCN's 18 GHz wireless video services in New York
City are distributed using microwave facilities provided by Bartholdi Cable
pursuant to temporary authorizations issued to Bartholdi Cable by the FCC.
Bartholdi Cable has agreed to provide transmission services to RCN until RCN has
either converted the wireless video subscribers to its advanced fiber optic
network facilities or has obtained FCC authority to provide such services
pursuant to its own wireless radio licenses. In addition, Bartholdi Cable has
agreed to transfer to RCN the transmission equipment on demand. Bartholdi
Cable's obligation to provide transmission services is subject to Bartholdi
Cable having licenses from the FCC to provide such services. The qualifications
of Bartholdi Cable to hold certain of the licenses needed to provide
transmission services to RCN are at issue in an FCC proceeding in which an
Initial Decision was released on March 6, 1998. In the Initial Decision, the
Administrative Law Judge found Bartholdi Cable unqualified with respect to 15
such licenses. The Administrative Law Judge declared that the Initial Decision
would become effective 50 days after its release unless Bartholdi Cable filed
exceptions to the Initial Decision within 30 days of its release or the FCC
elected to review the case on its own motion. Bartholdi Cable filed exceptions
to the Initial Decision on April 7, 1998. Because of the uncertainty as to
Bartholdi Cable's right in the future to offer transmission services to RCN, RCN
filed its own license applications at the FCC for all of the microwave
transmission paths which are currently being used by Bartholdi Cable to provide
transmission services to RCN and, in light of the increased uncertainties
resulting from the Initial Decision in the FCC proceeding involving certain of
Bartholdi Cable's licenses, RCN expects now actively to pursue its license
applications. While RCN expects to receive authorizations to transmit over these
microwave paths, there can be no assurance that RCN will be able to offer
wireless video services pursuant to its own FCC licenses or that the FCC's
investigation will be resolved favorably. The failure to obtain such license or
resolve such proceedings would materially adversely affect RCN's wireless video
operations in New York City.
There can be no assurance that RCN will be able to obtain or retain all
necessary authorizations needed to construct advanced fiber optic network
facilities, to convert its wireless video subscribers to an advanced fiber optic
network or to offer wireless video services pursuant to its own FCC licenses.
Hybrid Fiber/Coaxial Cable. RCN's hybrid fiber/coaxial cable systems are
subject to regulation under the 1992 Act, which provides, among other things,
for rate regulation for cable services in communities that are not subject to
"effective competition," certain programming requirements, and broadcast signal
carriage requirements that allow local commercial television broadcast stations
to require a cable system to carry the station. Local commercial television
broadcast stations may elect once every three years to require a cable system to
carry the station ("must-carry"), subject to certain exceptions, or to withhold
consent and negotiate the terms of carriage ("retransmission consent"). A cable
system generally is required to devote up to one-third of its activated channel
capacity for the carriage of local commercial television stations whether
pursuant to the mandatory carriage or retransmission consent requirements of the
1992 Act. Local non-commercial television stations are also given mandatory
carriage rights. The FCC recently issued rules establishing standards for
digital television ("DTV"). Among other provisions, the FCC's rules require
television stations to simulcast their NTSC and DTV signals for a period of
years. During this simulcast period, it is unclear whether must-carry rules will
apply to DTV signals. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. Cable systems with 36 or more channels must
designate a portion of their channel capacity for commercial leased access by
third parties to provide programming that may compete with services offered by
the cable operator.
On September 8, 1997, RCN was notified by the FCC that it has ruled that
certain of RCN's upper levels of service for its New Jersey systems are
regulated levels of service and that RCN's rates for such levels of service have
exceeded the allowable rates under the FCC rate regulation rules which have been
effective since September 1993. RCN had treated these levels of service as
unregulated. RCN intends to contest this decision. RCN does not believe that the
ultimate resolution of this matter will have a material impact on its results of
operations or financial condition.
Because a cable communications system uses local streets and rights-of-way,
such cable systems are generally subject to state and local regulation,
typically imposed through the franchising process. The terms and conditions of
state or local government franchises vary materially from jurisdiction to
jurisdiction and generally contain provisions governing cable service rates,
franchise fees, franchise term, system construction and maintenance obligations,
customer service standards, franchise renewal, sale or transfer of the
franchise, territory of the franchisee and use and occupancy of public streets
and types of cable services provided. Local franchising authorities (state or
local, depending on the practice in individual states) may award one or more
franchises within their jurisdictions and prohibit non-grandfathered cable
systems from operating without a franchise in such jurisdictions. The
Communications Act also provides that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Communications Act limits the payment of franchise fees to
5% of revenues derived from cable operations and permits the cable operator to
obtain modification of franchise requirements by the franchise authority or
judicial action if warranted by changed circumstances.
RCN's ability to provide franchised cable television services is dependent
to a large extent on its ability to obtain and renew its franchise agreements
from local government authorities on generally acceptable terms. RCN currently
has 91 franchise agreements relating to the hybrid fiber/coaxial cable systems
in New York (outside New York City), New Jersey and Pennsylvania. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction, conditions of service, including
the number of channels, the provision of free service to schools and certain
other public institutions, and the maintenance of insurance and indemnity bonds.
These franchises provide for the payment of fees to the issuing authorities and
generally range from 3% to 5% of revenues. The duration of these outstanding
franchises presently varies up to the year 2011. To date, all of RCN's cable
franchises have been renewed or extended, generally at or prior to their stated
expirations and on acceptable terms. Approximately 39 of RCN's hybrid
fiber/coaxial cable systems' franchises are due for renewal within the next
three years. No assurance can be given that RCN will be able to renew its
franchises on acceptable terms. No one franchise accounts for more than 7% of
RCN's total revenue. RCN's five largest franchises account for approximately 27%
of RCN's total revenue.
The hybrid fiber/coaxial cable systems are also subject to certain service
quality standards and other obligations imposed by the FCC and, where effective
competition has not been demonstrated to exist, to rate regulation by the FCC as
well. RCN's cable television system in Pennsylvania has been operating in a
competitive cable environment for almost 30 years, with approximately 80% of the
homes passed having access to an alternate cable operator, Service Electric
Cable TV. As a result, RCN's Pennsylvania cable system is exempt from many FCC
cable television regulations, including rate regulation. Its other cable
television systems in New York State and New Jersey currently remain subject to
FCC rate regulation. With the passage of the 1996 Act, however, all cable
systems rates will be deregulated as effective competition is shown to exist in
the franchise area, or by March 31, 1999, whichever date is sooner. RCN
anticipates that the remaining provisions of the 1992 Act that do not relate to
rate regulation, such as the provisions relating to retransmission consent and
customer service standards, will remain in place and may serve to reduce the
future operating margins of RCN's hybrid fiber/coaxial cable television
businesses as video programming competition develops in its cable television
service markets.
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities can demonstrate that they adequately
regulate pole attachment rates. In the absence of state regulation, the FCC
administers pole attachment rates on a formula basis. In some cases, utility
companies have increased pole attachment fees for cable systems that have
installed fiber optic cables and that are using such cables for the distribution
of non-video services. The FCC concluded that, in the absence of state
regulation, it has jurisdiction to determine whether utility companies have
justified their demand for additional rental fees and that the Communications
Act does not permit disparate rates based on the type of service provided over
the equipment attached to the utility's pole. The 1996 Act and the FCC's
implementing regulations modify the current pole attachment provisions of the
Communications Act by immediately permitting certain providers of
telecommunications services to rely upon the protections of the current law and
by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility. The FCC has recently adopted new regulations to
govern the charges for pole attachments used by companies provided
telecommunications services, including cable operators. These new pole
attachment rate regulations will become effective five years after enactment of
the 1996 Act, and any increase in attachment rates resulting from the FCC's new
regulations will be phased in equal annual increments over a period of five
years beginning on the effective date of the new FCC regulations. The ultimate
outcome of these rulemakings and the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on RCN or its businesses
cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any satellite video
programmer affiliated with a cable company, or with a common carrier providing
video programming directly to its subscribers, from favoring an affiliated
company over competitors and require such programmers to sell their programming
to other multichannel video distributors. These provisions limit the ability of
program suppliers affiliated with cable companies or with common carriers
providing satellite delivered video programming directly to their subscribers to
offer exclusive programming arrangements to their affiliates. The Communications
Act also includes provisions, among others, concerning horizontal and vertical
ownership of cable systems, customer service, subscriber privacy, marketing
practices, equal employment opportunity, obscene or indecent programming,
regulation of technical standards and equipment compatibility.
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, syndicated
program exclusivity, network program non-duplication, registration of cable
systems, maintenance of various records and public inspection files, microwave
frequency usage, lockbox availability, sponsorship identification, antenna
structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast
children's programming, consumer protection and customer service, ownership
of home wiring, indecent programming, programmer access to cable systems,
programming agreements, technical standards, consumer electronics equipment
compatibility and closed captioning. The FCC has the authority to enforce
its regulations through the imposition of substantial fines, the issuance
of cease and desist orders and/or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate certain
transmission facilities often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable television
have previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that there will be
legislative proposals in the future by Congress and other governmental bodies
relating to the regulation of communications services.
Cable television systems are subject to federal compulsory copyright
licensing covering the retransmission of television and radio broadcast signals.
In exchange for filing certain reports and contributing a percentage of their
basic revenues to a federal copyright royalty pool, cable operators can obtain
blanket licenses to retransmit the copyrighted material on broadcast signals.
The data services business, including Internet access, is largely
unregulated at this time (apart from Federal, state, and local laws and
regulations applicable to businesses in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
Some jurisdictions have sought to impose taxes and other burdens on providers of
data services, and to regulate content provided via the Internet and other
information services. RCN expects that proposals of this nature will continue to
be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
additional costs on providers of Internet access service and other data services
to the extent they use local exchange telephone network facilities for access to
their customers, similar proposals may well be considered by the FCC or Congress
in the future.
The foregoing does not purport to describe all present and proposed
federal, state, and local regulations and legislation affecting the telephone
and video programming industries. Other existing federal regulations, copyright
licensing, and, in many jurisdictions, state and local franchise requirements,
are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in
which communications companies operate. The ultimate outcome of these
proceedings, and the ultimate impact of the 1996 Act or any final regulations
adopted pursuant to the new law on RCN or its businesses cannot be determined at
this time.
Employees
As of September 30, 1998, RCN had approximately 2,200 full-time employees
including general office and administrative personnel. RCN considers relations
with its employees to be good.
Legal Proceedings
On September 30, 1997, the Yee Family Trusts, as holders of C-TEC's
Preferred Stock Series A and Preferred Stock Series B, filed an action against
RCN, Commonwealth Telephone and Cable Michigan in the Superior Court of New
Jersey, Chancery Division. The complaint alleges that Commonwealth Telephone's
distribution of the common stock of RCN and Cable Michigan in connection
with the spin-off, inter alia, (1) violated the terms of the preferred
stock instrument; (2) constituted a fraudulent conveyance; (3) breached
the covenant of good faith and fair dealing allegedly owed plaintiffs; (4)
breached fiduciary duties allegedly owed plaintiffs; and (5) constitutes an
unlawful distribution under Pennsylvania law. On December 1, 1997, the
complaint was amended to allege that Commonwealth Telephone's distribution
of the common stock of RCN and Cable Michigan was an unlawful distribution
in violation of 15 Pa.C.S. 1551(b)(2). The plaintiffs are seeking to set
aside the alleged fraudulent conveyance and unspecified monetary damages
alleged to be in excess of $52 million. RCN believes this lawsuit is
without merit and intends to contest this action vigorously. On January 9,
1998, the defendants, including RCN, filed a Motion to Dismiss, or in the
Alternative, for Summary Judgment. On September 15, 1998 the court granted
RCN's motion with respect to the breach of fiduciary duty and unlawful
distribution claims, but denied the motion with respect to the plaintiffs'
other claims. As a result, two counts of the complaint were dismissed.
RCN's answer was subsequently filed. Settlement discussions are currently
in process. RCN can not be certain that these discussions will be
successful in settling this complaint.
In the normal course of business, there are various legal proceedings
outstanding, including both commercial and regulatory litigation. In the opinion
of management, these proceedings will not have a material adverse effect on the
results of operations or financial condition of RCN.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of RCN Corporation is based
upon the Certificate of Incorporation and Bylaws of RCN Corporation and by
applicable provisions of law. The following description is qualified in its
entirety by reference to RCN Corporation's Certificate of Incorporation and
Bylaws, which are filed as exhibits to the RCN 10-K.
Certain provisions of the Delaware General Corporation Law and RCN
Corporation's Certificate of Incorporation and Bylaws summarized in the
following paragraphs may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares held by shareholders.
Authorized Capital Stock
RCN Corporation's Certificate of Incorporation authorizes the issuance of
200 million shares of common stock, par value $1.00 per share, 400 million
shares of Class B Stock, par value $1.00 per share, and 25 million shares of
Preferred Stock par value $1.00 per share.
RCN Common Stock
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of common stock on the applicable record date is
entitled to receive such dividends as may declared by RCN Corporation's Board of
Directors out of funds legally available therefor, and, in the event of
liquidation, to share pro rata in any distribution of RCN Corporation's assets
after payment or providing for the payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Each holder of common stock is
entitled to one vote for each share held of record on the applicable record date
on all matters presented to a vote of shareholders, including the election of
directors. Holders of common stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities and
there are no conversion rights or redemption or sinking fund provisions with
respect to such stock. On September 30, 1998, there were approximately
65,201,765 shares of RCN common stock issued and outstanding. On March 9, 1998,
RCN Corporation's Board of Directors declared a one for one stock dividend. The
record date for the stock dividend was March 20, 1998. Shareholders of record at
the market close on that date received an additional share of common stock for
each share held. The distribution date for the stock dividend was April 3, 1998.
All share and per share data, stock option data, and market prices (including
historical trading prices) of the common stock included in this prospectus have
been restated to reflect this stock dividend. RCN's common stock is admitted for
trading on the NASDAQ.
RCN Corporation's Certificate of Incorporation contains no restrictions on
the alienability of the common stock. Except as disclosed in the section
entitled "Certain Statutory, Charter and Bylaw Provisions," RCN Corporation's
Certificate of Incorporation or Bylaws and the agreements and plans involving
RCN do not discriminate against any existing or prospective holder of such
securities as a result of such security holder owning a substantial amount of
securities.
RCN Class B Stock
RCN Corporation's Class B Stock is in all material respects identical to
its common stock except that (i) the Class B Stock is generally non-voting, (ii)
the common stock is convertible at the option of the holder into Class B Stock
and (iii) in certain mergers, distributions and other transactions in which the
holders of common stock and Class B Stock are entitled to receive equity
interests of one or more corporations (including RCN), the equity interests
distributed in respect of the common stock and Class B Stock may have rights and
privileges that are substantially equivalent to the rights and privileges of the
common stock and the Class B Stock, respectively. As of the date hereof,
there are no outstanding shares of Class B Stock and RCN does not have any
current plan or intention to issue any Class B Stock.
Preferred Stock
Under RCN Corporation's Certificate of Incorporation, the Board of
Directors has the authority to create one or more series of preferred stock, to
issue shares of preferred stock in such series up to the maximum number of
shares of preferred stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights, voting
rights, rights and terms of redemption, liquidation preferences, the number of
shares constituting any such series and the designation of such series. The
authorized shares of RCN Corporation's Preferred Stock, as well as authorized
but unissued shares of common stock and Class B common stock, are available for
issuance without further action by RCN's shareholders, unless shareholder action
is required by applicable law or by the rules of a stock exchange or quotation
system on which any series of RCN's stock may then be listed or quoted.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. The Certificate of
Incorporation and Bylaws of RCN Corporation provide for the Board of Directors
to be divided into three classes of directors. The term of office of the first
class expires at the 2001 annual meeting, the term of office of the second class
expires at the 1999 annual meeting, and the term of office of the third class
expires at the 2000 annual meeting. At each annual meeting held thereafter, a
class of directors will be elected to replace the class whose term has then
expired. As a result, approximately one-third of the members of the Board of
Directors will be elected each year and, except as described above, each of the
directors serves a staggered three-year term. See "Management--Executive
Officers and Directors." Moreover, as is permitted under the Delaware General
Corporation Law only in the case of a corporation having a classified board, the
Certificate of Incorporation and Bylaws of RCN Corporation provide that
directors may be removed only for cause.
These provisions could prevent a shareholder (or group of shareholders)
having majority voting power from obtaining control of the Board of Directors
until the second annual shareholders' meeting following the date the acquirer
obtains such voting power. Accordingly, these provisions could have the effect
of discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of RCN.
Shareholder Action by Written Consent; Special Meetings. The RCN
Corporation Certificate of Incorporation and Bylaws provide that no action
required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting, and that no action may be taken by
the written consent of shareholders in lieu of a meeting. The RCN Corporation
Certificate of Incorporation and Bylaws also provide that special meetings of
RCN's shareholders may be called only by the Board of Directors, the Chairman of
the Board or the Chief Executive Officer of the Company. These provisions may
make it more difficult for shareholders to take action opposed by the Board of
Directors.
Advance Notice Provisions. RCN Corporation's Bylaws establish an advance
written notice procedure for shareholders seeking to nominate candidates for
election as directors at an annual meeting of shareholders or to bring business
before an annual meeting of shareholders of RCN. The RCN Bylaws provide that
only persons who are nominated by or at the direction of the Board of Directors,
or by a shareholder who has given timely written notice to the Secretary of RCN
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of RCN. The RCN Bylaws also provide that at any meeting of
shareholders only such business may be conducted as has been brought before the
meeting by or at the direction of the Board of Directors or, in the case of an
annual meeting of shareholders, by a shareholder who has given timely written
notice to the Secretary of RCN of such shareholder's intention to bring such
business before such meeting. Under the RCN Bylaws, for any such shareholder
notice to be timely, such notice must be received at the principal executive
offices of RCN in writing not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days'
notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder must be received not later
than the close of business on the 10th day following the day on which such
notice or public disclosure was given or made. Under the RCN Bylaws, a
shareholder's notice must also contain certain information specified in the
RCN Bylaws. These provisions may preclude or deter some shareholders from
bringing matters before, or making nominations for directors at, an annual
meeting.
Preferred Stock. Under the RCN Certificate of Incorporation, the Board of
Directors will have the authority, without further shareholder approval, to
create one or more series of preferred stock, to issue shares of preferred stock
in such series up to the maximum number of shares of preferred stock authorized,
and to determine the preferences, rights, privileges and restrictions of any
series, including the dividend rights, voting rights, rights and terms of
redemption, liquidation preferences, the number of shares constituting any such
series and the designation of such series. Pursuant to this authority, the Board
of Directors could create and issue a series of preferred stock with rights,
privileges or restrictions having the effect of discriminating against an
existing or prospective holder of such securities as a result of such security
holder beneficially owning or commencing a tender offer for a substantial amount
of RCN common stock. One of the effects of authorized but unissued and
unreserved shares of capital stock may be to render more difficult or discourage
an attempt by a potential acquirer to obtain control of RCN by means of a
merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of RCN's management. The issuance of such shares of capital stock may
have the effect of delaying, deferring or preventing a change in control of RCN
without any further action by the shareholders of RCN.
Amendment of Certain Charter and Bylaw Provisions. The RCN Certificate of
Incorporation provides that the Board of Directors may adopt, amend or repeal
any provision of the RCN Bylaws. The RCN Certificate of Incorporation and the
RCN Bylaws also provide that RCN Bylaw provisions may be adopted, amended or
repealed by the affirmative vote of shareholders holding not less than 66 2/3%
of the total number of votes entitled to be cast in the election of directors.
Any amendment, modification or repeal of the provisions of the RCN
Certificate of Incorporation relating to the election and removal of directors,
the right to call special meetings, the prohibition on action by written
consent, amendment of the RCN Bylaws and the limitation of liability and
indemnification of officers and directors will require approval by the
affirmative vote of shareholders holding at least 66 2/3% of the total number of
votes entitled to vote generally in the election of directors.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of three years following the date that such
shareholder became an interested shareholder, unless (i) prior to such date
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding for purposes of determining the
number of shares outstanding, shares owned by (A) persons who are both directors
and officers and (B) employee stock plans in certain circumstances), or (iii) on
or after such date the business combination is approved by the board and
authorized at an annual or special meeting of shareholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested shareholder. A "business combination"
includes a merger, consolidation, asset sale, or other transaction resulting in
a financial benefit to the interested shareholder. An "interested shareholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock. The restrictions
imposed by Section 203 will not apply to a corporation if, among other things,
(i) the corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 or (ii) 12 months have
passed after the corporation, by action of its shareholders holding a majority
of the outstanding stock, adopts an amendment to its certificate of
incorporation or Bylaws expressly electing not to be governed by Section
203. RCN has not elected out of Section 203 and, therefore, the
restrictions imposed by Section 203 will apply to RCN. Prior to the spin-
off, the Board of Directors approved of Level 3 Telecom becoming an
interested shareholder and, consequently, Section 203 would not apply to
any business combination with Level 3 Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the Delaware General Corporation Law and the RCN
Certificate of Incorporation and the RCN Bylaws relate to the limitation of
liability and indemnification of directors and officers of RCN. These various
provisions are described below.
The RCN Certificate of Incorporation provides that RCN's directors are not
personally liable to RCN or its shareholders for monetary damages for breach of
their fiduciary duties as a director to the fullest extent permitted by the
Delaware General Corporation Law. Under the Delaware General Corporation Law,
directors would not be personally liable to RCN or its shareholders for monetary
damages for breach of their fiduciary duties as a director, except for (i) any
breach of the director's duty of loyalty to RCN or its shareholders, (ii) acts
or omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) any transaction from which the director derived improper
personal benefit or (iv) the unlawful payment of dividends or unlawful stock
repurchases or redemptions. This exculpation provision may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter shareholders or RCN from bringing a lawsuit against
directors of RCN for breach of their fiduciary duties as directors. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission.
The RCN Certificate of Incorporation also provides that each person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of RCN or is or was serving at the request of RCN as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified and held harmless by the Corporation to the
fullest extent permitted by the Delaware General Corporation Law. This right to
indemnification shall also include the right to be paid by RCN the expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by the Delaware General Corporation
Law. This right to indemnification shall be a contract right. RCN may, by action
of the Board of Directors, provide indemnification to such of the employees and
agents of RCN to such extent and to such effect as the Board of Directors
determines to be appropriate and authorized by the Delaware General Corporation
Law.
RCN purchases and maintains insurance on behalf of any person who is or was
a director, officer, employee or agent of RCN, or is or was serving at the
request of RCN as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or her and incurred by him or her in
any such capacity, or arising out of his or her status as such, whether or not
RCN would have the power or the obligation to indemnify him or her against such
liability under the provisions of the RCN Certificate of Incorporation.
SELLING SHAREHOLDERS
The shares offered hereby may be offered by the shareholders named herein
or by pledgees, donees, transferees or other successors in interest that receive
such shares as a gift, partnership distribution or other non-sale related
transfer. The table below sets forth certain information with respect to the
selling shareholders listed below and their beneficial ownership of shares as of
July 28, 1998. Except as specified in the table below, none of the selling
shareholders or their affiliates hold any positions, or offices or had any other
material relationships with RCN, or any of its predecessors or affiliates,
during the past three years. RCN's authorized capital stock includes common
stock, class B common stock and preferred stock. The economic rights of each
class of RCN's common equity are identical, but voting and conversion rights
differ. Holders of common stock are entitled to one vote per share and holders
of class B common stock are not entitled to vote. Shares of common stock are
convertible into shares of class B common stock. See "Description of Capital
Stock."
Number of Shares of RCN Common Stock
-----------------------------------------------------------
Owned prior Percentage of
to the Not Subject to Subject to Outstanding
Name Offering Lockup(1) Lockup(1) Shares
- ------------ ----------- -------------- ---------- -------------
Phillip Kim 97,765 0 97,765 *
Emanuel Kwahk 97,765 0 97,765 *
John Riordan 97,765 0 97,765 *
John Bult 56,220 56,220 0 *
Sherwin Goldman 46,927 46,927 0 *
- -------------------
* Less than 1% of outstanding shares.
(1) Pursuant to the Registration Rights Agreement, certain of the selling
shareholders have agreed that the shares of common stock issued to said
selling shareholders in connection with the acquisition of Interport will
not be transferable, subject to certain exceptions, prior to June 12, 1999.
The selling shareholders may sell all or part of the shares registered
hereunder and as a result no estimate can be given as to the number of shares
that will be held by any selling shareholder upon termination of any offering
made hereby.
All of the shares that may be sold hereunder were originally issued by RCN
connection with RCN's acquisition of Interport. The shares were issued pursuant
to an exemption from the registration requirements of the Securities Act of
1933, as amended, provided by Section 4(2) thereof. The shares are being
registered by the Company pursuant to a registration rights agreement between
the Company and the selling shareholders listed above, dated as of June 12, 1998
(the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, RCN agreed to prepare and
file with the Commission a Registration Statement providing for the sale by the
selling shareholders of shares from time to time on a delayed or continuous
basis pursuant to Rule 415 under the Act. Under the terms of the Registration
Rights Agreement, RCN has agreed to pay the fees and expenses incurred in
connection with the registration; provided, however, that RCN will not pay any
underwriting fees, discounts or commissions and fees and disbursements of
counsel for the selling shareholders attributable to the sale of the shares.
PLAN OF DISTRIBUTION
Any distribution hereunder of the shares by the selling shareholders may be
effected from time to time in one or more of the following transactions: (a)
through brokers, acting as principal or agent, in transactions (which may
involve block transactions) in The Nasdaq National Market or otherwise, in
special offerings, in the over-the-counter market, or otherwise, at market
prices obtainable at the time of sale, at prices related to such prevailing
market prices, at negotiated prices or at fixed prices, (b) to underwriters who
will acquire the shares for their own account and resell them in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale (any public offering
price and any discount or concessions allowed or reallowed or paid to dealers
may be changed from time to time), (c) directly or through brokers or agents in
private sales at negotiated prices, (d) to lenders pledged as collateral to
secure loans, credit or other financing arrangements and any subsequent
foreclosure, if any, thereunder, (e) through put or call options transactions
relating to the shares, (f) through short sales of shares or (g) by any other
legally available means. Also, offers to purchase shares may be solicited by
agents designated by the selling shareholders from time to time. Underwriters or
other agents participating in an offering made pursuant to this prospectus (as
amended or supplemented from time to time) may receive underwriting discounts
and commissions under the Securities Act, and discounts or concessions may be
allowed or reallowed or paid to dealers, and brokers or agents participating in
such transactions may receive brokerage or agent's commissions or fees.
The selling shareholders may effect sales of shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders and/or the
purchasers of the shares for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). At the time a
particular offering of any shares is made hereunder, to the extent required by
law, a prospectus supplement will be distributed which will set forth the amount
of shares being offered and the terms of the offering, including the purchase
price or public offering price, the name or names of any underwriters, dealers
or agents, the purchase price paid by any underwriter for any shares purchased
from the selling shareholders, any discounts, commissions and other items
constituting compensation from the selling shareholders and any discounts,
commissions or concessions allowed or filed or paid to dealers. The shares may
be sold from time to time in one or more transactions at a fixed offering price,
which may be changed, or at varying prices determined at the time of sale or at
negotiated prices. Such prices will be determined by the selling shareholders or
by agreement between the selling shareholders and underwriters or dealers, if
any. The selling shareholders also may, from time to time, authorize dealers,
acting as selling shareholders' agents, to solicit offers to purchase the shares
upon the terms and conditions set forth in any prospectus supplement.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold hereunder in such jurisdictions only through
registered or licensed brokers or dealers.
RCN has been advised that, as of the date hereof, the selling shareholders
have made no arrangement with any broker for the sale of their shares. The
selling shareholders and any underwriters, brokers or dealers involved in the
sale of the shares may be considered "underwriters" as that term is defined by
the Securities Act, although the selling shareholders disclaim such status.
Under the Registration Rights Agreement, RCN has agreed to indemnify the selling
shareholders, their officers, directors, partners, and agents, any underwriter
and each person or entity who controls such selling shareholder or underwriter,
as the case may be, against certain liabilities which may be incurred in
connection with the sale of the shares under this prospectus. In addition, the
selling shareholders have agreed to indemnify RCN against certain liabilities.
The Registration Rights Agreement also provides for rights of contribution if
such indemnification is not available. RCN has agreed to pay certain expenses
incident to the registration statement and the sale of the shares hereunder to
the public, other than commissions, fees and discounts of underwriters, agents
or dealers. RCN will not receive any proceeds from any sales of the shares
pursuant to this prospectus.
Under applicable rules and regulations under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), any person engaged in the distribution of
the shares may not simultaneously engage in market making activities with
respect to the common stock of RCN for a period of two business days prior to
the commencement of such distribution. In addition and without limiting the
foregoing, each selling shareholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of purchases and
sales of shares of RCN's common stock by the selling shareholders.
In connection with any underwritten offering, certain underwriters and/or
selling group members may engage in passive market making transactions in the
shares on NASDAQ in accordance with Regulation M under the Exchange Act.
Regulation M permits, upon the satisfaction of certain conditions, underwriters
and selling group members participating in a distribution that are also NASDAQ
market makers in the security being distributed to engage in limited market
making transactions during the period when Regulation M under the Exchange Act
would otherwise prohibit such activity. Regulation M prohibits underwriters and
selling group members engaged in passive market making, generally, from entering
a bid or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on NASDAQ by a market maker that is not participating in
the distribution. Under Regulation M, each underwriter and selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
calendar months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
LEGAL MATTERS
The validity of the shares of common stock in respect of which this
prospectus is being delivered will be passed on for RCN by Davis Polk &
Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, appearing in the RCN 10-K and incorporated by reference into this
registration statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon incorporated
by reference herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of Erols Internet, Inc. at December 31, 1996 and
1997 and for the period from August 1, 1995 (inception) to December 31, 1995 and
for the years ended December 31, 1996 and 1997, appearing in the RCN 8-K dated
May 8, 1998 and incorporated by reference into the registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon incorporated by reference herein, and are included in
reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
<TABLE>
<CAPTION>
<S> <C>
========================================================= ==============================================
No person has been authorized to provide you with any [LOGO]
information or to make any representations, other than
those contained in this prospectus, in connection with
the offering made hereby. If such information or RCN CORPORATION
representations are made to you, you may not rely on
them as having been authorized by RCN. Neither the
delivery of this prospectus nor any sale made Common Stock
hereunder implies that there has been no change in the
affairs of RCN since the date of this prospectus. This
prospectus is not an offer to sell securities and is not
soliciting an offer to buy securities in any jurisdiction ------------------------------------
where the offer or sale is not permitted.
---------------------- PROSPECTUS
------------------------------------
TABLE OF CONTENTS
Page
-----
Available Information...............................3
Incorporation of Certain Documents by
Reference........................................3 November , 1998
Prospectus Summary...................................
Risk Factors........................................8
Use of Proceeds....................................14
Dividends..........................................14
Selected Historical Consolidated Financial
Data............................................15
Unaudited Pro Forma Consolidated Statements of
Operations......................................19
Business...........................................25
Description of Capital Stock.......................42
Selling Shareholders...............................46
Plan of Distribution...............................47
Legal Matters......................................48
Experts............................................48
========================================================= ==============================================
</TABLE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Spin-off
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered
hereby. All amounts are estimates except the registration fee.
Amount to
be Paid
----------
Registration fee..................................... $ 1,720.76
Printing............................................. $15,000.00
Legal fees and expenses.............................. $50,000.00
Accounting fees and expenses......................... $20,000.00
Miscellaneous........................................ $ 5,000.00
----------
TOTAL........................................... $91,720.76
==========
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law, which enables a corporation in its original certificate of incorporation or
an amendment thereto to eliminate or limit the personal liability of a director
for violations of the director's fiduciary duty, except (i) for any breach of
the director's duty of loyalty to the corporation or it stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law (providing for liability of directors for the unlawful payment
of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law empowers the Company to
indemnify, subject to the standards set forth therein, any person in connection
with any action, suit or proceeding brought before or threatened by reason of
the fact that the person was a director, officer, employee or agent of such
company, or is or was serving as such with respect to another entity at the
request of such company. The Delaware General Corporation Law also provides that
the Company may purchase insurance on behalf of any such director, officer,
employee or agent.
RCN's Amended and Restated Articles of Incorporation provides in effect for
the elimination of the personal liability of RCN directors for breaches of
fiduciary duty and for the indemnification by the Company of each director and
officer of the Company, in each case, to the fullest extent permitted by
applicable law.
RCN purchases and maintains insurance on behalf of any person who is or was
a director, officer, employee or agent of RCN, or is or was serving at the
request of RCN as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or her and incurred by him or her in
any such capacity, or arising out of his or her status as such, whether or not
RCN would have the power or the obligation to indemnify him or her against such
liability under the provisions of the RCN Certificate of Incorporation.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No. Document
- ------- ---------------------------------------------------------------------
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable
Michigan, Inc. and RCN Corporation (incorporated by reference to
Exhibit 2.1 to Amendment No. 2 to RCN's Information Statement on
Form 10/A ("Form 10") filed on September 5, 1997)
2.2* Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan,
Inc. and the Registrant (incorporated by reference to Exhibit 10.1
to RCN's Form 10)
2.3* Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN
Corporation and ENET Holding, Inc. (incorporated by reference to
Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998 8-K")
filed on March 6, 1998)
2.4* Amendment No. 1 to Agreement and Plan of Merger dated as of January
21, 1998 among Erols Internet, Inc., Erol Onaran, Gold & Appel
Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1* Indenture dated as of February 6, 1998 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the 9.80%
Senior Discount Notes due 2008 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission
File No. 333-48487) ("1998 Form S-4") filed on March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008, Series B (included
in Exhibit 4.1) (incorporated by reference to Exhibit 4.2 to RCN's
1998 Form S-4)
4.3* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect to
the 10% Senior Notes due 2007 (incorporated by reference to Exhibit
4.1 to RCN's Registration Statement on Form S-4 (Commission File
No. 333-41081) ("Form S-4") filed on November 26, 1997)
4.4* Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit
4.4) (incorporated by reference to Exhibit 4.2 to RCN's Form S-4)
4.5* Indenture dated as of October 17, 1997 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the
11 1/8% Senior Discount Notes due 2007 (incorporated by reference to
Exhibit 4.3 to RCN's Form S-4)
4.6* Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included
in Exhibit 4.6) (incorporated by reference to Exhibit 4.4 to RCN's
Form S-4)
4.7* Indenture dated June 24, 1998 between the Company, as Issuer, and The
Chase Manhattan Bank, as Trustee, with respect to the 11% Senior
Discount Notes due 2008 (incorporated by Reference to Exhibit 4.8
to RCN's Registration Statement on Form S-1 (Commission File No.
333-55673))
4.8* Form of 11% Senior Discount Note due 2008 (included in
Exhibit 4.8) (incorporated by reference to Exhibit 4.8 to
RCN's Registration Statement on Form S-1 (Commission File
No. 333-55673))
4.9* Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as
Trustee under the Indenture (as defined therein), and the Company
(incorporated by reference to Exhibit 4.6 to RCN's Form S-4)
4.10* Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems,
Inc., ComVideo Systems, Inc., C-TEC Cable Systems of New York, Inc.
and First Union National Bank, as agent** (incorporated by reference
to Exhibit 4.1 to RCN's Form 10)
4.11* Registration Rights Agreement dated as of June 12, 1998 among certain
shareholders of Interport Communications Corp. and RCN Corporation
(incorporated by reference to Exhibit 4.12 to the 1998 Form S-1)
5.1* Opinion of Davis Polk & Wardwell
11.1* Statement regarding Computation of Per Share Earnings (included in the
Notes to the Consolidated Financial Statements)
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to
Erols Internet, Inc.
24.1* Power of Attorney (included on the signature page of the Registration
Statement)
- --------
* Previously filed.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in paragraph
(i) and (ii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this registration
statement.
- --------
**Exhibits and schedules which have not been filed with Exhibit 4.10 will be
provided to the Commission by the Registrant upon request.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby understands that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrants pursuant to the
foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused
this amendment to the registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Princeton, State
of New Jersey, on November 30, 1998.
RCN CORPORATION
By: /s/ Bruce C. Godfrey
-----------------------------------
Bruce C. Godfrey
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- ---------------------------- -----------------
*
- --------------------------
David C. McCourt Director, Chairman and Chief November 30, 1998
Executive Officer
*
- --------------------------
Michael J. Mahoney Director, President and Chief November 30, 1998
Operating Officer
/s/ Bruce C. Godfrey
- --------------------------
Bruce C. Godfrey Director, Executive Vice November 30, 1998
President and Chief Financial
Officer
*
- --------------------------
James Q. Crowe Director November 30, 1998
*
- --------------------------
Alfred Fasola Director November 30, 1998
*
- --------------------------
Stuart E. Graham Director November 30, 1998
*
- --------------------------
Richard R. Jaros Director November 30, 1998
*
- --------------------------
Thomas May Director November 30, 1998
*
- --------------------------
Thomas P. O'Neill, III Director November 30, 1998
*
- --------------------------
Eugene Roth Director November 30, 1998
*
- --------------------------
Walter Scott, Jr. Director November 30, 1998
*
- --------------------------
Michael B. Yanney Director November 30, 1998
*
- --------------------------
Ralph S. Hromisin Senior Vice President and November 30, 1998
Chief Accounting Officer
* By: /s/ Bruce C. Godfrey
--------------------------
Bruce C. Godfrey
Attorney-in-Fact
EXHIBIT INDEX
Exhibit
No. Document
- ------- ---------------------------------------------------------------------
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable
Michigan, Inc. and RCN Corporation (incorporated by reference to
Exhibit 2.1 to Amendment No. 2 to RCN's Information Statement on
Form 10/A ("Form 10") filed on September 5, 1997)
2.2* Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan,
Inc. and the Registrant (incorporated by reference to Exhibit 10.1
to RCN's Form 10)
2.3* Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN
Corporation and ENET Holding, Inc. (incorporated by reference to
Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998 8-K")
filed on March 6, 1998)
2.4* Amendment No. 1 to Agreement and Plan of Merger dated as of January
21, 1998 among Erols Internet, Inc., Erol Onaran, Gold & Appel
Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1* Indenture dated as of February 6, 1998 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the 9.80%
Senior Discount Notes due 2008 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission
File No. 333-48487) ("1998 Form S-4") filed on March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008, Series B (included
in Exhibit 4.1) (incorporated by reference to Exhibit 4.2 to RCN's
1998 Form S-4)
4.3* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect to
the 10% Senior Notes due 2007 (incorporated by reference to Exhibit
4.1 to RCN's Registration Statement on Form S-4 (Commission File
No. 333-41081) ("Form S-4") filed on November 26, 1997)
4.4* Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit
4.4) (incorporated by reference to Exhibit 4.2 to RCN's Form S-4)
4.5* Indenture dated as of October 17, 1997 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the
11 1/8% Senior Discount Notes due 2007 (incorporated by reference to
Exhibit 4.3 to RCN's Form S-4)
4.6* Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included
in Exhibit 4.6) (incorporated by reference to Exhibit 4.4 to RCN's
Form S-4)
4.7* Indenture dated June 24, 1998 between the Company, as Issuer, and The
Chase Manhattan Bank, as Trustee, with respect to the 11% Senior
Discount Notes due 2008 (incorporated by Reference to Exhibit 4.8
to RCN's Registration Statement on Form S-1 (Commission File No.
333-55673))
4.8* Form of 11% Senior Discount Note due 2008 (included in
Exhibit 4.8) (incorporated by reference to Exhibit 4.8 to
RCN's Registration Statement on Form S-1 (Commission File
No. 333-55673))
4.9* Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as
Trustee under the Indenture (as defined therein), and the Company
(incorporated by reference to Exhibit 4.6 to RCN's Form S-4)
4.10* Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems,
Inc., ComVideo Systems, Inc., C-TEC Cable Systems of New York, Inc.
and First Union National Bank, as agent** (incorporated by reference
to Exhibit 4.1 to RCN's Form 10)
4.11* Registration Rights Agreement dated as of June 12, 1998 among certain
shareholders of Interport Communications Corp. and RCN Corporation
(incorporated by reference to Exhibit 4.12 to the 1998 Form S-1)
5.1* Opinion of Davis Polk & Wardwell
11.1* Statement regarding Computation of Per Share Earnings (included in the
Notes to the Consolidated Financial Statements)
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to
Erols Internet, Inc.
24.1* Power of Attorney (included on the signature page of the Registration
Statement)
- --------
* Previously filed.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this
Registration Statement of RCN Corporation on Form S-3 and the related
Prospectus, of our report dated March 13, 1998, on our audits of the
consolidated financial statements of RCN Corporation as of December 31, 1997
and 1996 and for the years ended December 31, 1997, 1996 and 1995. We also
consent to the reference to our Firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
_____________________________
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 25, 1998
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption
"Experts" in the Registration Statement (Form S-3 No. 333-61223) to be filed
on or about November 25, 1998 and related Prospectus of RCN Corporation for the
registration of 396,442 shares of RCN Corporation's common stock and to the
incorporation by reference therein of our report dated January 15, 1998,
except for Note 10, as to which the date is February 20, 1998, on the
financial statements of Erols Internet, Inc. included in the RCN Corporation
Current Report on Form 8-K dated May 8, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
--------------------------
Ernst & Young LLP
Vienna, Virginia
November 24, 1998
