<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 28, 1998
28,889,584 Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 28, 1998 computed by reference to closing price as reported by NASDAQ
for Common Stock ($58.75 per share)
$ 914,684,566 Common Stock
Documents Incorporated by Reference
1. Proxy Statement for 1998 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K or any amendment to this
Form 10-K.
<PAGE>
The information required under Item 13 of Part III is included in the
definitive Proxy Statement to Registrant's Annual Meeting of Shareholders to be
filed by Registrant with the Commission pursuant to Section 14 (a) of the 1934
Act, and is hereby specifically incorporated herein by reference thereto.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on form 8-K.
Item 14 (a)(1) Financial Statements:
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows for Years Ended December 31, 1997,
1996 and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Changes in Common Shareholders' Equity for
Years Ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
Report of Independent Accountants
Item 14 (a)(2) Financial Statement Schedules:
Description
Condensed Financial Information of Registrant for the Year Ended
December 31, 1997. (Schedule I)
Valuation and Qualifying Accounts and Reserves for the Years Ended
December 31, 1997, 1996 and 1995 (Schedule II)
All other financial statement schedules not listed have been omitted
since the required information is included in the consolidated financial
statements or the notes thereto, or are not applicable or required.
Item 14 (a)(3) Exhibits:
Exhibits marked with an asterisk are filed herewith and are listed in the
index to exhibits of this Form 10-K/A. The remainder of the exhibits have been
filed with the Commission and are incorporated herein by reference.
(2) Plan of acquisition, reorganization, arrangement and Report on Form 8-K
(a) Form of Distribution Agreement among C-TEC Corporation, Cable Michigan,
Inc. and the Registrant is incorporated herein by reference to Exhibit 2.1
to the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(b) 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 the
Company's Current Report on Form 8-K ("Form 8-K") filed on March 6, 1998)
(Commission No. 0-22825.)
(c) 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 the Company's Form 8-K) (Commission File No. 0-22825.)
(3) Articles of Incorporation and By-laws
(a) Form of Amended and Restated Articles of Incorporation of the Registrant
are incorporated herein by reference to Exhibit 3.1 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(b) Form of Amended and Restated Bylaws of the Registrant are incorporated
herein by reference to Exhibit 3.2 to the Company's Amendment No. 2 to
Form 10/A filed September 5, 1997 (Commission File No. 0-22825.)
(4) Instruments defining the rights of security holders, including indentures
(a) 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 is incorporated herein
<PAGE>
by reference to Exhibit 4.1 to the Company's Amendment No. 2 to Form 10/A
filed September 5, 1997 (Commission File No. 0-22825.)
4(b) 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 the
Company's Registration Statement on Form S-4 ("1998 Form S-4") filed on
March 23, 1998) (Commission File No. 0-22825.)
4(c) Form of 9.80% Senior Discount Notes due 2008, Series B (included in
Exhibit 4.1) (incorporated by reference to Exhibit 4.2 to the Company's
1998 Form S-4) (Commission File No. 0-22825.)
4(d) Registration Rights Agreement dated as of February 6, 1998 by and among
the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Brothers Inc. and NationsBanc Montgomery Securities, Inc., as
Initial Purchasers (incorporated by reference to Exhibit 4.3 to the
Company's 1998 Form S-4) (Commission File No. 0-22825.)
4(e) 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 the Company's
Registration Statement on Form S-4 ("Form S-4") filed on November 26,
1997) (Commission File No. 0-22825.)
4(f) Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4)
(incorporated by reference to Exhibit 4.2 to the Company's Form S-4)
(Commission File No. 0-22825.)
4(g) 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 the
Company's Form S-4) (Commission File No. 0-22825.)
4(h) 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 the Company's
Form S-4) (Commission File No. 0-22825.)
4(i) 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 the Company's Form S-4) (Commission File No. 0-22825.)
(10) Material Contracts
(a) Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc.
and the Registrant is incorporated herein by reference to Exhibit 10.1 to
the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(b) Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber
Systems/McCourt, Inc. and RCN Telecom Services of Massachusetts, Inc. is
incorporated herein by reference to Exhibit 10.2 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(c) Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber
Systems of New York, Inc. and RCN Telecom Services of New York, Inc. is
incorporated herein by reference to Exhibit 10.3 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(d) Telephone Service to Reseller Agreement for Boston among Metropolitan
Fiber Systems/McCourt, Inc. and RCN Telecom Services of Massachusetts,
Inc. is incorporated herein by reference to Exhibit 10.4 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(e) Telephone Service to Reseller Agreement for New York among Metropolitan
Fiber Systems of New York, Inc. and RCN Telecom Services of New York, Inc.
is incorporated herein by reference to Exhibit 10.5 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(f) OVS Agreement dated May 8, 1997 between RCN Telecom Services, Inc. and MFS
Communication Company, Inc. is incorporated herein by reference to Exhibit
10.6 to the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(g) Joint Venture Agreement dated as of December 23, 1996 between RCN Telecom
Services, Inc. and Boston Energy Technology Group, Inc. is incorporated
herein reference by Exhibit 10.7 to the Company's Amendment No. 2 to Form
10/A filed September 5, 1997 (Commission File No. 0-22825.)
(h) Amended and Restated Operating Agreement of RCN-BecoCom, LLC dated as of
June 17, 1997 is incorporated herein by reference to Exhibit 10.8 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
File No. 0-22825.)
(i) Management Agreement dated as of June 17, 1997 among RCN Operating
Services, Inc. and BecoCom, Inc. is incorporated herein by reference to
Exhibit 10.9 to the Company's Amendment No.2 to Form 10/A filed September
5, 1997 (Commission File No. 0-22825.)
(j) Construction and Indefeasible Right of Use Agreement dated as of June 17,
1997 between BecoCom, Inc. and RCN-BecoCom, LLC is incorporated herein by
reference to Exhibit 10.10 to the Company's Amendment No. 2 to Form 10/A
filed September 5, 1997 (Commission File No. 0-22825.)
(k) License Agreement dated as of June 17, 1997 between Boston Edison Company
and BecoCom, Inc. is incorporated herein by reference to Exhibit 10.11 to
the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(l) Joint Investment and Non-Competition Agreement dated as of June 17, 1997
among RCN Telecom Services of Massachusetts, Inc., BecoCom, Inc. and RCN-
BecoCom, LLC is incorporated herein by reference to Exhibit 10.12 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
File No. 0-22825.)
*(m) Amended and restated Operating Agreement of Starpower Communications,
L.L.C. by and between Pepco Communications, L.L.C. and RCN Telecom
Services of Washington, D.C. Inc. dated October 28, 1997.
<PAGE>
*(21) Subsidiaries of the Registrant
*(23) Consent of Independent Accountants
*(24) Powers of Attorney
*(27 - 27.4) Financial Data Schedules
Item 14.(b) Reports on Form 8-K
The Company filed a Form 8-K on January 2, 1998 regarding a joint venture
entered into on December 18, 1997, with a subsidiary of Potomac Electric Power
Company. The joint venture was established to provide Washington, D.C.
area residents and businesses local and long-distance telephone, cable
television, and Internet services as a package from a single source.
The Company filed a Form 8-K on February 5, 1998 regarding 1) the Agreement and
Plan of Merger entered into on January 21, 1998 among the Company, Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A. and ENET Holding, Inc.,
a wholly-owned subsidiary of the Company, and 2) an Agreement and Plan of Merger
entered into on the same day between the Company, UNET Holding, Inc., a wholly-
owned subsidiary of the Company, and Ultranet Communications, Inc.
The Company filed a Form 8-K on March 6, 1998 regarding the completion on
February 20, 1998 of the acquisition of all of the outstanding shares of common
stock of Erols Internet Inc.
On May 8, 1998, the Company filed an 8-K to file the required financial
statements and the proforma financial statements related to the Erols
acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 2, 1998 RCN Corporation
By: \s\ David C. McCourt
-------------------------
David C. McCourt
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
\s\ David C. McCourt Chairman and Chief June 2, 1998
- -------------------------- Executive Officer
David C. McCourt
\s\ Michael J. Mahoney President and Chief June 2, 1998
- -------------------------- Operating Officer
Michael J. Mahoney
\s\ Bruce C. Godfrey Executive Vice President June 2, 1998
- -------------------------- and Chief Financial Officer
Bruce C. Godfrey
\s\ Ralph S. Hromisin Vice President and June 2, 1998
- -------------------------- Chief Accounting Officer
Ralph S. Hromisin
<PAGE>
SCHEDULE 1
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
Sales $40
Costs and expenses, excluding
depreciation and amortization 498
----------
Gross Profit (Loss) (458)
Depreciation and amortization -
----------
Operating income (loss) (458)
Interest income 661
Interest expense (12,791)
Other income/(expense), net -
----------
(Loss) income before income taxes (12,588)
(Benefit) provision for income taxes (4,388)
Equity in (loss) of
consolidated entities (44,191)
----------
Net (loss) $ (52,391)
==========
Earnings (loss) per average common share:
Net (loss) to shareholders $ (0.95)
Average shares outstanding 54,965,716
<PAGE>
SCHEDULE 1
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
ASSETS
Current assets
Cash and temporary cash investments $ -
Accounts receivable from related parties 3,291
Accounts receivable 1,977
Prepayments & other 211
Investments restricted for debt service 22,500
---------------
Total current assets 27,979
Investments restricted for debt service 39,411
Investments 859,271
Debt issuance cost 19,188
Deferred charges and other assets 2,877
---------------
Total assets $948,726
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 4,034
Accrued interest 4,687
Accrued expenses 318
---------------
Total current assets 9,039
Long-term debt 583,103
Common stock 27,495
Retained earnings (17,116)
Additional paid in capital 349,261
Cumulative translation adjustment (3,056)
---------------
Total liabilities and shareholders' equity $948,726
===============
<PAGE>
SCHEDULE 1
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
YTD 1997
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($52,391)
Deferred income taxes and investment tax credits (2,877)
Working capital 2,749
Equity in loss of consolidated entity 44,191
Noncash accretion of discounted senior notes 8,103
--------------
Net cash (used in) operating activities (225)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions 167
Other 17
--------------
Net Cash Provided by investing activities 184
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 575,000
(Increase) in cash restricted for debt service (61,250)
Financing costs (19,188)
Transfer (to) CTE (494,751)
Proceeds from exercise of stock options 230
--------------
Net cash provided by financing activities 41
--------------
Net increase/(decrease) in cash and temporary cash investments 0
Beginning cash & temporary cash investments 0
--------------
Ending cash & temporary cash investments $0
==============
<PAGE>
RCN CORPORATION SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ---------- ---------- ----------
ADDITION
----------------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------ ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS-
DEDUCTED FROM ACCOUNTS RECEIVABLE
IN THE CONSOLIDATED BALANCE SHEETS
1997 $861 $2,732 $997 $2,456 $2,134
1996 $607 $1,788 ($556) $978 $861
1995 $809 $614 ($619) $197 $607
ALLOWANCE FOR DEFERRED TAX ASSETS-
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS
1997 3,691 5,777 -- 1,064 8,404
1996 2,022 1,921 26 278 3,691
1995 1,474 649 -- 101 2,022
</TABLE>
<PAGE>
RCN CORPORATION
SELECTED FINANCIAL DATA
Thousands of Dollars Except Per Share Amounts
For the Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 127,297 $104,910 $ 91,997 $ 59,500 $ 49,504
Income (loss) from continuing operations (52,391) (5,989) 2,114 3,653 12,087
Income (loss) per average common share
from continuing operations $ (0.95) $ (0.11) $ 0.04 ($1.74) ($1.50)
Dividends per share - - - - -
Total assets 1,150,992 628,085 649,610 568,586 291,634
Long-term debt, net of current maturities 686,103 131,250 135,250 154,000 181,500
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Certain statements contained in this Annual Report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. Such forward-looking statements include, in
particular, statements made as to plans to develop networks and upgrade
facilities, the market opportunity presented by markets targeted by the Company,
the Company's intention to connect certain wireless video, resale telephone and
Internet service customers to its advanced fiber optic networks, the development
of the Company's businesses, the markets for the Company's services and
products, the Company's anticipated capital expenditures, the Company's
anticipated sources of capital and effects of regulatory reform and competitive
and technological developments. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Such
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
GENERAL
The Company is developing networks that are capable of providing a full range
of high speed, high capacity telecommunications services, including voice, video
programming and data services including high speed Internet access. The Company
intends to provide these services individually or in bundled service packages
primarily to residential customers in high density areas and also seeks to serve
certain commercial accounts on or near its networks. In 1997, the Company
commenced providing service through advanced fiber optic network facilities in
New York City and Boston, and the Company is developing an advanced fiber
network in Washington, D.C. The Company also has hybrid fiber/coaxial cable
television operations in New York (outside New York City), New Jersey and
Pennsylvania, wireless video operations in New York City, and certain other
operations, including Internet as well as local and long distance telephone.
The negative operating cash flow from the Company's advanced fiber optic
network business has resulted primarily from expenditures associated with the
development of the Company's operational infrastructure and marketing expenses.
The Company expects it will continue to experience negative operating cash flow
while it continues to invest in its networks and until such time as revenue
growth is sufficient to fund operating expenses. The Company expects to achieve
positive operating margins over time by (i) increasing the number of customers
it serves, (ii) increasing the number of connections per customer by cross
marketing its services and promoting bundled service options and therefore
increasing the revenue per customer, (iii) lowering the costs associated with
new subscriber additions and (iv) reducing the cost of providing services by
capturing economies of scale. The Company expects its operating revenues will
increase in 1998 through internal growth of its current advanced fiber optic
networks; however, the Company also expects negative operating cash flow will
increase for some period of time as the Company initiates network development in
Washington, D.C. and expands its current networks. When the Company makes its
initial investment in a new market, the operating losses typically increase as
the network and sales force are expanded to facilitate growth. The Company's
ability to generate positive cash flow in the future will depend on the extent
of capital expenditures in current and additional markets, the ability of the
joint ventures to generate revenues and cash flow, competition in the Company's
markets and any potential adverse regulatory developments. The Company will be
dependent on various financing sources to fund its growth as well as continued
losses from operations. There can be no assurance that such funding will be
available, or available on terms acceptable to the Company. See "Liquidity and
Capital Resources."
<PAGE>
The terms of the Company's joint ventures require the mutual consent of the
Company and its joint venture partner to distribute or advance funds to the
Company. The Company's debt agreements allow subsidiaries and joint ventures to
incur indebtedness for network buildout costs, which indebtedness may contain
limitations on the subsidiaries' and the joint venture's ability to pay
dividends and distributions to the Company. Although the joint ventures have
not had a significant impact on the Company's cash flows in the periods
presented, cash flows available to the Company in future periods will be
affected by the extent to which operations are conducted through joint ventures.
Due to the degree of control that the Company has in the joint ventures, RCN
accounts for the BECO joint venture on a consolidated basis and Starpower under
the equity method of accounting.
Prior to September 30, 1997, the Company was operated as part of C-TEC. On
September 30, 1997, C-TEC distributed 100% of the outstanding shares of common
stock of its wholly owned subsidiaries, RCN Corporation ("RCN") and Cable
Michigan, Inc. ("Cable Michigan") to holders of record of C-TEC's Common Stock
and C-TEC's Class B Common Stock as of the close of business on September 19,
1997 (the "Distribution") in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN
consists primarily of C-TEC's high growth bundled residential voice, video and
Internet access operations in the Boston to Washington, D.C. corridor, its
existing New York, New Jersey and Pennsylvania cable television operations, a
portion of its long distance operations and its international investment in
Megacable, S.A. de C.V. ("Megacable"). C-TEC, RCN and Cable Michigan have
entered into certain agreements providing for the Distribution, and governing
various ongoing relationships between the three companies, including a
distribution agreement and a tax-sharing agreement. The historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations or the financial condition of the
Company which would have resulted had the Company been an independent, public
company during the reporting periods, and are not necessarily indicative of the
Company's future operating results or financial condition.
Certain of the Company's businesses were acquired by C-TEC and transferred to
the Company in connection with the Distribution. On August 30, 1996, a
subsidiary of C-TEC acquired an 80.1% interest in Freedom New York, L.L.C.
("Freedom") and all related rights and liabilities from Kiewit Telecom Holdings,
Inc. Freedom held the wireless cable television business of Liberty Cable
Television, Inc. The Company acquired the remaining minority interest in
Freedom in March 1997. The acquisition was accounted for as a purchase and is
reflected in the Company's consolidated financial statements since September
1996. On May 15, 1995, C-TEC Cable Systems, Inc., a wholly owned subsidiary of
C-TEC ("RCN Cable"), acquired 40% of the outstanding common stock of Twin County
Trans-Video, Inc. ("Twin County"). The remaining shares were subject to an
escrow agreement, pending completion of the merger, and were required to be
voted under the direction of the Company. As of May 15, 1995, the Company also
assumed management of Twin County. As a result, the Company had control of Twin
County and accordingly has fully consolidated Twin County in the Company's
financial statements since May 1995, the date of the original acquisition. The
remaining outstanding common stock of Twin County was acquired in September
1995. Goodwill relating to this acquisition is being amortized over a period of
approximately 10 years. In January 1995, RCN International Holdings, Inc.
(formerly C-TEC International, Inc.), a wholly owned subsidiary of C-TEC,
purchased a 40% equity position in Megacable, the second largest cable
television provider in Mexico. The Company accounts for its investment by the
equity method of accounting and is amortizing the original excess cost over the
underlying equity in the net assets on a straight-line basis over 15 years.
<PAGE>
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. The Company believes that this supplemental
unaudited financial data provides useful disclosure in analyzing its business.
<TABLE>
<CAPTION>
Pro Forma Total RCN
Year Ended
December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales:
Voice $ 4,007 $ 830 $ 237
Video 103,371 87,470 65,699
Data 41 4 --
Commercial and other 19,878 16,606 26,061
------------------------------------------
Total sales 127,297 104,910 91,997
Costs and expenses, excluding depreciation and amortization:
Direct expenses 51,757 35,226 39,604
Operating, selling, general and administrative 83,422 43,881 35,399
------------------------------------------
EBITDA before nonrecurring charges (7,882) 25,803 16,994
Depreciation and amortization 53,205 38,881 22,336
Nonrecurring charges 10,000 -- --
------------------------------------------
Operating (loss) (71,087) (13,078) (5,342)
Interest income 22,824 25,602 29,001
Interest expense (25,602) (16,046) (16,517)
Other income(expense), net 131 (546) (304)
------------------------------------------
(Loss) income before income taxes (73,734) (4,068) 6,838
(Benefit) provision for income taxes (20,849) 979 1,119
------------------------------------------
(Loss) income before equity in unconsolidated entities, (52,885) (5,047) 5,719
minority interest and extraordinary item
Equity in loss of unconsolidated entities (3,698) (2,282) (3,461)
Minority interest in loss (income) of consolidated entities 7,402 1,340 (144)
------------------------------------------
(Loss) income before extraordinary item (49,181) (5,989) 2,114
Extraordinary charge -- debt prepayment penalty (3,210) -- --
------------------------------------------
Net (loss) income $(52,391) $ (5,989) $ 2,114
Balance sheet data:
Cash, temporary cash investments and short-term investments $638,513 $108,674 $158,485
Property, plant and equipment $307,920 $220,357 $173,373
Accumulated depreciation $107,419 $ 84,529 $ 71,293
Net property, plant and equipment $200,501 $135,828 $102,080
Long-term debt (including current portion) $686,103 $131,250 $161,000
</TABLE>
<PAGE>
Results of Operations
The Company has elected to adopt Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131") in the first quarter of 1998. The Company's operations involve
developing an advanced fiber network to provide a bundled service package of
voice, video and data services to new customers in high density markets and
migrating as many customers as is economically justified to the single source
network, including customers which were served by the Company's previously
separate lines of business, for which profitability was separately measurable
and monitored. While the Company's chief decision makers monitor the revenue
streams of the various products, operations are managed and financial
performance is evaluated based upon the delivery of multiple services to
customers over a single network. This allows the Company to leverage its
network costs to maximum profitability. As a result, there are many shared
expenses generated by the various revenue streams; because management believes
that any allocation of the expenses incurred on a single network to multiple
revenue streams would be impractical and arbitrary, management does not
currently make such allocations internally. The chief decision makers do,
however, monitor financial performance in a way which is different from that
depicted in the historical general purpose financial statements included in this
Annual Report.
The Company manages operations and evaluates operating financial performance
on a pro forma total RCN basis (shown in the table captioned "Supplemental
Unaudited Financial Data" above), which reflects the consolidation of all
domestic joint ventures, including those not consolidated under generally
accepted accounting principles. The same net loss results on both a historical
and pro forma total RCN basis since the outside ownership of the joint venture,
which is consolidated only in the pro forma total RCN information, is reflected
as minority interest in the pro forma total RCN information. The discussion
which follows addresses results on a pro forma total RCN basis.
Pro Forma Total RCN Year Ended December 31, 1997 Compared to Year Ended December
31, 1996:
On a historical basis, for the year ended December 31, 1997, operating income
before depreciation and amortization and nonrecurring charge was ($7,670) as
compared to $25,803 for the year ended December 31, 1996. Sales increased 21.3%
to $127,297 for the year ended December 31, 1997 from $104,910 for the same
period in 1996.
Sales. Video sales are comprised primarily of subscription fees for basic,
premium and pay-per-view cable television services: for both wireless and hybrid
fiber/coaxial cable customers in New York, New Jersey and Pennsylvania which the
Company expects to migrate to its advanced fiber networks over time. Voice sales
include local telephone service fees consisting primarily of monthly line
charges, local toll and special features and long-distance telephone service
fees based on minutes of traffic and tariffed rates or contacted fees. Data
sales represent Internet access fees billed at contracted rates. For the year
ended December 31, 1997, total sales were $127,297, an increase of $22,387 or
21.3%, from $104,910 for the year ended December 31, 1996, primarily due to
higher total service connections which increased 20.6% to approximately 268,000
at December 31, 1997 from approximately 222,000 at December 31, 1996. The
increase is due to the commencement of service through advanced fiber optic
network facilities as well as growth in resold voice and off-net video
connections.
Voice revenues increased $3,177 to $4,007 for the year ended December 31, 1997
from $830 for the year ended December 31, 1996. The increase was primarily due
to an increase in off-net connections. Off-net connections were 24,900 and
1,875 at December 31, 1997 and 1996, respectively.
Video revenue increased $15,901 or 18.2% to $103,371 for the year ended
December 31, 1997 from $87,470 for the year ended December 31, 1996. The
increase was due to an increase in off-net video sales principally resulting
from higher basic service revenue resulting from approximately 4,850 additional
average monthly subscribers over 1996, the effects of a rate increase in the
first quarter of 1997 and cash incentives related to the launch of certain new
channels. Additionally, other video sales increased primarily due to the
acquisition of Freedom on August 30, 1996 (the "Freedom Acquisition"), which
resulted in approximately 38,000 wireless video connections for a full year in
1997 as compared to four months in 1996. The Company also began providing video
service over its advanced fiber network during 1997 and had approximately 11,800
advanced fiber connections at December 31, 1997.
Commercial and other revenues increased $3,272, or 19.7% to $19,878 for the
year ended December 31, 1997 from $16,606 for the year ended December 31, 1996.
The increase primarily results from terminating access provided to Commonwealth
Telecom Services, Inc. ("CTSI"), a subsidiary of Commonwealth Telephone. CTSI is
a CLEC which operates in areas adjacent to the traditional service area of
Commonwealth Telephone Company (also a wholly owned subsidiary of Commonwealth
Telephone). An increase in commercial main access lines of approximately 5,200
over 1996 accounted for approximately $1,100 of the increase in commercial and
other revenue.
<PAGE>
Cost and Expenses, Excluding Depreciation and Amortization and Nonrecurring
Charges. Costs and expenses, excluding depreciation and nonrecurring charges,
are comprised of direct costs and operating, selling, general and administrative
expenses. Direct expenses include direct costs of providing services, primarily
video programming and franchise costs, network access fees, and video
transmission licensing fees. For the year ended December 31, 1997, direct
expenses were $51,757, an increase of $16,531 or 46.9% as compared to direct
expenses of $35,226 in 1996. The increase is primarily attributable to higher
sales and a change in overall revenue mix to a higher volume of resold voice,
which has a lower margin than the Company's other products. The resold voice
increase represents planned marketing primarily in the Boston and New York City
markets ahead of construction of the advanced fiber network to build a customer
base which is intended to be migrated to the advanced fiber network. Origination
and programming costs increased approximately $7,200 primarily due to higher
video connections, rate increases and additional channels. The remaining
increase in direct costs and expenses is principally attributable to higher
commercial long distance network capacity in anticipation of volume growth in
the Company's markets resulting in higher recurring costs.
Operating, selling, general and administrative expenses primarily include
customers service costs, advertising, sales and marketing expenses, plant
maintenance and repair ("technical expenses"), salaries and benefits, and other
corporate overhead.
Operating, selling, general and administrative expenses increased $39,541 or
90.1% to $83,422 for the year ended December 31, 1997 from $43,881 for the year
ended December 31, 1996. Advertising costs increased approximately $9,000 for
the year ended December 31, 1997 primarily due to a high visibility multi-media
campaign to promote name recognition primarily in New York City and Boston.
Customer service costs increased approximately $4,100, or 60.3% primarily
related to headcount additions to support the increase in the customer base and
to meet the Company's objectives for world class customer service. Technical
expense increased approximately $8,300, or 75.1% for the year ended December 31,
1997. The increase is primarily related to salaries and benefits associated
with increased network engineering staff, responsible for planning the
development and construction of the advanced fiber network, and increased
installation and repair technicians. Sales and marketing costs increased
approximately $8,500, or 116.7%, for the year ended December 31, 1997. The
increase relates to higher sales staff to increase penetration in the Company's
markets, higher marketing staff to monitor and coordinate the Company's direct
advertising efforts and plan sales promotions and to higher telemarketing
expenses. The remaining increase in operating, selling, general and
administrative expenses is attributable to several factors including costs
associated with the spin-off of the Company from C-TEC. Additionally, in
connection with the Distribution (Note 1), C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of RCN no longer accrued benefits under
the defined benefit pension plan, but became fully vested in their defined
pension benefits accrued through that date. C-TEC notified affected
participants in December 1996. In December 1996, C-TEC allocated pension plan
assets of $6,984 to a separate plan for employees who no longer accrue benefits
after December 31, 1996. The underlying liabilities were also allocated. The
allocation of assets and liabilities resulted in a curtailment/settlement gain
of $4,292. The Company's allocable share of this gain was $3,437. Such gain
did not recur in 1997.
Depreciation and Amortization. Depreciation and amortization is comprised
principally of depreciation relating to the Company's Hybrid Fiber/Coaxial
facilities, advanced fiber and wireless video network and amortization of
subscriber lists, building access rights and goodwill. Depreciation and
amortization is comprised principally of depreciation related to the Company's
advanced fiber network, its wireless network, and its hybrid fiber/coaxial cable
systems; and amortization of subscriber lists, building access rights and
goodwill resulting primarily from its acquisition of Freedom, Twin County.
Depreciation and amortization increased $14,324, or 36.8% to $53,205 for the
year ended December 31, 1997 as compared to $38,881 for 1996. The increase is
principally due to the additional depreciation and amortization resulting from
the Freedom Acquisition and depreciation related to the Company's advanced fiber
optic networks in New York City and Boston.
In future periods, depreciation and amortization are expected to exceed
amounts recorded in 1997 due to depreciation with respect to the Company's
advanced fiber optic networks in New York City and Boston and due to
depreciation and amortization with respect to the Company's acquisitions in
February 1998 of Erols and UltraNet (Note 19).
Nonrecurring Charges. Nonrecurring charges of $10,000 in 1997 represent costs
incurred with respect to the termination of a marketing services agreement held
by Freedom.
Interest Income. For the year ended December 31, 1997, interest income was
$22,824, a decrease of $2,778, or 10.9% primarily due to lower average cash
balances and lower average notes receivable with related parties. Average cash
balances decreased principally as a result of the Freedom Acquisition in August
1996 (as well as the
<PAGE>
acquisition in March 1997 of the remaining 19.9% ownership interest in Freedom)
and capital expenditures, partially offset by the proceeds of the Company's high
yield debt offering in October 1997 (Note 10).
Interest Expense. For the year ended December 31, 1997, interest expense was
$25,602, an increase of $9,556, or 59.6% primarily due to interest expense on
the Company's $225,000 of 10% Senior Notes and $601,045 aggregate principal
amount at maturity of 11 1/8% Senior Discount Notes placed in October 1997 (Note
10). This was partially offset by lower interest expense resulting from the
required principal payment in December 1996 of $18,750 on 9.65% Senior Secured
Notes. Additionally, the Company paid $922 to Kiewit Telecom Holdings, Inc. in
1996 in connection with the Company's August 1996 acquisition of Kiewit Telecom
Holdings, Inc.'s 80.1% interest in Freedom. This portion of the consideration
represents an amount to compensate Kiewit Telecom Holdings, Inc. for forgone
interest on the amount which it had invested in Freedom.
Income Tax. Benefit for income taxes increased $21,828 primarily due to the
increase of $65,020 in loss after minority interest and equity in
unconsolidated entities before income taxes. For an analysis of the change in
income taxes, see the reconciliation of the effective income tax rate in Note 11
to the Consolidated Financial Statements.
Minority Interest. Minority interest in the loss of consolidated entities
increased $6,062 primarily as a result of the minority share of the losses of
the BECO joint venture (Note 7), which began operations in June 1997.
Additionally, the minority share of the losses of Freedom from January 1 through
March 21, at which time the Company acquired the remaining 19.9% ownership
interest, was $966 and the minority share of the losses of the PEPCO joint
venture which began operations in 1997, and which is consolidated in the pro
forma total RCN statements but not the historical statements, was $106.
Equity in loss of Unconsolidated Entities. The Company's equity in the (loss)
of unconsolidated entities was ($3,698) in 1997 and ($2,282) in 1996, and is
comprised principally of the Company's share of the operating results of
Megacable. In January 1995, the Company purchased a forty percent equity
position in Megacable, a Mexican cable television provider, for cash of $84,115.
The Company is exposed to foreign currency translation adjustments resulting
from translation into U.S. dollars of the financial statements of Megacable,
which through December 1996 utilized the peso as the local and functional
currency. Such adjustments have historically been included as a separate
component of shareholders' equity. Effective January 1, 1997, since the three
year cumulative rate of inflation at December 31, 1996 exceeded 100% , Mexico is
being treated for accounting purposes under Statement of Financial Accounting
Standards No. 52 - "Foreign Currency Translation" as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The
remeasurement of the Mexican peso into U.S. dollars creates translation
adjustments which are included in net income. The Company is also exposed to
foreign currency transaction losses resulting from transactions of Megacable
which are made in currencies different from Megacable's own. The Company's
proportionate share of transaction gains (losses) are included in income as they
occur. The Company does not hedge its foreign currency exchange risk and it is
not possible to determine what effect future currency fluctuations will have on
the Company's operating results. Exchange gains (losses) of ($12), $247, and
($932) in 1997, 1996, and 1995, respectively, including translation losses in
1997, are included in the respective statements of operations through the
Company's proportionate share of losses of Megacable.
In 1997, Megacable had sales of $30,441, operating income before depreciation
and amortization of $10,504 and net income of $6,653. In 1996, Megacable had
sales of $23,225, operating income before depreciation and amortization of
$10,183 and net income of $10,226. Year end subscriber counts were 211,627 at
December 31, 1997 as compared to 178,664 at December 31, 1996. In 1997 and
1996, the Company's share of the income of Megacable was $2,411 and $4,090,
respectively, which includes the exchange gains (losses) as discussed above.
The Company's investment in Megacable exceeded its underlying equity in the net
assets of Megacable when acquired by approximately $94,000, which goodwill is
being amortized on a straight-line basis over 15 years. In 1997 and 1996,
amortization of the Company's excess purchase price over the net assets of
Megacable when acquired was $6,280 in each year.
<PAGE>
Extraordinary Charge. In September 1997, the Company prepaid Senior Secured
Notes with the proceeds of new credit facilities (Note 10). The early
extinguishment of the Senior Secured Notes resulted in an extraordinary charge
of $3,210, net of taxes.
Pro Forma Total RCN Year Ended December 31, 1996 Compared to Year Ended December
31, 1995
On a historical basis, for the year ended December 31, 1996, operating income
before depreciation and amortization was $25,803 as compared to $16,994 for the
year ended December 31, 1995. Sales increased 14.0% to $104,910 for 1996 from
$91,997 in 1995. The improvement in operating income before depreciation and
amortization of $8,809 was offset by higher depreciation and amortization of
$16,545, as discussed below, resulting in a net loss of ($5,989) for the year
ended December 31, 1996 as compared to net income of $2,114 in 1995.
Sales. For the year ended December 31, 1996, total sales were $104,910, an
increase of $12,913 or 14.0% from $91,997 for the year ended December 31, 1995.
Video sales increased $21,771, or 33.1% to $87,470 in 1996 from $65,699 in 1995,
primarily due to the acquisition of the Pennsylvania cable system (formerly Twin
County Trans Video, Inc.) in May 1995, which resulted in $13,530 of the increase
in sales in 1996. The Pennsylvania cable system serves approximately 74,000
subscribers in the Greater Lehigh Valley area of Pennsylvania. The remaining
increase in video sales is due to higher basic service revenues resulting from
an increase in average subscribers of 4,995 or 5.3% and the full year impact, in
1996, of the 9.6% rate increase in April 1995 and the impact of 5.9% rate
increase in February 1996. The 14.0% increase in total sales in 1996 was lower
than the increase of 54.6% in 1995, principally due to the consolidation of the
Pennsylvania cable system for seven months (from acquisition in May 1995).
Since the Pennsylvania cable system was consolidated for seven months in 1995,
consolidation for a full year in 1996 reflects only incremental five months
revenue as compared to incremental seven months revenue in 1995.
Commercial and other revenues decreased $9,455, or 36.3%, to $16,606 in 1996
from $26,061 in 1995 principally as a result of termination of AT&T Tariff 12
resale services in the second quarter of 1995.
Cost and Expenses, Excluding Depreciation and Amortization and Nonrecurring
Charges. For the year ended December 31, 1996, direct expenses were $35,226, a
decrease of $4,378 or 11.1% as compared to direct expenses of $39,604 in 1995.
Lower costs associated with the reduction in AT&T Tariff 12 resale services were
partially offset primarily by higher origination, programming and franchise
costs principally resulting from the acquisition of the Pennsylvania cable
system, the Freedom Acquisition, other subscriber growth, channel additions and
programming fee increases.
Operating, selling, general and administrative expenses increased $8,482 or
24.0% to $43,881 for the year ended December 31, 1996 from $35,399 for the year
ended December 31, 1995. Customer service costs increased approximately $2,700
or 66.1% primarily due to increased staff to support the start-up and expected
growth of bundled service operations in New York City and Boston. Technical
expenses increased approximately $3,000 or 38.3% primarily as a result of the
Freedom Acquisition in August 1996. Additionally, technical expense increased
as a result of the acquisition of the Pennsylvania cable system in May 1995,
resulting in consolidation for seven months in 1995 as compared to a full year
in 1996. Sales and marketing costs increased approximately $1,500 or 26.6% for
the year ended December 31, 1996. The increase is primarily related to the
Freedom Acquisition and the start-up of sales and marketing efforts for the
bundled service product in New York City and Boston. The remaining increase in
operating, selling, general and administrative expenses is comprised of an
increase of approximately $250 in advertising, the Company's allocable share of
costs associated with investigation of the feasibility of various restructuring
alternatives of C-TEC to enhance shareholder value, and other increases in
general and administrative expenses of approximately $3,900 resulting from the
Freedom Acquisition. These other increases were partially offset by the
Company's allocable share of the gain on the partial curtailment and settlement
of C-TEC's defined benefit pension plan of $3,437.
Depreciation and Amortization. For 1996, depreciation and amortization
expense was $38,881, an increase of $16,545 or 74.1% as compared to 1995
primarily due to purchase accounting effects of the acquisition of the
Pennsylvania cable system in May 1995 and the Freedom Acquisition on August 30,
1996. (See Note 4 to the
<PAGE>
Consolidated Financial Statements.) In addition, the Company incurred $3,756 in
depreciation related to the Company's advanced fiber optic networks in New York
City and Boston.
Interest Income. For the year ended December 31, 1996, interest income was
$25,602, a decrease of $3,399, or 11.7% due primarily to a reduction in average
cash balances in 1996 as compared to 1995 and a decrease in the average yield on
invested cash, partially offset by interest income of $2,222 accrued on a
$13,088 note receivable acquired from Mazon Corporativo S.A. de C.V. in January
1996. Average cash balances decreased in 1996 primarily due to cash used in the
Freedom Acquisition and the purchase of the loan receivable from Mazon
Corporativo S. A. de C.V. Additionally, lower balances on notes receivable-
affiliates contributed to the decrease.
Interest Expense. Interest expense for 1996 was $16,046, a decrease of $471,
or 2.9% in 1996 as compared to 1995. This decrease is due to lower average
rates on outstanding debt and includes approximately $922 paid to Kiewit Telecom
Holdings, Inc., the Company's controlling shareholder, in connection with the
Freedom Acquisition. This portion of the consideration represents an amount to
compensate Kiewit Telecom Holdings, Inc. for forgone interest on the amount
invested in Freedom.
Income Taxes. The Company's effective income tax rate was (19.5%) in 1996 and
34.6% in 1995. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 11 to the Consolidated
Financial Statements.
Minority Interest. As a result of the Freedom Acquisition, Freedom's
financial results are consolidated with the Company since August 30, 1996, the
date of acquisition. This resulted in minority interest in the loss of Freedom
of $1,546 for 1996. Additionally, the 20% minority interest in the income of
HomeLink Limited Partnership, a Hybrid Fiber/Coaxial subsidiary, was ($206) in
1996 as compared to ($144) in 1995.
<PAGE>
Equity in loss of Unconsolidated Entities. In 1996, Megacable had sales of
$23,225, operating income before depreciation and amortization of $10,183 and
net income of $10,226. In 1995, Megacable had sales of $20,841, operating
income before depreciation and amortization of $8,154 and net income of $5,802.
Year end subscriber counts were 178,664 at December 31, 1996 as compared to
177,317 at December 31, 1995. In 1996 and 1995, the Company's share of the
income of Megacable was $4,090 and $2,696, respectively, which includes foreign
currency transaction losses as noted in the 1997 discussion. In 1996 and 1995,
amortization of the Company's excess purchase price over the net assets of
Megacable when acquired was $6,280 and $5,757, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that it will require a substantial amount of capital to
fund the network development and operations in the Boston to Washington, D.C.
corridor, including funding the development of its advanced fiber optic
networks, upgrading its Hybrid Fiber/Coaxial plant, funding operating losses and
debt service requirements. The Company currently estimates that its capital
requirements for the period from January 1, 1998 through 1999 will be
approximately $785,000, which includes capital expenditures (including
connection costs which will only be incurred as the Company obtains revenue-
generating customer connections) of approximately $300,000 in 1998 and
approximately $485,000 in 1999. The Company's capital expenditure plan has been
accelerated due to more rapid deployment of its network development plan, in
part due to the Erols and UltraNet acquisitions. These capital expenditures
will be used principally to fund the buildout of the Company's fiber optic
network in high density areas in the Boston, New York and Washington, D.C.
markets and to upgrade its Hybrid Fiber/Coaxial cable systems. To build out
these areas on an efficient basis, the Company undertakes a subscriber-driven
capital expenditure strategy whereby it (i) closely monitors development of its
subscriber base in order to direct network deployment in each target market, and
(ii) seeks to establish a customer base in advance of or concurrently with its
network deployment. For example, the Company offers Internet and resale
telephone services on an interim basis to customers located near its advanced
fiber optic networks. Depending upon factors such as subscriber density,
proximity to the advanced fiber optic network and development costs and the
degree of success achieved in its initial markets, the Company will determine
whether extending its advanced fiber optic network to additional high density
target markets can be achieved on an attractive economic basis. In addition to
its own capital requirements, the Company's joint venture partners are each
expected to contribute approximately $150,000 in capital to the joint ventures
in connection with development of the Boston and Washington, D.C. markets from
September 1997 through 2000 of which approximately $50,900 has been contributed.
The Company expects to have sufficient liquidity to meet its capital
requirements through mid-2000. The Company will continue to require additional
capital for planned increases in network coverage and other capital
expenditures, working capital, debt service requirements, and anticipated
further operating losses. The actual timing and amount of capital required to
roll out the Company's network and to fund operating losses may vary materially
from the Company's estimates and additional funds will be required in the event
of significant departures from the current business plan, unforeseen delays,
cost overruns, engineering design changes and other technological risks or other
unanticipated expenses. Due to its subscriber-driven investment strategy,
should the Company encounter a successful rollout in its initial markets, and/or
decide to enter new markets, the Company may accelerate the rollout and/or
extend the reach of its network; such acceleration could increase the Company's
capital requirements. In addition, the commencement of operations and buildout
in new markets would substantially increase the Company's capital requirements.
Conversely, should the Company be less successful than anticipated, the
operating losses associated with the installed network may be higher than
anticipated. The Company presently intends to judge the success of its initial
rollout in deciding whether to undertake additional capital expenditures to
rollout the network to additional areas. Since the Company anticipates that, if
it is successful, it will continue to extend its network coverage into
additional areas within and potentially beyond the Boston-Washington, D.C.
corridor, it expects to continue to experience losses and negative cash flow on
an aggregate basis for an extended period of time.
The Company's current joint venture agreements reduce the amount of
expenditures required by RCN to develop the network due both to access to the
joint venture partners' existing facilities and to the anticipated joint venture
partners' equity contributions. However, the joint venture arrangements will
also reduce the potential cash flows to be realized from operation of the
networks in the markets in which the joint ventures operate and restrict the
Company's access to cash flow generated by the joint ventures (which will be
paid in the form of dividends). The Company may enter into additional joint
ventures in the future as the Company begins to develop new markets.
<PAGE>
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.
Sources of funding for the Company's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. The Company continually evaluates its
capital raising opportunities, and is considering, subject to market conditions,
a possible public offering or private placement of additional debt securities
during the second or third quarter of 1998. There can be no assurance that
additional financing will be available to the Company or, if available, that it
can be obtained on a timely basis and on acceptable terms. Failure to obtain
such financing could result in the delay or curtailment of the Company's
development and expansion plans and expenditures. Any of these events could
impair the Company's ability to meet its debt service requirements and could
have a material adverse effect on its business.
In October 1997, the Company raised $575,000 in gross proceeds from an
offering of two tranches of debt securities. The offering was comprised of
$225,000 principal amount of 10% Senior Notes and $601,000 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,000 of restricted cash to be used to fund the Escrow Account to pay
interest on the 10% Senior Notes for three years. In February 1998, the Company
raised $350,587 in gross proceeds from an offering of $567,000 principal amount
at maturity of 9.80% Senior Discount Notes, due in 2008. The Indentures which
govern the 1997 Notes and the 1998 Notes contain similar provisions. The Chase
Manhattan Bank acts as Trustee for each of the Indentures. The 1997 Notes and
the 1998 Notes are general senior unsecured obligations of RCN. The 9.80% Senior
Discount Notes will mature on February 15, 2008. The 9.80% Senior Discount Notes
will not bear cash interest prior to February 15, 2003. The 1997 Notes will
mature on October 15, 2007. Interest on the 10% Senior Notes are payable in cash
at a rate of 10% per annum semi-annually in arrears on each April 15 and October
15, commencing April 15, 1998. The 11 1/8% Senior Discount Notes will not bear
cash interest prior to October 15, 2002.
RCN Cable and certain of its subsidiaries have in place secured credit
facilities comprised of a five-year revolving credit facility in the amount of
$25,000 (the "Revolving Credit Facility") and an eight-year term credit facility
in the amount of $100,000 (the "Term Credit Facility"), both of which facilities
are governed by a single credit agreement dated as of July 1, 1997 (the "Credit
Agreement"). As of December 31,1997, $100,000 of the Term Credit Facility was
outstanding. The term loan must be repaid over six years in quarterly
installments, at the end of September, December, March and June of each year
from September 30, 1999 through June 30, 2005. As of December 31, 1997, $3,000
principal was outstanding under the Revolving Credit Facility. Revolving loans
may be repaid and reborrowed from time to time. All borrowings under the Credit
Agreement will be pari passu and will be secured under a common collateral
package.
<PAGE>
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At December 31, 1997, the Company had an
aggregate of approximately $1,036,000 of indebtedness outstanding, and the
ability to borrow up to an additional $22,000 under the Credit Agreement. As a
result of the substantial indebtedness of the Company, the Company's fixed
charges are expected to exceed its earnings for the foreseeable future. In
addition, the Company will require substantial additional indebtedness
particularly in connection with the buildout of the Company's networks and the
introduction of its telecommunications services to new markets. The leveraged
nature of the Company could limit its ability to effect future financing or may
otherwise restrict the Company's business activities.
The extent of the Company's leverage may have the following consequences: (i)
limit the ability of the Company to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) require that a substantial portion of the Company's cash flows
from operations be dedicated to the payment of principal and interest on its
indebtedness and therefore not be available for other purposes; (iii) limit the
Company's flexibility in planning for, or reacting to, changes in its business;
(iv) place the Company at a competitive disadvantage as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
On a historical basis, for the year ended December 31, 1997, the Company's net
cash provided by operating activities was $1,661, comprised primarily of a net
loss of ($52,391) adjusted by non-cash depreciation and amortization of $53,205,
other non-cash items totaling ($611) , working capital changes of $377 and
changes in other deferred expenses of $1,081. Net cash used in investing
activities of $475,860 consisted primarily of purchases of short-term
investments of $445,137, additions to property, plant and equipment of $79,042
and acquisitions of $30,490 (primarily acquisition of the minority interest of
Freedom) partially offset by sales and maturities of short-term investments of
$76,923. Net cash provided by financing activities of $635,266 consisted
primarily of issuance of long-term debt of $688,000, change in affiliate notes
of $97,624 and transfers from C-TEC of $89,324 partially offset by redemption of
long-term debt of $141,250, transfers to C-TEC of $23,474, payments made for
debt financing costs of $19,743 and an increase related to cash restricted for
debt service of $61,250.
<PAGE>
On a historical basis, for the year ended December 31, 1996, the Company's net
cash provided by operating activities was $23,831 comprised primarily of a net
loss of $5,989 adjusted by non-cash depreciation and amortization of $38,881 and
other non-cash items totaling ($7,184). Net cash used in investing activities
of $9,377 consisted primarily of additions to property, plant and equipment of
$38,548, the purchase of a loan receivable of $13,088 and acquisitions of
$30,090 (primarily the Freedom Acquisition), partially offset by net sales and
maturities of short-term investments of $73,995. Net cash provided by financing
activities of $9,391 included the issuance of long-term debt of $19,000 and
change in affiliate notes of $32,802 partially offset by the redemption of long-
term debt of $44,750.
IMPACT OF THE YEAR 2000 ISSUE
The Company has certain financial, administrative and operational systems
which are subject to Year 2000 exposures. The Company has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion. The Company's plan is
proceeding on target. The plan includes ensuring that those systems for which
the Company is dependent on external vendors, such as certain billing systems,
will be Year 2000 compliant by the end of 1999 based on the status of external
vendors' remediation efforts. For those internal systems that require
corrective action, the Company has contracted with its information systems
services provider to rewrite the relevant programming code. Finally, the
Company is well along on a conversion of its suite of financial systems to a
state-of-the-art Oracle system. Such system is expected to ensure Year 2000
compliance in financial applications, enable the Company to process and report
its financial transactions more efficiently and provide a greater level of
detailed information to facilitate management's analysis which is critical to
its business decisions.
The Company is employing a team approach across its management information
systems, financial and operational groups in addressing the above issues, as
well as utilizing the assistance of external consultants in the case of the
Oracle implementation. Such team approach facilitates a consistent progress
along plans without disruption of other areas of the business.
There is no assurance that the Company's plans will continue to progress as
intended. The Company estimates that its cost of Year 2000 remediation will not
be material.
<PAGE>
<TABLE>
<CAPTION>
RCN Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts) For the Years Ended December 31,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Sales $127,297 $104,910 $91,997
Costs and expenses, excluding depreciation and amortization 134,967 79,107 75,003
Nonrecurring charges 10,000 - -
Depreciation and amortization 53,205 38,881 22,336
-------------------------------------------
Operating (loss) (70,875) (13,078) (5,342)
Interest income 22,824 25,602 29,001
Interest expense (25,602) (16,046) (16,517)
Other income (expense), net 131 (546) (304)
-------------------------------------------
(Loss) income before income taxes (73,522) (4,068) 6,838
(Benefit) provision for income taxes (20,849) 979 1,119
-------------------------------------------
(Loss) income before minority interest and equity in
unconsolidated entities (52,673) (5,047) 5,719
Minority interest in loss (income) of consolidated entities 7,296 1,340 (144)
Equity in (loss) of unconsolidated entities (3,804) (2,282) (3,461)
-------------------------------------------
(Loss) income before extraordinary item (49,181) (5,989) 2,114
Extraordinary charge - debt prepayment penalty, net of tax of $1,728 (3,210) - -
-------------------------------------------
Net (loss) income ($52,391) ($5,989) $2,114
===========================================
Basic earnings per average common share:
Income (loss) before extraordinary charge ($0.89) ($0.11) $0.04
Extraordinary charge - debt prepayment penalty ($0.06) - -
Net income (loss) to shareholders ($0.95) ($0.11) $0.04
Weighted average shares outstanding 54,965,716 54,918,394 54,890,334
Diluted earnings per average common share:
Income (loss) before extraordinary charge ($0.89) ($0.11) $0.04
Extraordinary charge - debt prepayment penalty ($0.06) - -
Net income (loss) to shareholders ($0.95) ($0.11) $0.04
Weighted average shares and common stock equivalents outstanding 54,965,716 54,918,394 54,890,334
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RCN Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars) December 31,
1997 1996
---------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments $222,910 $61,843
Short-term investments 415,603 46,831
Accounts receivable from related parties 9,829 12,614
Accounts receivable, net of reserve for doubtful accounts
of $2,134 in 1997 and $861 in 1996 17,815 10,413
Unbilled revenues 1,695 844
Material and supply inventory, at average cost 2,745 1,140
Prepayments and other 5,314 4,556
Deferred income taxes 4,821 4,371
Investments restricted for debt service 22,500 -
---------------------
Total current assets 703,232 142,612
---------------------
Notes receivable - affiliates - 155,481
Property, plant and equipment, net of accumulated depreciation
of $107,419 in 1997 and $84,529 in 1996 200,340 135,828
Investments restricted for debt service 39,411 -
Investments 70,424 76,547
Intangible assets, net 96,547 93,471
Deferred charges and other assets 41,038 24,146
---------------------
Total assets $1,150,992 $628,085
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable to related parties $3,748 $4,880
Accounts payable 24,835 13,642
Advance billings and customer deposits 7,318 6,859
Accrued taxes 488 1,950
Accrued interest 5,549 5,041
Accrued contract settlements 3,126 3,565
Accrued cable programming expense 3,498 3,188
Accrued expenses 21,143 18,167
---------------------
Total current liabilities 69,705 57,292
---------------------
Long-term debt 686,103 131,250
Notes payable - affiliates - 11,854
Deferred income taxes 19,612 28,245
Other deferred credits 2,596 3,290
Minority interest 16,392 5,389
Commitments and contingencies
Preferred stock - -
Common shareholders' equity 356,584 390,765
---------------------
Total liabilities and shareholders' equity $1,150,992 $628,085
=====================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
For the Years Ended December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income ($52,391) ($5,989) $2,114
Gain on pension curtailment/settlement - (3,437) -
Accretion of discounted debt 8,103 - -
Gain on sale of partnership interest (661) - -
Extraordinary item - debt prepayment penalty 3,210 - -
Depreciation and amortization 53,205 38,881 22,336
Deferred income taxes and investment tax credits, net (10,503) (6,477) 6,696
Provision for losses on accounts receivable 2,732 1,788 614
Equity in loss of unconsolidated entities 3,804 2,282 3,461
Minority interest (7,296) (1,340) 144
Net change in certain assets and liabilities, net of business acquisitions:
Accounts receivable and unbilled revenues (14,979) (3,780) (5,550)
Material and supply inventory (1,605) (814) 777
Accounts payable 11,193 2,954 3,983
Accrued expenses 3,353 4,283 2,783
Accounts receivable from related parties 3,180 1,572 11,860
Accounts payable to related parties (1,132) (5,448) (419)
Other, net 367 597 529
Other 1,081 (1,241) (769)
-----------------------------------------
Net cash provided by operating activities 1,661 23,831 48,559
-----------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment (79,042) (38,548) (29,854)
Purchase of short-term investments (445,137) (75,091) (238,257)
Sales and maturities of short-term investments 76,923 149,086 245,112
Acquisitions, net of cash acquired (30,490) (30,090) (121,147)
Purchase of loan receivable - (13,088) -
Proceeds from sale of partnership interest 1,900 - -
Other (14) (1,646) (2,057)
-----------------------------------------
Net cash used in investing activities (475,860) (9,377) (146,203)
-----------------------------------------
Cash flows from financing activities
Redemption of long-term debt (141,250) (44,750) (28,741)
Issuance of long-term debt 688,000 19,000 19,300
Change in affiliate notes, net 97,624 32,802 (6,130)
Extraordinary item - debt prepayment penalty (3,210) - -
Payments made for debt financing costs (19,743) - -
Cash contribution from joint venture partner 9,016 - -
(Increase) related to investments restricted for debt service (61,250) - -
Proceeds from issuance of stock 230 - -
Transfers from C-TEC 89,323 78,550 132,707
Transfers (to) C-TEC (23,474) (76,211) (148,339)
-----------------------------------------
Net cash provided by (used in) financing activities 635,266 9,391 (31,203)
-----------------------------------------
Net increase (decrease) in cash and temporary cash investments 161,067 23,845 (128,847)
Cash and temporary cash investments at beginning of year 61,843 37,998 166,845
-----------------------------------------
Cash and temporary cash investments at end of year $222,910 $61,843 $37,998
=========================================
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Income taxes $1,090 $549 $497
========================================
Interest (net of amounts capitalized) $16,536 $16,046 $16,404
========================================
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
Supplemental Schedule of Non-Cash Investing and Financing Activities
In March 1997, the Company acquired the portion of Freedom which it
did not already own. The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Cash paid $40,000
Non-capitalizable costs (10,000)
Reduction of minority interest (3,812)
---------
Fair value of assets acquired $26,188
=========
In 1996, C-TEC acquired an 80.1% interest in Freedom New York, L.L.C.
The acquisition was accounted for as a purchase.
A summary of the acquisition is as follows:
Cash paid $28,906
Liabilities assumed 7,621
Deferred tax asset recognized (167)
Minority interest recognized 6,188
---------
Fair value of assets acquired $42,548
=========
In 1995, C-TEC acquired all the outstanding Common Stock of Twin County
Trans Video, Inc. and a related covenant not to compete.
The consideration for the acquisition was as follows:
Cash paid (including $1,000 deposit in 1994) $37,313
Issuance of 5% Promissory Note 4,000
Capital contribution by stockholder 39,493
Liabilities assumed 16,364
Deferred tax liability incurred 33,797
---------
Fair value of assets acquired $130,967
=========
In 1996, the $4,000 promissory note was canceled and the Company paid cash
of $500 in settlement of certain purchase price adjustments.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to Shareholders' Net Investment in connection
with the Distribution.
BECO's contribution of the IRU to the RCN-BECOCOM joint venture (Note 7(a))
is reflected as "Advanced Fiber Plant" at its fair value.
See accompanying notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(Thousands of Dollars)
Common Additional Shareholder's Cumulative Total
Shares Issued Common Paid Net Translation Shareholders'
and Outstanding Stock in Capital Deficit Investment Adjustment Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,400 $ 1 $ - $ - $372,846 $ - $372,847
Net income 2,114 2,114
Transfers from C-TEC 21,714 21,714
Cumulative translation adjustment (2,606) (2,606)
---------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,400 1 - - 396,674 (2,606) 394,069
Net loss (5,989) (5,989)
Transfers from C-TEC 3,134 3,134
Cumulative translation adjustments (449) (449)
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,400 1 - - 393,819 (3,055) 390,765
Net loss from 1/1/97 through 9/30/97 (35,275) (35,275)
Net loss from 10/1/97 through 12/31/97 (17,116) (17,116)
Transfers from C-TEC 17,980 17,980
Common stock issued in connection
with the distribution 54,967,952 54,968 321,556 (376,524) -
Stock plan transactions 20,518 20 210 230
---------------------------------------------------------------------------------------------
Balance, December 31, 1997 54,989,870 $54,989 $321,766 ($17,116) $ - ($3,055) $356,584
=============================================================================================
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE>
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars Except Per Share Data)
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, RCN Corporation (the "Company" or "RCN") was
operated as part of C-TEC Corporation ("C-TEC"). On September 30, 1997, C-TEC
distributed 100 percent of the outstanding shares of common stock of its wholly
owned subsidiaries, RCN Corporation ("RCN") and Cable Michigan, Inc. ("Cable
Michigan") to holders of record of C-TEC's Common Stock and C-TEC's Class B
Common Stock as of the close of business on September 19, 1997 (the
"Distribution") in accordance with the terms of a Distribution Agreement dated
September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN consists primarily
of C-TEC's bundled residential voice, video and Internet access operations in
the Boston to Washington, D.C. corridor, its existing New York, New Jersey and
Pennsylvania cable television operations, a portion of its long distance
operations and its international investment in Megacable, S.A. de C.V.
("Megacable"). Cable Michigan, Inc. consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc. In connection with the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc.
("CTE").
The consolidated financial statements have been prepared using the historical
basis of assets and liabilities and historical results of operations of all
wholly and majority owned subsidiaries. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company in the future or what they would have been had the Company been
an independent, public company during the reporting periods. All material
intercompany transactions and balances have been eliminated. Investments
accounted for by the equity method include a 40% interest in Megacable, a
Mexican cable television system operator. Joint ventures which the Company
controls and in which the minority investors do not possess significant veto
rights are consolidated. Other joint ventures are accounted for by the equity
method.
C-TEC's corporate services group has historically provided substantial support
services such as finance, cash management, legal, human resources, insurance and
risk management and its financial statements are included in the consolidated
financial statements of the Company. Prior to the Distribution, the corporate
office allocated the cost for these services pro rata among the business units
supported primarily based on assets; contribution to consolidated earnings
before interest, depreciation, amortization, and income taxes; and number of
employees. In the opinion of management, the method of allocating these costs
is reasonable; however, the costs of these services remaining with the Company
after allocation to C-TEC's other business units are not necessarily indicative
of the costs that would have been incurred by the Company on a stand-alone
basis. Also included in the Company's consolidated financial statements are
the financial statements of the corporate financial services company which
invests excess cash of, and advances funds to the Company and prior to the
Distribution, C-TEC. The financial services company charges interest expense on
outstanding advances and pays interest income on excess cash invested for
affiliates.
CTE, RCN and Cable Michigan have entered into certain agreements providing for
the Distribution, and governing various ongoing relationships, including the
provision of support services, between the three companies, including a
distribution agreement and a tax-sharing agreement.
2. SEGMENT INFORMATION
The Company has elected to adopt Statement of Financial Accounting Standards
No. 131-- "Disclosure about Segments of an Enterprise and Related Information"
("SFAS 131") in the first quarter of 1998 and has retroactively restated its
segment disclosures.
<PAGE>
The Company's operations involve developing an advanced fiber network to
provide a bundled service package of voice, video and data services to new
customers in high density markets and migrating as many customers as is
economically justified to the single source network, including customers which
were served by the Company's previously separate lines of business for which
profitability was separately measurable and monitored. While the Company's
chief decision makers monitor the revenue streams of the various products,
operations are managed and financial performance is evaluated based upon the
delivery of multiple services to customers over a single network. This allows
the Company to leverage its network costs to maximum profitability. As a
result, there are many shared expenses generated by the various revenue streams;
because management believes that any allocation of the expenses incurred on a
single network to multiple revenue streams would be impractical and arbitrary,
management does not currently make such allocations internally. The chief
decision makers do, however, monitor financial performance in a way which is
different from that depicted in the Company's historical general purpose
financial statements.
The Company manages operations and evaluates operating financial performance
on a pro forma total RCN basis, which reflects the consolidation of all domestic
joint ventures, including those not consolidated under generally accepted
accounting principles. The same net loss results on both a historical and pro
forma total RCN basis since the outside ownership of the joint venture, which is
consolidated only in the pro forma total RCN information, is reflected as
minority interest in the pro forma total RCN information. Such results are as
follows:
<TABLE>
<CAPTION>
Pro Forma
Total RCN
Year Ended
December 31,
-------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Sales:
Voice $ 4,007 $ 830 $ 237
Video 103,371 87,470 65,699
Data 41 4 --
Commercial and other 19,878 16,606 26,061
-------------------------------------------------
Total Sales 127,297 104,910 91,997
Costs and expenses, excluding depreciation and amortization:
Direct expenses 51,757 35,226 39,604
Operating, selling, general and administrative 83,422 43,881 35,399
-------------------------------------------------
EBITDA before nonrecurring charge (7,882) 25,803 16,994
Depreciation and amortization 53,205 38,881 22,336
Nonrecurring charge 10,000 -- --
-------------------------------------------------
Operating loss (71,087) (13,078) (5,342)
Interest income 22,824 25,602 29,001
Interest expense (25,602) (16,046) (16,517)
Other income (expense), net 131 (546) (304)
-------------------------------------------------
(Loss) income before income taxes (73,734) (4,068) 6,838
(Benefit) provision for income taxes (20,849) 979 1,119
-------------------------------------------------
(Loss) income before equity in unconsolidated entities, minority (52,885) (5,047) 5,719
interest and extraordinary item
Equity in loss of unconsolidated entities (3,698) (2,282) (3,461)
Minority interest in loss (income) of consolidated entity 7,402 1,340 (144)
-------------------------------------------------
(Loss) income before extraordinary item (49,181) (5,989) 2,114
Extraordinary charge -- debt prepayment penalty (3,210) -- --
Net (loss) income $(52,391) $ (5,989) $ 2,114
=================================================
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
Cash and Temporary Cash Investments - For purposes of reporting cash flows,
the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be temporary cash investments. Temporary
cash investments are stated at cost which approximates market.
Short-Term Investments and Investments Restricted for Debt Service -
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date in accordance with Statement of Financial Accounting
Standards No. 115 -- "Accounting for Certain Investments in Debt and Equity
Securities." At December 31, 1997 and 1996, marketable debt and equity
securities have been categorized as available for sale. The Company states its
short-term investments at cost, which approximates market. Investments
restricted for debt service have been categorized as held to maturity.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
reflects the original cost of acquisition or construction, including payroll and
related costs such as taxes, pensions and other fringe benefits, and certain
general administrative costs.
Depreciation is provided on the straight-line method based on the useful lives
of the various classes of depreciable property. The average estimated lives of
depreciable property, plant and equipment are:
<TABLE>
<CAPTION>
Lives
----------------------
<S> <C>
Hybrid fiber/coaxial plant 5-22 years
Advanced fiber plant 10-15 years
Wireless & other plant 5 years
Buildings and leasehold improvements 5-45 years
Furniture, fixtures and vehicles 3-10 years
Other 3 years
</TABLE>
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred. Major replacements and betterments
are capitalized. Gain or loss is recognized on major retirements and
dispositions.
Intangible Assets - Intangible assets are amortized on a straight-line basis
over the expected period of benefit ranging from 2 to 15 years.
Accounting for Impairments - The Company follows the provisions of Statement
of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS 121.
Revenue Recognition - Local telephone service revenue is recorded as earned
based on tariffed rates. Long distance telephone service revenue is recorded
based on minutes of traffic processed and tariffed rates or contracted fees.
Revenues from cable programming services are recorded in the month the service
is provided. Internet access service revenues are recorded based on contracted
fees.
Advertising Expense - Advertising costs are expensed as incurred. Advertising
expense charged to operations was $12,203, $1,441 and $862 in 1997, 1996 and
1995, respectively.
Stock Based Compensation - The Company applies Accounting Principles Board
Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans. The Company has
<PAGE>
adopted the disclosure - only provisions of Statement of Financial Accounting
Standards No. 123 -- "Accounting for Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share - The Company has adopted statement of Financial
Accounting Standards No. 128 -- "Earnings Per Share" ("SFAS 128"). Basic
earnings (loss) per share is computed based on net income (loss) divided by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to be
dilutive common stock equivalents. The conversion of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and have a dilutive effect if the Company had
income from continuing operations is 517,506.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by the number of average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common equity for each
share of C-TEC common equity owned.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) before extraordinary charge $ (49,181) $ (5,989) $ 2,114
====================================================
Basic earnings per average common share:
Average shares outstanding 54,965,716 54,918,394 54,890,334
(Loss) income per average common share $ (0.89) $ (0.11) $ 0.04
Diluted earnings per average common share:
Average shares outstanding 54,965,716 54,918,394 54,890,334
Dilutive shares resulting from stock options -- -- --
----------------------------------------------------
54,965,716 54,918,394 54,890,334
====================================================
(Loss) income per average common share $ (0.89) $ (0.11) $ 0.04
</TABLE>
Income Taxes - The Company and its subsidiaries report income for federal tax
purposes on a consolidated basis. Prior to the Distribution, the Company and
its subsidiaries were included in the consolidated federal income tax return of
C-TEC. Income tax expense is allocated to subsidiaries on a separate return
basis except that the Company's subsidiaries receive benefit for the utilization
of net operating losses and investment tax credits included in the consolidated
return even if such losses and credits could not have been used on a separate
return basis. The Company accounts for income taxes using Statement of
Financial Accounting Standards No. 109 -- "Accounting for Income Taxes." The
statement requires the use of an asset and liability approach for financial
reporting purposes. The asset and liability approach requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between financial reporting basis and tax basis of
assets and liabilities. If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Investment tax credits ("ITC") for the Company have been deferred in prior
years and are being amortized over the average lives of the applicable property.
Foreign Currency Translation - The Company has a 40% interest in Megacable.
For purposes of determining its equity in the earnings of Megacable, the Company
translates the revenues and expenses of Megacable into U.S. dollars at the
average exchange rates that prevailed during the period. Assets and liabilities
are translated into U.S. dollars at the rates in effect at the end of the fiscal
period. Prior to 1997, the Company's share of the gains or losses that result
from this process are shown in the cumulative translation adjustment account in
the common shareholders' equity section of the balance sheet. Effective January
1, 1997, since the three-year cumulative rate of inflation at December 31, 1996
exceeded 100%, Mexico is treated for accounting purposes as having a highly
inflationary economy. As a result, the financial statements of Megacable are
remeasured as if the functional currency were the U.S. dollar. The
remeasurement of the Mexican peso into U.S. dollars creates translation
<PAGE>
adjustments which are included in net income. The Company's proportionate share
of gains and losses resulting from transactions of Megacable, which are made in
currencies different from its own, are included in income as they occur.
4. BUSINESS COMBINATIONS
The following business combinations were transacted by wholly owned
subsidiaries of C-TEC. The acquired businesses were transferred to the Company
in connection with the Distribution.
On August 30, 1996, FNY Holding Company, Inc., formerly a wholly owned
subsidiary of C-TEC ("FNY") acquired from Kiewit Telecom Holdings, C-TEC's
controlling shareholder at the time, an 80.1% interest in Freedom New York, LLC
and all related rights and liabilities ("Freedom") for cash consideration of
approximately $29,000. In addition, FNY assumed liabilities of approximately
$7,600. (In March 1996, Freedom had acquired the wireless cable television
business of Liberty Cable Television). The acquisition was accounted for as a
purchase, and accordingly, Freedom is included in the Company's consolidated
financial statements since September 1996. The full fair value of assets
acquired and liabilities assumed has been reflected in the Company's financial
statements with minority interest reflecting the separate 19.9% ownership.
FNY allocated the purchase price paid on the basis of the fair value of
property, plant and equipment and identifiable intangible assets acquired and
liabilities assumed. There was no excess cost over fair value of net assets
acquired.
Contingent consideration of $15,000 was payable in cash and was to be based
upon the number of net eligible subscribers, as defined in the Acquisition
Agreement, in excess of 16,563 delivered to the Company. The contingent
consideration is not included in the acquisition cost total above but was to
have been recorded when and if the future delivery of subscribers occurred. In
addition, FNY paid $922 to Kiewit Telecom Holdings which represents compensation
for foregone interest on the amount invested by Kiewit Telecom Holdings in
Freedom. This amount has been charged to operations.
On March 21, 1997, the Company paid $15,000 in full satisfaction of contingent
consideration payable for the original acquisition of Freedom. Additionally,
pursuant to the terms of the Freedom Operating Agreement, the assets of RCN
Telecom Services of New York, Inc., a wholly-owned subsidiary of RCN, were
contributed to Freedom, in which the Company had an 80.1% ownership interest
prior to such contribution. Subsequent to this contribution, the Company paid
$15,000 to acquire the minority ownership of Freedom. These amounts were
primarily allocated to excess cost over fair value of net assets acquired and
are being amortized over a period of approximately six years. The Company also
paid $10,000 to terminate a marketing services agreement between Freedom and an
entity controlled by Freedom's former minority owners. The Company charged this
amount to operations for the quarter ended March 31, 1997.
On May 15, 1995, C-TEC Cable Systems, Inc., ("RCN Cable") formerly a wholly
owned subsidiary of C-TEC, acquired 40% of the outstanding common stock of Twin
County Trans Video, Inc. ("Twin County") in exchange for cash of approximately
$26,300, including a $1,000 deposit made in 1994, and a $4,000, 5% promissory
note of RCN Cable. In addition, RCN Cable paid $11,000 in consideration of a
noncompete agreement and assumed liabilities of approximately $16,400. The
remaining shares were subject to an escrow agreement, pending completion of the
merger, and were required to be voted under the direction of RCN Cable. As of
May 15, 1995, RCN Cable also assumed management of Twin County. As a result,
RCN Cable had control of Twin County and accordingly Twin County is consolidated
in the Company's financial statements since May 1995, the date of the original
acquisition. The remaining outstanding common stock of Twin County was acquired
in September 1995 in exchange for $52,000 stated value redeemable convertible
preferred stock of C-TEC. The preferred stock has a stated dividend rate of 5%,
beginning January 1, 1996. The fair value of the preferred stock, as determined
by an independent appraiser was $39,500 which was recorded as additional paid-in
capital to the Company. In 1996, the $4,000 promissory note was canceled and
RCN Cable paid cash of $500 in settlement of certain purchase price adjustments.
RCN Cable has allocated the purchase price paid for Twin County on the basis
of the fair value of property, plant and equipment and identifiable intangible
assets acquired and liabilities assumed. The excess of the consideration for
the acquisition over the fair value of the net assets acquired of approximately
$16,700 has been allocated to goodwill and is being amortized over a period of
approximately 10 years.
<PAGE>
In January 1995, RCN International Holdings, Inc. (formerly C-TEC
International, Inc.), formerly a wholly owned subsidiary of C-TEC, purchased a
40% equity position in Megacable. The aggregate consideration for the purchase
was cash of $84,115. The Company accounts for its investment by the equity
method of accounting. The original excess cost over the underlying equity in
the net assets acquired is approximately $94,000, which is being amortized on a
straight-line basis over 15 years.
In January 1995, RCN Cable purchased the assets of Higgins Lake Cable, Inc.
for cash of approximately $4,750.
In June 1995, C-TEC invested approximately $2,220 for a one-third interest in
a partnership which intends to provide alternative access telephone service to
commercial subscribers. C-TEC transferred this investment to RCN Cable in 1996
at net book value of $1,977. The Company disposed of its investment in 1997 and
realized a gain of $661.
In November 1995, the Company purchased the assets used in the provision of
residential telephone services in New York by RealCom Office Communications,
Inc. for cash of approximately $1,050.
The following unaudited pro forma summary presents information as if the
acquisitions of Freedom and Twin County had occurred at the beginning of 1996.
The pro forma information is provided for information purposes only. It is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations of the consolidated entities.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
Sales $127,297 $110,116
(Loss) from continuing operations before extraordinary items $(72,245) $(20,189)
Net (loss) $(53,831) $(16,807)
Pro Forma Earnings Per Share:
(Loss) from continuing operations before extraordinary items $ (1.31) $ (0.37)
Net (loss) $ (0.98) $ (0.31)
</TABLE>
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at cost, include the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Federal Agency notes $110,966 $ --
Commercial Paper 43,859 8,823
Corporate debt securities 222,785 38,008
Certificates of deposit 37,993 --
----------------------------------
Total $415,603 $46,831
==================================
</TABLE>
At December 31, 1997, short term investments with an amortized cost of
$329,714 have contractual maturities of one to three years. All remaining short
term investments have contractual maturities under one year.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
<S> <C> <C>
Hybrid fiber/coaxial plant $ 157,652 $148,172
Advanced fiber plant 76,572 29,226
Wireless & other plant 4,771 4,245
Buildings, leasehold improvements and land 16,607 10,989
Furniture, fixtures and vehicles 23,399 18,119
Construction in process 28,195 9,013
Other 563 593
------------------------------------
Total property, plant and equipment 307,759 220,357
Less accumulated depreciation (107,419) (84,529)
------------------------------------
Property, plant and equipment, net $ 200,340 $135,828
====================================
</TABLE>
Depreciation expense was $24,257, $19,372 and $13,236 for the years ended
December 31, 1997, 1996 and 1995, respectively.
<PAGE>
7. INVESTMENTS AND JOINT VENTURES
Investments at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Megacable $70,363 $74,232
Partnership -- 2,315
Other 61 --
----------------------------------
Total Investments $70,424 $76,547
==================================
</TABLE>
Investments carried on the equity method consist of the following at December
31:
<TABLE>
<CAPTION>
Percentage Owned
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Megacable 40.00% 40.00%
Partnership Interest -- 33.33%
Starpower Communications, LLC 50.00% --
</TABLE>
a. In September 1996, RCN and Boston Edison Company ("BECO"), through wholly
owned subsidiaries, entered into a letter of intent to form a joint venture to
utilize 126 fiber miles of BECO's fiber optic network to deliver RCN's
comprehensive communications package in Greater Boston. The venture, in the
form of an unregulated entity with a term expiring in the year 2060, was formed
pursuant to a joint venture agreement dated December 23, 1996 (the "Boston Joint
Venture Agreement") providing for the organization and operation of RCN-BECOCOM,
LLC ("RCN-BECOCOM"). RCN-BECOCOM was organized to own and operate an advanced
fiber optic telecommunications network and to provide, in the market in and
around Boston, Massachusetts , voice, video and data services, as well as the
communications support component of energy related customer services offered by
BECO. RCN owns 51% of the equity interest in RCN-BECOCOM and BECO, owns the
remaining 49% interest. Future capital contributions are required to be made on
a 51% and 49% basis for RCN and BECO, respectively.
The closing of the transactions contemplated by the Boston Joint Venture
Agreement occurred on June 17, 1997. RCN will manage the business of RCN-
BECOCOM pursuant to the terms of the Management Agreement and, in consideration
therefor, will receive reimbursement for its reasonable costs, and a
performance-based fee (based on factors including the number of subscribers and
operating cash flow) to be determined by agreement of RCN and RCN-BECOCOM. The
initial term of the agreement expires on December 31, 2001. The agreement
provides for automatic successive three-year renewal periods, unless notice is
given ninety days before the end of the period. As a result of its ownership,
management and control, this joint venture with BECO is consolidated in RCN's
financial statements.
Pursuant to an Indefeasible Right of Use Agreement ("IRU Agreement") , BECO
will, for certain agreed upon fees, (i) provide construction services to build
out the Network, (ii) make available to RCN-BECOCOM (a) all of the available
capacity of BECO's existing fiber backbone, and (b) the ability to use BECO's
real estate, poles, easements and other interests for the construction and
operation of the Network and (iii) maintain the Network. BECO's construction
obligations expire on June 17, 2007 and the term of the IRU Agreement expires on
December 31, 2060. One year before each respective expiration date, BECO agrees
to commence good-faith negotiations to extend construction obligations beyond
June 17, 2007 and to allow continued use of BECO's facilities beyond December
31, 2060. The fair value of the IRU transferred by BECO to the joint venture is
reflected as "Advanced Fiber Plant" in property, plant and equipment.
BECO will have the right at the time of the Distribution and every two years
thereafter to convert its ownership interest in RCN-BECOCOM into the Common
Stock of RCN pursuant to specific terms and conditions. If BECO exercises its
conversion rights, BECO will remain obligated to make 49% of all cash
contributions by the parties and any cash contributions made after conversion
will result in it owning a portion of RCN-BECOCOM based on the value of RCN-
BECOCOM at the time of the contribution. BECO may exercise its conversion
rights in whole or in part from time to time. In January 1998, BECO notified
RCN that it has elected to exercise its option to the full extent permitted by
the Exchange Agreement with respect to 1997. RCN and BECO are presently in
discussions with respect to the calculation of the agreed upon value for the
exercise of such option.
<PAGE>
b. On August 1, 1997, RCN and Potomac Capital Investment Corporation
("PCI"), a wholly owned subsidiary of PEPCO, entered into a letter of intent
(the "Letter of Intent") to form a joint venture which will own and operate a
communications network to provide voice, video, data and other communications
services to residential and commercial customers in the greater Washington,
D.C., Virginia and Maryland area (the "Washington, D.C. Market"). Starpower, an
unregulated limited liability company with a perpetual term, was formed on
October 28, 1997 to construct, own, lease, operate and market a network for the
selling of voice, video, data and other telecommunications services to all
potential commercial and residential customers in the Washington, D.C. Market.
RCN owns 50% of the equity interest in Starpower and PCI owns the remaining 50%
interest.
The closing of the Starpower joint venture (the "Starpower Closing") occurred
on December 19, 1997.
Pursuant to the Amended and Restated Operating Agreement, RCN and Pepco
Communications are each required to make additional capital contributions in
accordance with a schedule set forth in such agreement on a 50%/50% basis.
Failure of either RCN or Pepco Communications to make a scheduled capital
contribution or to vote in favor of certain additional capital contributions may
result in the recalculation of equity interests. The business and affairs of
Starpower is to be managed by RCN and Pepco Communications. So long as RCN and
Pepco Communications maintain a 50%/50% equity interest in the joint venture,
each of RCN and Pepco Communications will appoint three members to the
operating committee, the approval of which is required for any business action.
Certain fundamental business actions, such as mergers, acquisitions, sales of
substantially all of the assets, liquidation and amendments to the certificate
of organization or any agreement signed at the Starpower Closing, require the
unanimous approval of the operating committee regardless of whether the parties
continue to maintain a 50%/50% ownership interest. As a result of the joint
control, Starpower is accounted for under the equity method of accounting.
A subsidiary of RCN will provide support services including customer service,
billing, marketing and certain administrative, accounting and technical support
services, each of which shall be provided at cost.
c. The basis of the Company's investment in Megacable exceeded its underlying
equity in the net assets of Megacable when acquired by approximately $94,000
which excess is being amortized on a straight-line basis over 15 years. At
December 31, 1997, the unamortized excess over the underlying equity in the net
assets was $75,886. The Company recorded its proportionate share of (losses)
and amortization of excess cost over net assets of ($3,869), ($2,190) and
($3,061) in 1997, 1996 and 1995, respectively.
Effective January 1, 1997, since the three-year cumulative rate of inflation
at December 31, 1996 exceeded 100%, Mexico is being treated for accounting
purposes under Statement of Financial Accounting Standards No. 52 -- "Foreign
Currency Translation", as having a highly inflationary economy. As a result,
the financial statements of Megacable are remeasured as if the functional
currency were the U.S. dollar. The remeasurement of the Mexican peso into U.S.
dollars creates translation adjustments which are included in net income.
Exchange gains (losses) of $(12), $247, and $(932) in 1997, 1996 and 1995,
respectively, including translation losses in 1997, are included in the
respective statements of operations through the Company's proportionate share of
losses of Megacable.
The following table reflects the summarized financial position and results of
operations of Megacable as of and for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Assets $76,323 $67,672
Liabilities 8,347 6,455
Stockholders' equity 67,976 61,217
Sales 30,441 23,225
Costs and expenses 23,389 15,689
Foreign currency transaction gains (losses) (31) 618
Net income 6,653 10,226
</TABLE>
<PAGE>
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31,
<TABLE>
<CAPTION> Amortization
Period 1997 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Franchises and subscriber lists 2-10.5 years $ 79,273 $ 78,720
Noncompete agreements 5-8 years 11,209 11,209
Goodwill 5-10 years 42,787 16,830
Building access rights 3-4 years 15,197 14,920
Other intangible assets 5-15 years 1,469 520
-------------------------------------
Total intangible assets 149,935 122,199
Less accumulated amortization (53,388) (28,728)
-------------------------------------
Intangible assets, net $ 96,547 $ 93,471
=====================================
</TABLE>
Amortization expense charged to operations in 1997, 1996 and 1995 was $28,948,
$19,509 and $9,100, respectively.
9. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Note and interest receivable - Mazon Corporativo, S.A. de C.V. $17,682 $15,310
Debt issuance costs 19,743 309
Prepaid pension costs -- 2,967
Prepaid professional services 938 3,439
Other 2,675 2,121
----------------------------------
Total $41,038 $24,146
==================================
</TABLE>
10. DEBT
a. Long-term debt
Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Senior Secured Notes 9.65% due 1999 $ -- $131,250
Revolving Credit Agreement 3,000 --
Term Credit Agreement 100,000 --
Senior Notes 10% due 2007 225,000 --
Senior Discount Notes 11 1/8% due 2007 358,103 --
----------------------------------
Total 686,103 131,250
Due within one year -- --
----------------------------------
Total Long -Term Debt $686,103 $131,250
==================================
</TABLE>
In October 1997, pursuant to Rule 144A of the Securities Exchange Act of 1933,
the Company completed an offering of 10% Senior Notes with an aggregate
principal amount of $225,000 and 11 1/8% Senior Discount Notes with an aggregate
principal amount at maturity of $601,045, both due 2007, to qualified
institutional buyers as defined in Rule 144A. The Senior Discount Notes were
issued at a discount and generated gross proceeds to the Company of $350,000.
In December 1997, the Company commenced an SEC registered Exchange Offer of its
10% Senior Notes due 2007, Series B for any and all outstanding 10% Senior Notes
due 2007, Series A and its 11 1/8% Senior Discount Notes due 2007, Series B for
any and all outstanding 11 1/8% Senior Discount Notes due 2007 Series A. The
Exchange Offer closed in January of 1998. All outstanding notes were exchanged.
<PAGE>
The 10% Senior Notes were issued under an indenture dated October 17, 1997
(the "10% Indenture") between the Company and The Chase Manhattan Bank, as
Trustee. The 10% Senior Notes are general senior obligations of the Company
which mature on October 15, 2007 and are collateralized by a pledge of the
Escrow Account which contains approximately $61,000 of the net proceeds from the
sale of the 10% Senior Notes plus approximately $1,000 of aggregate interest,
representing funds that, together with the future proceeds from the investment
thereof, will be sufficient to pay interest on the 10% Senior Notes for six
scheduled interest payments. Interest on the 10% Senior Notes is payable in
cash semi-annually in arrears on each April 15 and October 15, commencing April
15, 1998.
The 10% Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 10% Senior Notes are redeemable, in whole or in part, at any time on or
after October 15, 2002 at the option of the Company. The 10% Senior Notes have
redemption prices starting at 105% of the principal amount and declining to 100%
of the principal amount, plus any accrued interest.
The 11 1/8% Senior Discount Notes were issued under an indenture dated October
17, 1997 (the "11 1/8% Indenture") between the Company and The Chase Manhattan
Bank, as Trustee. The 11 1/8% Senior Discount Notes are general senior
obligations of the Company, limited to $601,045 aggregate principal amount at
maturity and will mature on October 15, 2007. The 11 1/8% Senior Discount Notes
were issued at a discount to yield gross proceeds of $350,000. The 11 1/8%
Senior Discount Notes will not bear cash interest prior to October 15, 2002.
The 11 1/8% Indenture contains certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 11 1/8% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after October 15, 2002 at the option of the Company. The 11 1/8%
Senior Discount Notes have redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued interest.
Certain subsidiaries of the Company, including RCN Cable, have in place a
$125,000 credit agreement comprised of two credit facilities. The first is a
five year revolving credit facility in the amount of $25,000 which provides
credit availability through June 30, 2002. Revolving loans may be repaid and
reborrowed from time to time. The second is a term credit facility in the
amount of $100,000 which is to be repaid over six years in quarterly
installments from September 30, 1999 through June 30, 2005. Interest only is
due through June 30, 1999. The interest rate is based on either a LIBOR or
Base Rate option, at the election of the Company (6.82% at December 31, 1997).
The credit agreement is collateralized by a pledge by the Company of its stock
in RCN Cable and may, in the future, be secured by pledges of stock of
subsidiaries of the Company. At December 31, 1997, the entire $100,000 term
credit facility is outstanding and $3,000 of the revolving credit facility is
outstanding. RCN Cable used a portion of its initial borrowings under the
credit facilities to prepay higher priced Senior Secured Notes. The early
extinguishment of the Senior Secured Notes resulted in an extraordinary charge
of $3,210, net of taxes of $1,728. The credit agreement contains restrictive
covenants which, among other things, require the Company to maintain certain
debt to cash flow and interest coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.
In 1989, in order to complete the August 29, 1989 Michigan Cable Television
acquisition, RCN Cable entered into a private placement of Senior Secured Notes
for $150,000 and a $70,000 Revolving Secured Credit Agreement, which was
voluntarily reduced to $60,000 in 1990 and which, in accordance with its terms,
reduced on a quarterly basis, through original scheduled maturity in September
1996. In August 1996, RCN Cable obtained an amendment and waiver related to
this Revolving Secured Credit Agreement which extended final maturity to
December 1996 and increased the amount of available borrowings. Additionally,
the restrictive covenant relating to limitations on the amount of capital
expenditures was waived for the year ending December 31, 1996. The Senior
Secured Notes were collateralized by the stock of certain cable subsidiaries of
the Company. On September 1, 1996 and on each
<PAGE>
September 1 thereafter, a mandatory principal repayment was required on the
Senior Secured Notes. The Senior Secured Notes contained restrictive covenants
which, among other things, required maintenance of a specified debt to cash flow
ratio. These notes were prepaid in 1997 as discussed above. The Senior Secured
Notes were classified as long-term at December 31, 1996 since the Company had
the intent and the ability to refinance this obligation on a long-term basis
through the above credit facilities.
In connection with the acquisition of Twin County Trans-Video, Inc., RCN Cable
issued a $4,000 promissory note at 5% due in May 2003. The note was unsecured.
In September 1996, the note was canceled in settlement of certain purchase price
adjustments.
Contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Aggregate Amounts
------------------------ --------------------
<S> <C>
1998 $ --
1999 $ 3,750
2000 $11,250
2001 $16,250
2002 $20,500
</TABLE>
b. Short-term debt
At December 31, 1997, the Company had unused lines of credit for $5,500 at
prime (8.50% at December 31, 1997). Short-term unsecured borrowings may be made
under these lines of credit. The amounts available under these lines of credit
are reduced by outstanding letters of credit ($3,060 at December 31,1997). All
unused lines of credit are cancellable at the option of the banks. There are no
commitment or facility fees associated with maintaining availability of the
above-mentioned lines of credit.
11. INCOME TAXES
The (benefit) provision for income taxes is reflected in the Consolidated
Statements of Operations as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal $(11,795) $ 5,730 $(5,713)
State 1,449 1,102 375
------------------------------
Total Current (10,346) 6,832 (5,338)
------------------------------
Deferred:
Federal (10,161) (4,751) 7,016
State (342) (1,000) (377)
------------------------------
Total Deferred (10,503) (5,751) 6,639
------------------------------
Amortization of ITC -- (102) (182)
------------------------------
Provision (benefit) for income taxes:
Before extraordinary item (20,849) 979 1,119
Extraordinary item (1,728) -- --
------------------------------
Total (benefit) provision for income taxes $(22,577) $ 979 $ 1,119
==============================
</TABLE>
At December 31, 1997 and 1995, the Company had tax related balances due from
affiliates of $3,186 and $501, respectively. At December 31, 1996, the Company
had tax related balances due to affiliates of $817.
<PAGE>
Temporary differences that give rise to a significant portion of deferred tax
assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net operating loss carryforwards $ 10,078 $ 2,130
Alternative minimum tax credits 167 219
Employee benefit plans 1,031 882
Reserve for bad debt 844 693
Start-up costs 586 959
Investment in unconsolidated entity 3,985 4,771
Accruals for nonrecurring charges and contract settlements 2,368 2,299
Other, net 1,823 1,888
---------------------
Total deferred tax assets 20,882 13,841
---------------------
(14,759) (15,019)
Property, plant and equipment
Intangible assets (11,253) (17,776)
All other (1,257) (1,229)
---------------------
Total deferred liabilities (27,269) (34,024)
---------------------
Subtotal (6,387) (20,183)
Valuation allowance (8,404) (3,691)
---------------------
Total deferred taxes $(14,791) $(23,874)
=====================
</TABLE>
In the opinion of management, based on the future turnaround of existing
temporary differences for the consolidated taxpaying group, primarily
depreciation, the Company will more likely than not be able to realize
substantially all of its deferred tax assets.
A valuation allowance has been provided for the portion of deferred tax assets
which, in the opinion of management is uncertain as to their realization. The
valuation allowance relates primarily to state net operating loss carryforwards
generated by certain subsidiaries.
The net change in the valuation allowance for deferred tax assets during 1997
was an increase of $4,713.
Net operating losses will expire as follows:
<TABLE>
<CAPTION>
Federal State
------- -------
<C> <S> <C>
1999 $ -- $ 2,793
2000 3,087
2001 14,532
2002 3,141
2003 10,244
2004 3,767
2011 38,116
2012 8,028
2017 8,218 --
------------------
Total $8,218 $83,708
==================
</TABLE>
<PAGE>
The provision (benefit) for income taxes is different from the amounts
computed by applying the U.S. statutory federal tax rate of 35%. The
differences are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
(Loss) income before (benefit) provision for the income taxes and
extraordinary item $(70,030) $(5,010) $3,233
=====================================================
Federal income tax benefit at statutory rate $(24,511) $(1,753) $1,131
State income taxes net of federal income tax benefit 719 66 (33)
Investment tax credits amortized -- (102) (50)
Amortization of goodwill 830 779 388
Estimated nondeductible expenses 1,913 1,564 (93)
Adjustment to prior year accrual (197) 421 (161)
Other, net 397 4 (63)
-----------------------------------------------------
Total (benefit) provision for income taxes $(20,849) $ 979 $1,119
=====================================================
</TABLE>
In 1995, C-TEC received official notification of final settlement from the
Internal Revenue Service relating to the examination of C-TEC's consolidated
federal income tax returns for 1989, 1990 and 1991. The most significant
adjustment relates to the disallowance of the claimed amortization of certain
intangible assets. As a result of the disallowance, the Company's taxes payable
for prior years increased approximately $580. The amount accrued in previous
years was sufficient to satisfy the above adjustment. No additional accrual
during 1995 was required.
In 1997 and 1996, estimated non-deductible expenses relate primarily to
charges in connection with the restructuring of the Company.
12. STOCKHOLDERS' EQUITY AND STOCK PLANS
The Company has authorized 100,000,000 shares of $1 par value common stock and
200,000,000 shares of $1 par value Class B nonvoting common stock. The Company
also has authorized 25,000,000 shares of $1 par value preferred stock. At
December 31, 1997, 54,989,870 shares of common stock are issued and outstanding.
In March 1998, the Company's Board of Directors approved a two-for-one stock
split, payable in the form of a 100% stock dividend. The record date for the
stock split is March 20, 1998. Stockholders of record at the market close on
that date will receive an additional share of RCN common stock for each share
held. The distribution date for the stock dividend will be April 3, 1998. All
share and per share data, stock option data, and market prices of the Company's
common stock have been restated to reflect this stock split.
In connection with the Distribution, the Company Board adopted the 1997 RCN
Corporation Stock Option Plan ("the 1997 Plan"), designed to provide equity
based compensation opportunities to key employees when shareholders of the
Company have received a corresponding benefit through appreciation in the value
of RCN Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well as
stock options that are not designated as incentive stock options, performance-
based stock options, stock appreciation rights, performance share units,
restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 5,000,000 shares of Common Stock, plus
3,040,100 shares of Common Stock issuable in connection with the Distribution
related option adjustments, may be issued pursuant to Awards granted under the
1997 Plan.
Unless earlier terminated by the Company Board, the 1997 Plan will expire on
the tenth anniversary of the Distribution. The Company Board or the
Compensation Committee may, at any time, or from time to time, amend or suspend
and, if suspended, reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of RCN were granted stock option
awards under C-TEC's stock option plans. In connection with the Distribution
3,040,100 options covering Common Stock were issued. Each C-TEC option was
adjusted so that each holder would currently hold options to purchase shares of
CTE Common Stock, RCN Common Stock and Cable Michigan Common Stock. The number
of shares subject to, and the exercise
<PAGE>
price of, such options were adjusted to take into account the Distribution and
to ensure that the aggregate intrinsic value of the resulting RCN, Cable
Michigan and CTE options immediately after the Distribution was equal to the
aggregate intrinsic value of the C-TEC options immediately prior to the
Distribution.
Information relating to stock options is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- ---------------
<S> <C> <C>
Outstanding December 31, 1994 1,431,000
Granted 1,257,000
Exercised --
Canceled 280,000
-----------------
Outstanding December 31, 1995 2,408,000
Granted 190,000
Exercised 58,000
Canceled 272,000
-----------------
Outstanding December 31, 1996 2,268,000 $ 7.10
Granted 4,862,100 $14.31
Exercised 20,000 $ 8.07
Canceled 3,000 $ 8.36
-----------------
Outstanding December 31, 1997 7,107,100 $11.95
=================
Shares exercisable December 31, 1997 1,221,000 $ 7.05
</TABLE>
The following table summarizes stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------------------ -----------------------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Prices Shares Remaining Contractual Life Exercise Price Shares Exercise Price
- -------------------------- ------------- -------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$6.24 to $8.40 3,017,100 7.5 years $ 7.36 1,221,000 $7.05
$15.32 to $16.82 4,090,000 9.8 years 15.33 -- --
--------------- ---------------
Total 7,107,100 1,221,000
=============== ===============
</TABLE>
No compensation expense related to stock option grants was recorded in 1997 as
the option exercise prices were equal to fair market value on the date granted.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black Scholes option pricing
model with weighted average assumptions for dividend yield of 0% for 1997, 1996
and 1995; expected volatility of 38.6% prior to the Distribution and 49.8%
subsequent to the Distribution for 1997, 39.5% for 1996, and 35.9% for 1995;
risk-free interest rate of 6.52%, 5.95% and 6.32% for 1997, 1996 and 1995,
respectively; and expected lives of 5 years for 1997, 1996 and 1995.
The weighted-average fair value of options granted during 1997 was $7.46.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Net earnings - as reported $(52,391) $(5,989) $2,114
Net earnings - pro forma $(54,419) $(6,612) $1,695
Basic earnings per share - as reported $ (0.95) $ (0.11) $ 0.04
Basic earnings per share - pro forma $ (0.99) $ (0.12) $ 0.03
Diluted earnings per share - as reported $ (0.95) $ (0.11) $ 0.04
Diluted earnings per share - pro forma $ (0.99) $ (0.12) $ 0.03
</TABLE>
<PAGE>
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the C-TEC "Executive Stock Purchase Plan" or "C-TEC
ESPP"). Under the C-TEC ESPP, participants may purchase shares of C-TEC Common
Stock in an amount of between 1% and 20% of their annual base compensation and
between 1% and 100% of their annual bonus compensation provided, however, that
in no event shall the participant's total contribution exceed 20% of the sum of
their annual compensation, as defined by the C-TEC ESPP. Participant's accounts
are credited with the number of share units derived by dividing the amount of
the participant's contribution by the average price of a share of C-TEC Common
Stock at approximately the time such contribution is made. The share units
credited to a participant's account do not give such participant any rights as a
shareholder with respect to, or any rights as a holder or record owner of, any
shares of C-TEC Common Stock. Amounts representing share units that have been
credited to a participant's account will be distributed, either in a lump sum or
in installments, as elected by the participant, following the earlier of the
participant's termination of employment or three calendar years following the
date on which the share units were initially credited to the participant's
account. It is anticipated that, at the time of distribution, a participant
will receive one share of C-TEC Common Stock for each share unit being
distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow.
Shares of restricted C-TEC Common Stock awarded under the C-TEC Executive
Stock Purchase Plan and share units awarded under the C-TEC ESPP that relate to
C-TEC Common Stock were adjusted so that following the Distribution, each such
participant was credited with an aggregate equivalent value of restricted shares
of common stock of Commonwealth Telephone Enterprises, the Company and Cable
Michigan. In 1997, the Company's Board of Directors approved the RCN
Corporation Executive Stock Purchase Plan (the "RCN ESPP"), with terms
substantially the same as the C-TEC ESPP. The number of shares which may be
distributed under the RCN ESPP as matching shares or in payment of share units
is 250,000. At December 31, 1997, 61,412 matching shares have been issued under
the RCN ESPP, none of which are vested. The Company recognizes the cost of the
matching shares over the vesting period. Expense recognized in 1997 and 1996
was $80 and $145, respectively.
13. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
County Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
<S> <C> <C>
Benefits earned during the year (service cost) $ 2,365 $ 1,656
Interest cost on projected benefit obligation 3,412 3,083
Actual return on plan assets (3,880) (12,897)
Other components net (1,456) 8,482
-------------------------------------
Net periodic pension cost $ 441 $ 324
=====================================
</TABLE>
<PAGE>
The following assumptions were used in the determination of the consolidated
projected benefit obligation and net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Discount rate 7.5% 7.0%
Expected long-term rate of return on plan assets 8.0% 8.0%
Weighted average long-term rate of compensation increases 6.0% 6.0%
</TABLE>
The Company's allocable share of the consolidated net periodic pension costs,
based on the Company's proportionate share of consolidated annualized salaries
as of the valuation date, was approximately $158 and $251 for 1996 and 1995,
respectively. These amounts are reflected in operating expenses. As discussed
below, no pension cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study of
its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants
in December 1996. In December 1996, C-TEC allocated pension plan assets of
$6,984 and the related liabilities to a separate plan for employees who no
longer accrue benefits after lump sum distributions. The allocation of assets
and liabilities resulted in a curtailment/settlement gain of $4,292. The
Company's allocable share of this gain was $3,437. This gain results primarily
from the reduction of the related projected benefit obligation. The curtailed
plan has assets in excess of the projected benefit obligation. Such excess
amounts to $3,917 which, along with unrecognized items of $1,148 results in
prepaid pension cost of $2,769, which is included in "Prepayments and other" in
the accompanying 1997 and 1996 consolidated balance sheets.
The following table sets forth the plans' funded status and amounts recognized
in C-TEC's balance sheet at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Plan assets at fair value $ 55,325
Actuarial present value of benefit obligations:
Accumulated benefit obligations:
Vested 32,372
Nonvested 1,704
------------------
Total 34,076
Effect of increases in compensation 6,042
------------------
Plan assets in excess of (less than) projected benefit obligation 15,207
Unrecognized transition asset (3,463)
Unrecognized prior service cost 2,438
Unrecognized net gain (11,215)
------------------
Prepaid pension cost $ 2,967
==================
</TABLE>
C-TEC's pension plan has assets in excess of the accumulated benefit
obligation. Plan assets include cash, equity, fixed income securities and
pooled funds under management by an insurance company. Plan assets include
common stock of C-TEC with a fair value of approximately $5,835 at December 31,
1996.
Prepaid pension cost is included in "Deferred Charges and Other Assets" in
the accompanying 1996 consolidated balance sheet. The prepaid pension asset was
transferred to CTE in connection with the Distribution in 1997.
C-TEC sponsors a 401(k) savings plan covering substantially all employees of
the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employees contributions. Contributions charged to expense were
$354 and $268 in 1996 and 1995, respectively. Contributions charged to expense
in 1997 prior to the Distribution were $515.
In connection with the Distribution, RCN established a qualified savings plan
under Section 401(k) of the Code that will also qualify as an ESOP under
Sections 401(a) and 4975(e)(7) of the Code (the "ESOP"). Eligible active
<PAGE>
employees under the ESOP, employees of the Company Businesses who make Section
401(k) contributions and certain other employees will be allocated shares of
Company Common Stock. Contributions charged to expense in 1997 were $306.
The Company provides certain postemployment benefits to former or inactive
employees of the Company who are not retirees. These benefits are primarily
short-term disability salary continuance. The Company accrues the cost of
postemployment benefits over employees' service lives. The Company uses the
services of an enrolled actuary to calculate the expense. Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries. The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost. The net periodic postemployment benefit cost
(credit) was approximately $458, $539 and ($106) in 1997, 1996 and 1995,
respectively.
14. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1997 related
to its 1998 construction budget.
b. Total rental expense, primarily for office space and pole rentals, was
$3,505, $3,632 and $2,846 for 1997, 1996 and 1995, respectively. At December
31, 1997, rental commitments under noncancellable leases, excluding annual pole
rental commitments of approximately $794 that are expected to continue
indefinitely, are as follows:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
------------ ------------------
<S> <C>
1998 $3,725
1999 $3,314
2000 $2,939
2001 $2,826
2002 $2,848
Thereafter $8,501
</TABLE>
c. The Company has outstanding letters of credit aggregating $3,060 at
December 31, 1997.
d. The Company has entered into various noncancellable contracts for
network services. Future obligations under these agreements are as
follows:
<TABLE>
<CAPTION>
Network
Year Services
-------------------------- --------------
<S> <C>
1998 $3,026
1999 $3,064
2000 $3,012
2001 $2,762
2002 $ 12
Thereafter $ 14
</TABLE>
e. The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation. However, there is no
assurance that there will not be additional challenges to its rates.
f. In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial position or results of operations or
liquidity of the Company.
g. The Company has agreed to indemnify Cable Michigan and CTE and their
respective subsidiaries against any and all liabilities which arise primarily
from or relate primarily to the management or conduct of the business of the
Company prior to the effective time of the Distribution. The Company has also
agreed to indemnify Cable Michigan and CTE and their respective subsidiaries
against 30% of any liability which arises from or relates to the
<PAGE>
management or conduct prior to the effective time of the Distribution of the
businesses of C-TEC and its subsidiaries and which is not a true CTE liability,
a true Cable Michigan liability or a true Company liability.
The Tax Sharing Agreement, by and among the Company, Cable Michigan and CTE
(the "Tax Sharing Agreement"), governs contingent tax liabilities and benefits,
tax contests and other tax matters with respect to tax returns filed with
respect to tax periods, in the case of the Company, ending or deemed to end on
or before the Distribution Date. Under the Tax Sharing Agreement, Adjustments
(as defined in the Tax Sharing Agreement) to taxes that are clearly attributable
to the Company Group, the Cable Michigan Group, or the CTE Group will be borne
solely by such group. Adjustments to all other tax liabilities will be borne
50% by CTE, 30% by the Company and 20% by Cable Michigan.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the Capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Code, then the
Company will be liable for any and all increases in tax attributable thereto.
h. Under the Starpower Amended and Restated Operating Agreement, the Company
is committed to make quarterly capital contributions aggregating the following
in the years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $56,250
1999 $68,750
2000 $25,000
</TABLE>
i. If, within five years after the Distribution, the ESOP portion of the
401(k) Plan does not hold shares representing at least 3% of the number of
shares of Company Common Stock outstanding immediately after the Distribution as
increased by the number of shares issuable to BECO pursuant to the Exchange
Agreement (collectively, "Outstanding Company Common Stock") with a market value
at such time of not less than $24,000, RCN will issue to the ESOP, in exchange
for a note from the ESOP (the "ESOP Note"), the amount of Company Common Stock
necessary to increase the ESOP's holdings of Company Common Stock to that level,
provided, however, that RCN is not obligated to issue shares to the ESOP in
excess of 5% of the number of shares of Outstanding Company Common Stock.
15. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company had the following transactions with affiliates during the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Corporate office costs allocated to affiliates $12,091 $12,362 $10,009
Cable staff and customer service costs allocated to Cable Michigan 3,489 3,577 2,952
Interest income on affiliate notes 8,688 15,119 17,340
Interest expense on affiliate notes 537 354 279
Long-distance terminating access charge expense from CTE 1,312 728 862
Royalty fees charged by CTE 669 859 533
Revenue from engineering services -- 296 2,169
Other affiliate revenues 1,576 -- 6
Other affiliate expenses 2,199 1,980 2,090
</TABLE>
At December 31, 1997 and 1996, the Company has accounts receivable from
related parties of $9,829 and $12,614, respectively, for these transactions. At
December 31, 1997 and 1996, the Company has accounts payable to related parties
of $3,748 and $4,880, respectively, for these transactions.
The Company had notes receivable of $7,914 in 1996 from advances by the
Company's corporate financial services company to CTE. The Company also had
notes receivable of $147,567 at December 31, 1996, from Cable Michigan, Inc.
primarily related to the acquisition of the Michigan cable operations and
subsequent operations. All intercompany notes receivable were settled in
connection with the Distribution.
<PAGE>
The Company had notes payable of $11,854 in 1996 from excess cash advanced by
CTE to the Company's corporate financial services company for investment. All
intercompany notes payable were settled in connection with the Distribution.
16. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables, cash and temporary cash investments, and short-term
investments.
The Company places its cash and temporary investments with high credit quality
financial institutions and limits the amount of credit exposure to any one
financial institution. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base primarily centered in
the Boston to Washington, D.C. corridor of the United States. The Company
routinely assesses the financial strength of its customers. As a consequence,
concentrations of credit risk are limited.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity of
these instruments.
b. Short-term investments
Short-term investments consist of commercial paper, corporate debt securities,
certificates of deposit and federal agency notes. Short-term investments are
carried at amortized cost which approximates fair value due to the short period
of time to maturity.
c. Long-term investments
Long-term investments consist of investments accounted for under the equity
method for which disclosure of fair value is not required. The note and
interest receivable are carried at cost plus accrued interest which management
believes approximates fair value.
d. Investments restricted for debt service
Investments restricted for debt service consists of an amount placed in escrow
from the proceeds of the 10% Senior Notes which, together with the proceeds from
the investment thereof, will be sufficient to pay interest on the 10% Senior
Notes for six scheduled interest payments. Investments restricted for debt
service are carried at amortized cost.
e. Long-term debt
The fair value of fixed rate long-term debt was estimated based on the
Company's current incremental borrowing rate for debt of the same remaining
maturities. The fair value of floating rate debt is considered to be equal to
the carrying value since the debt reprices at least every six months and the
Company believes that its credit risk has not changed from the time the floating
rate debt was borrowed and therefore, it would obtain similar rates in the
current market.
f. Letter of credit
The contract amount of letters of credit represents a reasonable estimate of
their value since such instruments reflect fair value as a condition of their
underlying purpose and are subject to fees competitively determined in the
marketplace.
<PAGE>
The estimated carrying fair value of the Company's financial instruments are
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments $222,910 $222,910 $ 61,843 $ 61,843
Short-term investments $415,603 $415,603 $ 46,831 $ 46,831
Note and interest receivable $ 17,682 $ 17,682 $ 15,310 $ 15,310
Investments restricted for debt service $ 61,911 $ 61,911 -- --
Financial Liabilities:
Fixed rate long-term debt:
Senior Secured Notes -- -- $131,250 $137,459
Senior Notes 10% $225,000 $233,438 -- --
Senior Discount Notes 11.125% $358,103 $377,156 -- --
Floating rate long-term debt:
Revolving Credit Agreement $ 3,000 $ 3,000 -- --
Term Credit Agreement $100,000 $100,000 -- --
Unrecognized financial instruments:
Letters of credit $ 3,060 $ 3,060 $ 3,060 $ 3,060
</TABLE>
18. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 29,677 $ 31,029 $ 31,148 $ 35,443
Operating income (loss) before depreciation,
amortization and nonrecurring charges $ 4,153 $ 850 $ (4,332) ($8,341)
Operating (loss) $(18,037) $(12,416) $(18,011) $(22,411)
Loss before extraordinary charge N/A N/A N/A $(17,116)
Loss before extraordinary charge per Average common
share N/A N/A N/A $ (0.31)
Common Stock
High N/A N/A $ 16.63 $ 21.63
Low N/A N/A $ 12.44 $ 12.50
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales $24,165 $24,852 $26,746 $29,147
Operating income before depreciation and amortization $ 4,199 $ 7,777 $ 9,188 $ 4,639
Operating (loss) $(4,621) $(1,233) $ (19) $(7,205)
</TABLE>
<PAGE>
19. SUBSEQUENT EVENTS
a. In February 1998, the Company completed an offering of 9.8% Senior
Discount Notes with an aggregate principal amount at maturity of $567,000, due
February 2008. The 9.8% Senior Discount Notes were issued at a discount and
generated gross proceeds to the Company of $350,587.
The 9.8% Senior Discount Notes are general senior obligations of the Company,
limited to $567,000 aggregate principal amount at maturity and will mature on
February 15, 2008. The 9.8% Senior Discount Notes were issued at a discount to
yield gross proceeds of $350,587. The 9.8% Senior Discount Notes will not pay
cash interest prior to February 15, 2003. The yield to maturity of the 9.8%
Senior Discount Notes, determined on a semi-annual bond equivalent basis, will
be 9.8% per annum.
The 9.8% Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, prepay subordinate indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
The 9.8% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of the Company. The 9.8%
Senior Discount Notes may be redeemed at redemption prices starting at 104.9% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest.
b. On January 21, 1998, RCN entered into the Agreement and Plan of Merger
(the "Erols Merger Agreement") among RCN, Erols Internet, Inc. ("Erols"), Erol
Onaran, Gold & Appel Transfer, S.A., a British Virgin Islands corporation ("Gold
& Appel"), and ENET Holdings, Inc., a Delaware corporation and a wholly owned
subsidiary of RCN ("ENET"), to acquire all of the outstanding shares of common
stock of Erols. The merger was consummated on February 20, 1998. Erols merged
with and into ENET (the "Erols Merger"), with ENET as the surviving corporation.
The approximate total Erols Merger consideration was $29,200 in cash, 1,730,648
shares of RCN common stock plus the assumption and repayment of $5,800 of debt.
Additionally, the Company is converting approximately 999,000 Erols stock
options to 699,104 RCN stock options at an average exercise price of $3.424 per
share. The transaction was accounted for under the purchase method of
accounting.
RCN expects to contribute to Starpower approximately 60% of the subscribers
acquired in the acquisition of Erols.
c. On January 21, 1998, RCN, UNET Holdings, Inc., a wholly owned subsidiary
of RCN, and Ultranet Communications, Inc. ("Ultranet") entered into an Agreement
and Plan of Merger (the "Ultranet Merger Agreement"). The total consideration
for the acquisition was $7,368 in cash, 890,384 shares of RCN common stock, and
$3,000 in deferred compensation. Additionally, the Company is converting 63,500
UltraNet stock options to 117,052 RCN stock options at an average exercise price
of $1.825 per share and making cash payments aggregating approximately $503 to
certain other holders of UltraNet stock options. The transaction was
consummated on February 27, 1998. The transaction was accounted for under the
purchase method of accounting.
RCN expects to contribute to RCN-BECOCOM approximately 30% of the subscribers
acquired in the acquisition of Ultranet.
d. RCN paid $12,500 in cash in January 1998 as its initial capital
contribution to Starpower.
e. In January 1998, BECO notified RCN that it has elected to exercise its
option to the full extent permitted by the Exchange Agreement (Note 7) with
respect to 1997. RCN and BECO are presently in discussions with respect to the
calculation of the agreed upon value for the exercise of such option.
<PAGE>
f. On February 27, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Lancit Media Entertainment, Ltd. ("Lancit")
and LME Acquisition Corporation ("MergerSub"), a wholly owned subsidiary of RCN.
Pursuant to the terms of the Merger Agreement, MergerSub will be merged with and
into Lancit (the "Merger") such that immediately following the Merger, Lancit
will be a wholly-owned subsidiary of RCN. The consummation of the Merger is
subject to customary conditions, including the adoption and approval of the
Merger and the Merger Agreement by the stockholders of Lancit in accordance
with the provisions of applicable law and the filing and effectiveness of a
registration statement of RCN. There is no assurance that this transaction will
be consummated.
<PAGE>
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in these
financial statements is the responsibility of the management of RCN Corporation.
The financial statements report on management's accountability for Company
operations and assets. To this end, management maintains a system of internal
controls and procedures designed to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity with generally accepted accounting principles. The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.
Coopers & Lybrand, L.L.P., independent accountants, conduct a review of internal
accounting controls to the extent required by generally accepted auditing
standards and perform such tests and procedures as they deem necessary to arrive
at an opinion on the fairness of the financial statements presented herein.
The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company. The Audit Committee
recommends to the Board of Directors the independent auditors for election by
the shareholders. The Committee also meets periodically with management and the
independent and internal auditors to review accounting, auditing, internal
accounting controls and financial reporting matters. As a matter of policy, the
internal auditors and the independent auditors periodically meet alone with, and
have access to, the Audit Committee.
\s\ Bruce C. Godfrey
- --------------------
Bruce C. Godfrey
Executive Vice President
Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of RCN Corporation:
We have audited the accompanying consolidated balance sheets of RCN
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCN Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 13, 1998
(except Note 2, as to which
the date is May 20, 1998)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 222,910
<SECURITIES> 415,603
<RECEIVABLES> 16,967<F1>
<ALLOWANCES> 2,134
<INVENTORY> 2,745
<CURRENT-ASSETS> 703,232
<PP&E> 307,759
<DEPRECIATION> 107,419
<TOTAL-ASSETS> 1,150,992
<CURRENT-LIABILITIES> 69,705
<BONDS> 686,103
0
0
<COMMON> 54,989
<OTHER-SE> 301,595
<TOTAL-LIABILITY-AND-EQUITY> 1,150,992
<SALES> 0
<TOTAL-REVENUES> 127,297
<CGS> 0
<TOTAL-COSTS> 101,739<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,732
<INTEREST-EXPENSE> 25,602
<INCOME-PRETAX> (73,522)
<INCOME-TAX> (20,849)
<INCOME-CONTINUING> (49,181)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,210)
<CHANGES> 0
<NET-INCOME> (52,391)
<EPS-PRIMARY> (0.95)<F2>
<EPS-DILUTED> (0.95)<F2>
<FN>
<F1>Receivables and total costs have been restated to conform with the December
1997 reporting format.
<F2>EPS has been restated to give effect to a two for one stock split payable in
the form of a 100% stock dividend, declared in March 1998 for stockholders of
record on March 20, 1998, with a distribution date of April 3, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 61,843
<SECURITIES> 46,831
<RECEIVABLES> 11,845<F1>
<ALLOWANCES> 861
<INVENTORY> 1,140
<CURRENT-ASSETS> 142,612
<PP&E> 220,357
<DEPRECIATION> 84,529
<TOTAL-ASSETS> 628,085
<CURRENT-LIABILITIES> 57,292
<BONDS> 131,250
0
0
<COMMON> 1
<OTHER-SE> 390,764
<TOTAL-LIABILITY-AND-EQUITY> 628,085
<SALES> 0
<TOTAL-REVENUES> 104,910
<CGS> 0
<TOTAL-COSTS> 70,822<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,788
<INTEREST-EXPENSE> 16,046
<INCOME-PRETAX> (4,068)
<INCOME-TAX> 979
<INCOME-CONTINUING> (5,989)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,989)
<EPS-PRIMARY> (0.11)<F2>
<EPS-DILUTED> (0.11)<F2>
<FN>
<F1>Receivables and total costs have been restated to conform with the December
1997 reporting format.
<F2>EPS has been restated to give effect to a two for one stock split payable in
the form of a 100% stock dividend, declared in March 1998 for stockholders of
record on March 20, 1998, with a distribution date of April 3, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 40,130
<SECURITIES> 13,007
<RECEIVABLES> 14,179<F1>
<ALLOWANCES> 1,736
<INVENTORY> 1,117
<CURRENT-ASSETS> 86,901
<PP&E> 227,635
<DEPRECIATION> 89,948
<TOTAL-ASSETS> 645,248
<CURRENT-LIABILITIES> 56,605
<BONDS> 131,250
0
0
<COMMON> 1
<OTHER-SE> 362,448
<TOTAL-LIABILITY-AND-EQUITY> 645,248
<SALES> 0
<TOTAL-REVENUES> 29,677
<CGS> 0
<TOTAL-COSTS> 22,715<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 531
<INTEREST-EXPENSE> 3,431
<INCOME-PRETAX> (16,348)
<INCOME-TAX> (4,800)
<INCOME-CONTINUING> (11,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,444)
<EPS-PRIMARY> (0.21)<F2>
<EPS-DILUTED> (0.21)<F2>
<FN>
<F1>Receivables and total costs have been restated to conform with the December
1997 reporting format.
<F2>EPS has been restated to give effect to a two for one stock split payable in
the form of a 100% stock dividend, declared in March 1998 for stockholders of
record on March 20, 1998, with a distribution date of April 3, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 41,478
<SECURITIES> 4,003
<RECEIVABLES> 16,843<F1>
<ALLOWANCES> 1,809
<INVENTORY> 1,323
<CURRENT-ASSETS> 84,688
<PP&E> 240,453
<DEPRECIATION> 95,457
<TOTAL-ASSETS> 593,650
<CURRENT-LIABILITIES> 63,135
<BONDS> 131,250
0
0
<COMMON> 1
<OTHER-SE> 341,453
<TOTAL-LIABILITY-AND-EQUITY> 593,650
<SALES> 0
<TOTAL-REVENUES> 60,706
<CGS> 0
<TOTAL-COSTS> 46,994<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,297
<INTEREST-EXPENSE> 7,129
<INCOME-PRETAX> (27,220)
<INCOME-TAX> (7,143)
<INCOME-CONTINUING> (20,250)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,250)
<EPS-PRIMARY> (0.37)<F2>
<EPS-DILUTED> (0.37)<F2>
<FN>
<F1>Receivables and total costs have been restated to conform with the December
1997 reporting format.
<F2>EPS has been restated to give effect to a two for one stock split payable in
the form of a 100% stock dividend, declared in March 1998 for stockholders of
record on March 20, 1998, with a distribution date of April 3, 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 183,337
<SECURITIES> 0
<RECEIVABLES> 18,402<F1>
<ALLOWANCES> 1,741
<INVENTORY> 2,428
<CURRENT-ASSETS> 247,068
<PP&E> 273,960
<DEPRECIATION> 101,544
<TOTAL-ASSETS> 598,679
<CURRENT-LIABILITIES> 72,441
<BONDS> 110,000
0
0
<COMMON> 54,970
<OTHER-SE> 318,790
<TOTAL-LIABILITY-AND-EQUITY> 598,679
<SALES> 0
<TOTAL-REVENUES> 91,854
<CGS> 0
<TOTAL-COSTS> 71,849<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,327
<INTEREST-EXPENSE> 10,460
<INCOME-PRETAX> (45,253)
<INCOME-TAX> (11,907)
<INCOME-CONTINUING> (32,065)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,210)
<CHANGES> 0
<NET-INCOME> (35,275)
<EPS-PRIMARY> (0.64)<F2>
<EPS-DILUTED> (0.64)<F2>
<FN>
<F1>Receivables and total costs have been restated to conform with the December
1997 reporting format.
<F2>EPS has been restated to give effect to a two for one stock split payable in
the form of a 100% stock dividend, declared in March 1998 for stockholders of
record on March 20, 1998, with a distribution date of April 3, 1998.
</FN>
</TABLE>
