As filed with the Securities and Exchange Commission on March 10, 1999
Registration No. 333-63889
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
AMENDMENT NO. 2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3498533
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
John Jones
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
Copy to:
Julia Cowles
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
--------------------
Approximate date of commencement of proposed sale to the
public: From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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PROSPECTUS
March , 1999 RCN LOGO
436,118 Shares
RCN Corporation
Common Stock
---------------
This prospectus relates to the sale of up to 436,118 shares of
common stock, par value $1.00 per share, of RCN Corporation by certain
shareholders of RCN Corporation. All of the shares were originally issued by
RCN Corporation in connection with its acquisition of JavaNet, Inc.
---------------
The common stock is included for quotation in The Nasdaq
National Market under the symbol "RCNC." On March 8, 1999, the last sale
price of the common stock was $24 1/2 per share.
---------------
Investing in common stock involves certain risks. See "Risk
Factors" beginning on Page 6.
---------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
SUMMARY
This summary may not contain all the information that may be
important to you. You should read the entire prospectus, including the
financial data and related notes, before making an investment decision.
We are building high-speed, high-capacity advanced fiber optic
networks in selected markets with high levels of population density. Our
strategy is to become the leading single source provider of voice, video and
data services to residential customers in each of our markets by offering
individual or bundled service options, superior customer service and
competitive prices. We are also constructing our networks with significant
excess capacity in order to accommodate expanded services in the future.
Our initial advanced fiber optic networks have been established
in selected markets in the Boston to Washington, D.C. corridors, which
includes New York City, and also in the San Francisco Bay area. In Boston and
Washington, we operate through joint ventures with Boston Edison Company and
PEPCO Communications, L.L.C., respectively. We are typically building the
first true local network to compete with the aging infrastructure of the
incumbent service providers in our markets.
The construction and operation of our local networks are highly
scalable. The economic viability of a market area is principally dependent
upon achieving a minimum number of homes passed in the area being served by
each switching and head end facility. We phase our market entrance or
expansion projects such that we have sufficient cash on hand to reach these
home passed minimums. Additional funding accelerates our ability to enter new
markets or further expand existing ones.
We have extensive operating experience in the telephone, video
and Internet industries and in the design, development and construction of
telecommunications facilities. As of December 31, 1998, we had approximately
855,000 total service connections, including approximately 123,000 connections
provided to customers on our advanced fiber optic network.
Business Strategy
Our goal is to become the leading provider of communication
services to residential customers in our target markets by pursuing the
following key strategies:
o Exploit the "Last Mile" Bottleneck in Existing Local
Networks. Existing local networks are typically low
capacity, single service facilities without the bandwidth
for multiple or new services and revenue streams. We seek
to be the first operator of an advanced fiber optic
network offering advanced communications services to
residential customers in our target markets.
o Continue Construction of Advanced Fiber Optic Networks. Our
advanced fiber optic networks are designed with sufficient
capacity to meet the growing demand for high speed, high
capacity, voice, video and data services. Our networks
also have a significant amount of excess capacity which
will be available for the introduction of new products.
o Leverage our Network and Customer Base. We are able to
leverage our network by delivering a broad range of
communications products and by focusing on high density
residential markets. This bandwidth capacity and home
density allows us to maximize the revenue potential per
mile of constructed network. We believe we can further
exploit our network capacity and customer base by
exploring opportunities to deliver new products and
services in the future, including complementary commercial
and wholesale products and services.
o Offer Bundled Voice, Video and Data Services with Quality
Customer Service. By connecting customers to our own
network, we improve our operating economics and have
complete control over our customers' experience with us.
o Continue to Use Strategic Alliances. We have been able to
enter markets quickly and efficiently and to reduce the
up-front capital investment required to deploy our
networks by entering into strategic alliances.
Connections
Because we deliver a variety of services to our customers, we
report the total number of our various revenue generating service connections
for local telephone, video programming and Internet access. For example, a
single customer who purchases local telephone, video programming and Internet
access counts as three connections. The table below shows our growth in total
connections and growth in customers connected to advanced fiber optic
networks, which we refer to as "On-Net Connections".
<TABLE>
<CAPTION>
As of
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
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<S> <C> <C> <C> <C> <C>
Total Connections:
Voice............. 28,114 44,950 60,480 78,950 95,890
Video............. 239,403 243,157 249,360 255,100 261,662
Data.............. 150 370,538 400,148 474,127 497,809
Total........... 267,667 658,645 709,988 808,177 855,361
On-Net Connections. 15,148 20,339 48,212 82,842 123,393
Homes Passed....... 44,045 63,386 122,977 213,983 304,505
Marketable Homes... -- -- 111,187 181,353 270,406
</TABLE>
Our off-net connections are delivered through a variety of
facilities including hybrid fiber/coaxial cable systems and a wireless video
system.
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Our principal executive offices are located at 105 Carnegie
Center, Princeton, New Jersey, and our telephone number is (609) 734-3700. We
maintain a web site at http://www.rcn.com where general information about us is
available. Reference to the website shall not be deemed to incorporate the
contents of the website into this prospectus.
The Offering
Common stock offered by selling shareholders ........436,118
Common stock outstanding as of December 31, 1998 ....64,944,349
NASDAQ symbol .......................................RCNC
Use of proceeds .....................................We will not receive any
proceeds from the sale of
the shares being offered
hereby.
Risk Factors
Prospective investors should carefully consider all of the
information in this prospectus and, in particular, should evaluate the
specific risk factors set forth under "Risk Factors," beginning on page 6.
RISK FACTORS
You should carefully consider each of the following risks and
all of the other information set forth in this prospectus before deciding to
invest in our securities. Some of the following risks relate principally to
our business in general and the industry in which we operate. Other risks
relate principally to the securities markets and ownership of our securities.
The risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into
actual events, our business, financial condition or results of operations
could be materially adversely affected. In such case, the trading price of
our securities could decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks faced by us described below and elsewhere
in this prospectus.
We have a limited operating history and have incurred negative cash flow and
operating losses
We have only recently begun operating a voice, video and data
services business. Accordingly, you will need to evaluate our performance
based on a limited operating history. In connection with entering this
business, we have incurred operating and net losses and negative cash flows
and expect to continue to do so for the next five to seven years as we expand
our network and customer base. Whether we continue to have negative cash flow
in the future will be affected by a variety of factors including:
o our pace of entry into new markets;
o the time and expense required for constructing our fiber
optic network as we planned;
o our success in marketing services;
o the intensity of competition; and
o the availability of additional capital to pursue our
business plans.
We had operating losses after depreciation and amortization and
nonrecurring charges of $158,793,000, $70,875,000 and $13,078,000 for the
years ended December 31, 1998, 1997 and 1996. We can not assure you that we
will achieve or sustain profitability or positive cash flows from operating
activities in the future.
Additional growth will require additional capital, and our total capital needs
may be substantial
We expect that we will require a substantial amount of capital
to expand the development of our network and operations into new areas. We
will need capital to fund the construction of our advanced fiber optic
networks, upgrade our hybrid fiber/coaxial plant and fund operating losses and
pay our debts. Based on our current growth plan, we currently estimate that
our capital requirements for the period from January 1, 1999 through 2000 will
be approximately $1.8 billion, which include capital expenditures of
approximately $700 million in 1999 and approximately $1 billion in 2000.
These capital expenditures do not include amounts our joint venture partners
contribute to the Boston and Washington, D.C. joint ventures. We are
obligated to pay our portion of any capital contributions required by the
joint ventures' annual budget or capital contribution schedule. If our joint
venture partner(s) fail to make anticipated capital contributions, it could
have a material adverse effect on our business. See "Business--Network
Development and Financing Plan."
We may seek sources of funding from vendor financing, public
offerings or private placements of equity and/or debt securities, and bank
loans. We cannot assure you that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms. If we fail to obtain financing, it could result in the delay or
curtailment of our development and expansion plans and expenditures and could
have a material adverse effect on our business.
Our estimates of capital requirements are forward-looking
statements that are subject to change. The actual timing and amount of
capital required to develop our network and to fund operating losses may vary
materially from our estimates if there are significant departures from the
current business plan, unforeseen delays, cost overruns, engineering design
changes or other unanticipated expenses or occurrences.
Our substantial indebtedness limits our business flexibility
We have indebtedness that is substantial in relation to our
shareholders' equity and cash flow. As of December 31, 1998, we had an
aggregate of approximately $1,267 million of indebtedness outstanding. As a
result of our substantial indebtedness, fixed charges are expected to exceed
earnings for the foreseeable future, and our operating cash flow may not be
sufficient to pay principal and interest on our various debt securities. The
extent of our leverage may also have the following consequences:
o limit our ability to obtain necessary financing in the
future for working capital, capital expenditures, debt
service requirements or other purposes;
o require that a substantial portion of our cash flows from
operations be dedicated to paying principal and interest
on our indebtedness and therefore not be available for
other purposes;
o limit our flexibility in planning for, or reacting to,
changes in our business;
o place us at a competitive disadvantage as compared with our
competitors who do not have as much debt; and
o render us more vulnerable in the event of a downturn in our
business.
Our outstanding debt securities contain customary covenants
limiting our flexibility, including covenants limiting our ability to incur
additional debt, make liens, make investments, consolidate, merge or acquire
other businesses and sell assets, pay dividends and other distributions, make
capital expenditures and enter into transactions with affiliates.
We may not be able to manage our growth or integrate our acquisitions
The expansion and development of our operations, including the
construction and development of additional networks, will depend on several
factors, including our ability to:
o access markets,
o design fiber optic network backbone routes,
o install or lease fiber optic cable and other facilities,
including switches, and
o obtain rights-of-way, building access rights and any
government authorizations, franchises and permits,
all in a timely manner, at reasonable costs and on satisfactory
terms and conditions.
In addition to the markets we are presently developing, we
continually evaluate other potential markets. These markets may be within the
Boston to Washington, D.C. corridor or in non-contiguous areas. As is the
case in our present markets, we intend to evaluate potential markets in terms
of population density and favorable demographics, and to apply a strategy of
building network facilities to meet the needs of targeted subscribers in new
markets. We cannot assure you that we will be able to expand our existing
network or to identify and develop new markets. Furthermore, our ability to
manage our expansion effectively will also require us to continue to implement
and improve our operating and administrative systems and attract and retain
qualified management and professional and technical personnel. If we are not
able to manage our planned expansion effectively, it could have a material
adverse effect on our business.
We recently announced our intention to begin developing
advanced fiber optic networks in selected high density markets outside of the
Boston to Washington, D.C. corridor, initially in the San Francisco Bay Area.
Our proposed expansion into non-contiguous markets could place additional
strain on management resources. Furthermore, although we believe that our
experience in the Northeast will provide us with strategic advantages in
developing new markets, we cannot assure you that our experience in our
current markets will be replicated in the western United States.
We have experienced significant growth through acquisitions and
will continue to consider acquisition opportunities that arise from time to
time. Acquisitions may place a significant strain on our resources, and we may
incur additional expenses during the integration of the acquired company with
our business. For instance, the process of integrating the Internet service
provider businesses we acquired in 1998 may take a significant period of time
and require significant expenditure, including costs to upgrade the systems
and internal controls of these businesses. As a result, we cannot assure you
that we will be able to integrate these businesses successfully or in a timely
manner.
Our business is dependent upon acceptance of fiber optic technology as the
platform of choice
The telecommunications industry has been and will continue to
be subject to rapid and significant changes in technology. The effect of
technological changes on our business cannot be predicted, and we cannot
assure you that the fiber optic technology that we use will not be supplanted
by new or different technologies. See "Business--Competition."
We are dependent on our strategic relationships and joint ventures
We have entered into a number of strategic alliances and
relationships which allowed us to enter into the market for telecommunications
services earlier than if we had made the attempt independently. As our
network is further developed, we will be dependent on some of these
arrangements to provide a full range of telecommunications service offerings.
Our key strategic relationships include:
o our arrangements with MFS Communications Company, Inc.
(a subsidiary of WorldCom, Inc.) to lease portions of
MFS/WorldCom's fiber optic network in New York City and
Boston;
o our joint venture with Boston Edison Company under which we
have access to its extensive fiber optic network in
Greater Boston;
o our joint venture with Pepco Communications to develop and
operate an advanced fiber optic network in the
Washington, D.C. market; and
o our agreement with Level 3 to provide us with access to its
cross-country fiber network.
Our joint venture agreements with Boston Edison Company and
Pepco Communications contain provisions for the management, governance and
ownership of the RCN-BECOCOM and Starpower joint ventures, respectively.
Certain matters require the approval of our joint venture partner, including
some matters beyond our control, such as a change of control. In addition,
although certain covenants contained in our indentures apply to the joint
venture companies, neither the joint venture companies nor our joint venture
partners are parties to these indentures and are not bound to comply with the
indentures. A disagreement with our joint venture partners over certain
business actions, including actions related to compliance with these
indentures, could impede our ability to conduct our business. It may also
trigger deadlock provisions in the joint venture agreements which could force
us to sell our interest in the relevant joint venture or buy out the interest
of the other joint venturer. See "Business -- Strategic Relationships and
Facilities Agreements."
In addition, any disruption of our relationships or
arrangements with incumbent local exchange carriers, such as Bell Atlantic,
could have a material adverse effect on our company. We cannot assure you
that we will successfully negotiate agreements with the incumbent local
exchange carrier in new markets or renew existing agreements. Our failure to
negotiate or renew required interconnection and resale agreements could have a
material adverse effect on our business.
We may encounter difficulties in competing in the highly competitive
telecommunications industry
In each of the markets where we offer our services, we face
significant competition from larger, better-financed telephone carriers and
cable companies. Virtually all markets for voice, video and data services are
extremely competitive, and we expect that competition will intensify in the
future. Our principal competitors include:
o traditional and competitive telephone companies, including
Bell Atlantic, AT&T, Sprint, and MCI WorldCom, some of
which are constructing extensive fiber optic networks and
expanding into data services;
o cable television service operators such as Time Warner,
some of which are beginning to offer telephone and data
services through cable networks using fiber optic networks
and high-speed modems;
o established online services, such as America Online and
Internet services of other telecommunications companies;
o alliances and combinations of telephone companies, cable
service providers and Internet companies, including the
recently announced alliance that will combine services of
AT&T, TCI and At Home; and
o developing technologies such as Internet-based telephony
and satellite communications services.
It may be difficult to gain customers from the incumbent providers which have
historically dominated their markets.
Other new technologies may become competitive with services
that we offer. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors. We cannot predict the extent to which competition from such
developing and future technologies or from such future competitors will impact
our operations. See "Business -- Competition".
Our business plan depends upon continued application of regulations that have
been challenged in the past
Our ability to provide telephone and video programming
transmission services was made possible by important changes in government
regulations which have been subsequently challenged and may be subject to
change in the future. These regulations often have a direct or indirect
impact on the costs of operating our networks, and therefore the profitability
of our services. In addition, we will continue to be subject to other
regulations at the federal, state and local levels, all of which may change in
the future. We cannot assure you that we will be able to obtain all of the
authorizations we need to construct advanced fiber optic network facilities or
to retain the authorizations we have already acquired. It is possible that
changes in existing regulations could have an adverse impact on our ability to
obtain or retain authorizations and on our business. See
"Business--Regulation."
We may not be able to procure programming services from the third parties we
depend on
Our video programming services are dependent upon our
management's ability to procure programming that is attractive to our
customers at reasonable commercial rates. We are dependent upon third parties
for the development and delivery of programming services. These programming
suppliers charge us for the right to distribute the channels to our customers.
The costs to us for programming services is determined through negotiations
with these programming suppliers. Management believes that the availability of
sufficient programming on a timely basis will be important to our future
success. We cannot assure you that we will have access to programming
services or that management can secure rights to such programming on
commercially acceptable terms.
The expansion of our Internet services business has subjected us to additional
risks
The expansion of our Internet services business has subjected
us to additional risks. These risks will affect our ability to develop a
profitable Internet services business. These special factors include:
o evolving industry standards which have the potential to
make our services obsolete by replacing or providing
lower-cost alternatives to our services;
o constraints on server capacity or supply of equipment
(such as modems and servers) which could result in a
strain on incoming access lines, causing busy signals
and/or delays for our subscribers;
o network infrastructure and risk of system failure, such as
viruses, which could lead to interruptions, delays, or
cessation of our services, as well as corruption of our or
our subscribers' computer systems;
o possible claims of liability against us as a result of
computer viruses or security breaches; and
o the evolving competitive and regulatory environment
concerning Internet services.
Our management may have conflicts of interest with other companies
Level 3 Telecom beneficially owns approximately 46% of our
common stock. Level 3 Telecom effectively has the power to elect a majority
of our directors and to decide the outcome of substantially all matters voted
on by shareholders. This may tend to deter non-negotiated tender offers or
other efforts to obtain control of our company and thereby deprive
shareholders of opportunities to sell shares at prices higher than the
prevailing market price. Moreover, a disposition by Level 3 Telecom of a
significant portion of our common stock, or the perception that such a
disposition may occur, could affect the trading price of our common stock and
the control of our company. The common stock of Level 3 Telecom is owned 90%
by Level 3 and 10% by David C. McCourt, our Chairman and Chief Executive
Officer. Mr. McCourt has been a member of the Board of Directors and
President of Level 3 Telecom since September 1992. Based upon a review of
documents filed with the SEC, we believe that as of December 31, 1998, 16.1%
of the common stock of Level 3 was owned by directors and executive officers
of Level 3, five of whom (Walter Scott, Jr., Richard R. Jaros, David C.
McCourt, James Q. Crowe and Michael B. Yanney) are executive officers or
directors of RCN. The remaining shares of Level 3 common stock are owned by
other persons, none of whom own more than 5% of outstanding shares.
As a result of the September 30, 1997 spin-off of our shares to
holders of common equity of Commonwealth Telephone Enterprises, Inc.,
relationships exist that may lead to conflicts of interest. Level 3 Telecom
effectively controls both us and Commonwealth Telephone. In addition, the
majority of our named executive officers are also directors and/or executive
officers of Commonwealth Telephone. Our success may be affected by the degree
which our officers and directors are involved in our business and the
abilities of officers, directors and employees in managing both our company
and Commonwealth Telephone. We will deal with potential conflicts of interest
on a case-by-case basis taking into consideration relevant factors including
the requirements of The Nasdaq National Market and prevailing corporate
practices.
On January 12, 1999, we announced that we had entered into an
agreement with Level 3 for to provide us with access to its cross-country
fiber network. Although this agreement is designed to reflect similar
agreements entered into by parties negotiating at arm's length, we cannot
assure you that we would not be able to obtain better terms from an unrelated
third party.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document that
we file at the Public Reference Room of the SEC at 450 Fifth Street, NW,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also
inspect our filings at the regional offices of the SEC located at Citicorp,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048 or over the Internet at the SEC's WEB site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information
we file with them, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until we sell all of the securities:
(a) Annual Report on Form 10-K for the year ended December 31,
1997, as amended;
(b) Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, as amended;
(c) Current Report on Form 8-K dated May 8, 1998;
(d) Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, as amended;
(e) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, as amended; and
(f) Current Report on Form 8-K dated March o, 1999.
You may request a copy of these filings at no cost, by writing
or telephoning the office of Valerie Haertel, RCN Corporation, 105 Carnegie
Center, Princeton, N.J. 08540-6215, telephone number (609) 734 -3700.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject
to risks, uncertainties, and assumptions about our business, including, among
other things:
o plans to develop networks and upgrade facilities;
o opportunities presented by target markets;
o plans to connect certain wireless video, resale telephone
and Internet service customers to advanced fiber optic
networks;
o development of existing businesses;
o current and future markets for services and products;
o anticipated capital expenditures;
o impact of the Year 2000 issue;
o anticipated sources of capital; and
o effects of regulatory reform and competitive and
technological developments.
We have no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or risks. New information, future events or risks may cause the
forward-looking events we discuss in this prospectus not to occur.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares
being offered hereby.
DIVIDENDS
We anticipate that future revenues will be used principally to
support operations and finance business growth. Accordingly, we do not intend
to declare or pay cash dividends in the foreseeable future. Our Board of
Directors has the discretion to declare or pay any cash dividends in the
future. Their decision to declare any dividends and the amount of any
dividends will depend on a number of factors, including our financial
condition, capital requirements, funds from operations, future business
prospects and any other factor that they may deem relevant. We are a holding
company and our ability to pay cash dividends is dependent on our ability to
receive cash dividends, advances and other payments from our subsidiaries.
Our credit agreement contains restrictions on our subsidiaries' ability to pay
dividends. In addition, we have entered into indentures in connection with our
debt securities which also restrict our and certain of our subsidiaries'
ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 10-K for the year ended
December 31, 1997 and our 8-K dated March o, 1999.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth our selected historical consolidated
financial data. Prior to September 30, 1997, we operated as part of C-TEC
Corporation. The historical consolidated financial data presented below
reflect periods during which we did not operate as an independent company.
Accordingly, we had to make certain assumptions to reflect the results of
operations or the financial condition which would have resulted if we had
operated as a separate, independent company during the periods listed below.
You should not rely on the historical consolidated financial data as an
indication of our results of operation and financial condition that would have
been achieved if we had operated as a separate, independent company during the
periods listed below. The historical consolidated financial data also do not
necessarily indicate our future results of operation or financial condition.
We conduct portions of our business through joint ventures,
including our joint ventures with Boston Edison Company (which is consolidated
in our historical results of operations) and with Pepco Communications, L.L.C.
(which is accounted for under the equity method in our historical results of
operations). The unaudited financial information set forth under
"Consolidation of Joint Ventures--Results of Operations" in the table below
presents our results of operations as if all domestic joint ventures were
fully consolidated. We believe that this unaudited financial data provides
useful disclosure in analyzing our business.
The selected historical consolidated financial data for the
year ended December 31, 1994 and as of December 31, 1994 are derived from our
unaudited historical consolidated financial statements not included in this
prospectus. The selected historical consolidated financial data as of December
31, 1995 are derived from our audited historical consolidated financial
statements not included in this prospectus. The selected historical
consolidated financial data for the year ended December 31, 1995 and as of
December 31, 1996 are derived from and should be read in conjunction with our
audited historical consolidated financial statements incorporated by reference
to our 10-K for the year ended December 31, 1997. The selected historical
consolidated financial data for the years ended December 31, 1998, 1997 and
1996 and as of December 31, 1998 and 1997 are derived from and should be read
in conjunction with our audited historical consolidated financial statements
incorporated by reference to the our 8-K dated March o, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 10-K for the year ended December 31, 1997 and our 8-K dated
March o, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
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1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 59,500 $ 91,997 $104,910 $ 127,297 $ 210,940
Costs and expenses, excluding depreciation
and amortization................................ 49,747 75,003 79,107 134,967 262,352
Nonrecurring charges............................. -- -- -- 10,000 --
Acquired research and development................ -- -- -- -- 18,293
Depreciation and amortization.................... 9,803 22,336 38,881 53,205 89,088
-------- -------- -------- ---------- ----------
Operating (loss)................................. (50) (5,342) (13,078) (70,875) (158,793)
Interest income.................................. 21,547 29,001 25,602 22,824 58,679
Interest expense................................. (16,669) (16,517) (16,046) (25,602) (112,239)
Other (expense) income, net...................... 1,343 (304) (546) 131 (1,889)
(Benefit) provision for income taxes............. 2,340 1,119 979 (20,849) (4,998)
Equity in loss of unconsolidated entities........ -- (3,461) (2,282) (3,804) (12,719)
Minority interest in loss (income) of
consolidated entities........................... (95) (144) 1,340 7,296 17,162
Extraordinary charge- debt prepayment
penalty, net of tax of $1,728................... -- -- -- (3,210) --
Cumulative effect of changes in accounting
principles...................................... (83) -- -- -- (641)
-------- -------- -------- ---------- ----------
Net (loss) income................................ $ 3,653 $ 2,114 $ (5,989) $ (52,391) $ (205,442)
======== ======== ======== ========== ==========
Ratio of earnings to fixed charges............... 1.36 1.41 0.75 (1.87) (0.91)
Balance Sheet Data (at end of period):
Total assets..................................... $568,586 $649,610 $628,085 $1,150,992 $1,907,838
Long-term debt excluding current portion......... 154,000 135,250 131,250 686,103 1,263,036
Shareholders' equity............................. 372,847 394,069 390,765 356,584 371,446
Other Data:
EBITDA before nonrecurring charges............... 9,753 16,994 25,803 (7,670) (51,412)
Cashed Provided by (Used in):
Operating Activities............................. 6,193 48,559 23,831 2,069 35,110
Investing Activities............................. (140,152) (146,203) (9,377) (475,860) (828,176)
Financing Activities............................. 280,014 (31,203) 9,391 634,858 690,282
Consolidation of Joint Ventures--Results of
Operations:
Total Sales...................................... $104,910 $127,297 $ 245,125
Direct costs..................................... 35,226 51,757 112,371
Operating, selling, general and administrative... 43,881 83,422 181,248
EBITDA before nonrecurring charges............... 25,803 (7,882) (48,494)
Depreciation and amortization.................... 38,881 53,205 113,383
Operating (loss)................................. (13,078) (71,087) (180,170)
Cash, temporary cash investments and short-
term investments................................. 108,674 638,513 1,028,600
Property, plant and equipment.................... 220,357 307,920 645,005
Long-term debt (excluding current portion)....... 131,250 686,103 1,263,036
</TABLE>
In the table above:
(1) Nonrecurring charges represent costs of $10,000 incurred in
1997 the termination of a marketing services agreement related to our wireless
video services, and costs of $18,293 incurred in 1998 relating to acquisition
of in-process technology in connection with the acquisitions.
(2) The deficiency of earnings to fixed charges is based on
income from continuing operations and has been computed on a total enterprise
basis. Earnings represent income before income taxes, and fixed charges.
Fixed charges consist of interest expense and debt amortization costs. RCN's
earnings were insufficient to cover fixed charges by $73.5 million for the
year ended December 31, 1997 and by $214.2 million for the year ended December
31, 1998.
(3) EBITDA before nonrecurring charges represents earnings
before interest, depreciation and amortization, and income taxes. Because of
the capital intensive nature of the business and resulting large non-cash
charges for depreciation, EBITDA is commonly used in the communications
industry by management, investors, and analysts to analyze companies on the
basis of operating performance, leverage and liquidity. RCN intends to judge
the success of its initial rollout of fiber optic networks before deciding
whether to undertake additional capital expenditures to expand its network in
new areas. RCN believes that EBITDA is a critical measure of success.
Because RCN is in a growth-oriented and capital intensive phase of
development, it incurs depreciation and amortization charges in new markets
which may obscure its earnings growth in more mature markets. In addition,
EBITDA provides a measure of the availability of funds for various uses
including repayment of debt, expansion into new markets and acquisitions.
EBITDA is not intended to represent cash flows for the period and should not be
considered as an alternative to cash flows from operating, investing or
financing activities as determined in accordance with U.S. GAAP. EBITDA is not
a measurement under U.S. GAAP and may not be comparable with other similarly
titled measures of other companies. Certain of our debt agreements contain
certain covenants that, among other things, limit our and our subsidiaries'
ability 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.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Prior to September 30, 1997, RCN was operated as part of C-TEC.
The following unaudited pro forma consolidated statements of operations set
forth the historical statements of operations of RCN for the year ended
December 31, 1998 and as adjusted for the following:
o RCN's acquisition of Erols in February 1998;
o RCN's February 1998 issuance and sale of its 9.80% Senior
Discount Notes due 2008 (the "9.80% Notes"); and
o RCN's June 1998 issuance and sale of 6,098,355 shares of
Common Stock (the "Stock Offering") and its 11% Senior
Discount Notes due 2008 (the "11% Notes").
and the related transactions and events described in the notes thereto, as if
such transactions and events had been consummated on the first day of 1998.
Management believes that the assumptions used provide a
reasonable basis on which to present such unaudited pro forma statements of
operations. The unaudited pro forma statements of operations should be read in
conjunction with the financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 8-K dated
March o, 1999.
The unaudited pro forma statements of operations are provided
for information purposes only and should not be construed to be indicative of
RCN's results of operations had the spin-off and the transactions and events
described above been consummated on the dates assumed, may not reflect the
results of operations or financial condition which would have resulted had RCN
been operated as a separate, independent company during such period, and are
not necessarily indicative of RCN's future results of operations or financial
condition.
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Erols Adjustments
Historical for the Stock
Adjustments 1/1/98 - Acquisition Offering and
RCN for the 9.8% 2/28/98 Adjustments the 11%
Historical Notes (2) For Erols Notes Pro Forma
---------- ------------ ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales....................... $210,940 $8,700 $(5,371)(3) $214,269
Cost and expenses
excluding depreciation
and amortization.......... 262,352 8,388 (5,179)(3) 265,561
Nonrecurring acquisition
costs: In-process
technology................. 18,293 18,293
Depreciation and
amortization .............. 89,088 1,478 352 (4) 90,918
--------- ------- ------- ------- ------- ----------
Operating (loss)............. (158,793) (1,166) (544) -- (160,503)
Interest income.............. 58,679 58,679
Interest expense............. (112,239) $(3,492)(1) (164) 101 $(8,580)(6) (124,374)
Other (expense), net......... (1,889) (5) (1,894)
--------- ------- ------- ------- ------- ----------
(Loss) before income taxes... (214,242) (3,492) (1,335) (443) (8,580) (228,092)
(Benefit) for income taxes... (4,998) -- (1) -- -- (5) (4,998)
--------- ------- ------- ------- ------- ----------
(Loss) before equity in
unconsolidated entities
and minority interest...... (209,244) (3,492) (1,335) (443) (8,580) (223,094)
Equity in (loss) of
unconsolidated entities.... (12,719) (2,687)(3) (15,406)
Minority interest in loss of
consolidated entities...... 17,162 17,162
--------- ------- ------- ------- ------- ----------
Loss before cumulative effect
of change in accounting
principle.................. $(204,801) $(3,492) $(1,335) $(3,130) $(8,580) $ (221,338)
========= ======= ======= ======= ======= ==========
Unaudited pro forma loss per
average common share before
cumulative effect of change
in accounting principle.... $ (3.35) $ $ (3.62)
Weighted average number of
common shares and common
stock equivalents
outstanding................ 61,187,354 61,187,354
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statement of Operations
assumes that RCN was an autonomous entity rather than a wholly owned
subsidiary of C-TEC for the periods shown. The pro forma adjustments, as
described below, are keyed to the corresponding amounts shown in the relevant
statement.
(1) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 9.8% Notes aggregating
$3,492 for the year ended December 31, 1998. A pro forma adjustment was not
assumed for income tax benefits associated with the pro forma adjustment for
additional interest expense for the year ended December 31, 1998 because the
realization of such benefit would be uncertain.
(2) On February 20, 1998, RCN completed the acquisition of
Erols, Washington, D.C.'s largest Internet service provider. RCN accounted
for this transaction under the purchase method of accounting and accordingly,
the financial statements of Erols are not consolidated with RCN's historical
financial statements as of and for the year ended December 31, 1997. In 1998,
the financial results of Erols also are not consolidated with RCN's historical
financial statements for the period prior to February 20, 1998. The financial
information relating to Erols was provided by Erols.
A summary of the transaction is as follows:
Cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt of
approximately $5,100)................................ $ 36,000
Fair value of RCN stock issued.......................... 45,000
Fair value of stock options exchanged................... 11,000
Liabilities assumed..................................... 55,000
-----------
Fair value of assets acquired........................... $ 147,000
The fair value of assets acquired was allocated as follows:
In-process technology............. $ 13,228
Property, plant & equipment....... 19,100
Current assets.................... 2,280
Other assets...................... 3,800
Intangible assets: Estimated Useful
Life (months)
----------------
Customer base................ 15,000 48
Goodwill..................... 90,339 48
Tradename.................... 3,253 13
-----------
$ 147,000
===========
(3) Such adjustments include a pro forma allocation of
historical operating results of Erols to the joint venture with Pepco
Communications (see below) based upon the relationship of the number of
subscribers contributed to the joint venture to the total number of
subscribers acquired in the merger. RCN's share of such operating results,
including the depreciation and amortization effects of the allocation of a
portion of the total purchase price to the joint venture, representing the
agreed upon value of the subscribers to be contributed to the joint venture,
are included in the adjustment for "equity in (loss) of unconsolidated
entities."
A subsidiary of RCN is a party to a joint venture with a
subsidiary of Pepco Communications, to provide the greater Washington, D.C.
area residents and businesses local and long-distance telephone, cable
television, and Internet services as a package from a single source. As a
result of this joint venture, RCN contributed to the joint venture the
subscribers acquired in the merger with Erols which are located in the
relevant joint venture market. This represents approximately 62% of the
customer base acquired from Erols. The value of such contribution as agreed
to by the joint venture partners was $51,937. Additionally, Starpower assumed
the liability for the unearned revenue related to the subscribers contributed
to the joint venture of $26,663. A summary of related amounts transferred to
the joint venture is as follows:
<TABLE>
<S> <C>
Property, plant and equipment.................... $11,900
Customer base.................................... 9,300
Trade name....................................... 2,060
Goodwill......................................... 55,340
Unearned revenue................................. (26,663)
-------
Net investment in joint venture.................. $51,937
=======
</TABLE>
(4) Such adjustment reflects the change in depreciation and
amortization for the effect of the fair value adjustment of the net assets of
Erols acquired. RCN allocated the purchase price for Erols (see Note 2) on
the basis of the fair market value of the assets acquired and liabilities
assumed.
(5) A pro forma adjustment was not assumed for income tax
benefits associated with the pro forma adjustments for the historical results
of operations of Erols because the realization of such benefit would be
uncertain.
(6) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 11% Notes aggregating
$8,580 for the year ended December 31, 1998. Pro forma adjustments were not
assumed for income tax benefits associated with the pro forma adjustments for
additional interest expense because the realization of such benefits would be
uncertain.
BUSINESS
Overview
We are building high-speed, high-capacity advanced fiber optic
networks in selected markets with high levels of population density. Our
current services include local and long distance telephone, video programming
and data services, including high speed Internet access. Our strategy is to
become the leading single-source provider of voice, video and data services to
residential customers in each of our markets by offering individual or bundled
service options, superior customer service and competitive prices. We are also
constructing our networks with significant excess capacity in order to
accommodate expanded services in the future. We intend to expand the services
provided to our customers through strategic alliances and opportunistic
development of complementary products. In addition, we will use the excess
capacity in our fiber optic networks to provide services to commercial
customers located on or near our networks. As a result of recent acquisitions
and internal growth, we are a leading regional Internet service provider in
the Boston to Washington, D.C. corridor. Our Internet businesses have
recently been integrated under the brand name "RCN.com."
Our initial advanced fiber optic networks have been established
in selected markets in the Boston to Washington, D.C. corridor, including New
York City, and the San Francisco Bay area. We are typically building the
first true local network to compete with the aging infrastructure of the
incumbent service providers in our markets. In the Boston market we operate
our advanced fiber optic network through a joint venture with Boston Edison
Company. We own and manage 51% owned of the venture and it is accounted for on
a consolidated basis. In the Washington, D.C. market, we are developing an
advanced fiber optic network through a joint venture named Starpower with
Pepco Communications, L.L.C., an indirect wholly owned subsidiary of Potomac
Electric Power Company. We own 50% of Starpower and Pepco Communications owns
50% and it is accounted for under the equity method of accounting. We believe
that these joint ventures provide us with a number of important advantages.
For example, we are able to access rights of way of our joint venture partners
and use their existing fiber optic facilities. This allows us to enter our
target markets quickly and efficiently and to reduce our up-front costs of
developing our networks. In addition, our joint venture partners provide us
with additional assets, equity capital and established customer bases. We also
benefit from our relationship with our largest shareholder, Level 3
Communications, Inc., and from the experience gained by certain of our key
employees who participated in the operation and development of other
telephone, cable television and business ventures, including MFS
Communications Company, Inc.
Because we deliver a variety of services, we report the total
number of our various service connections purchased for local telephone, video
programming and Internet access rather than the number of customers. For
example, a single customer who purchases local telephone, video programming
and Internet access counts as three connections. See "--RCN
Services--Connections." As of December 31, 1998, we had approximately 855,000
connections which were delivered through a variety of our owned and leased
facilities including hybrid fiber/coaxial cable systems, a wireless video
system and advanced fiber optic networks. As of that date, we had
approximately 123,000 total connections attributable to customers connected to
advanced fiber optic networks ("on-net" connections) and had approximately
732,000 connections attributable to customers served through other facilities
("off-net" connections). See "--RCN Services." Approximately 370,000 of our
497,000 Internet service connections were acquired during 1998. See "--Recent
Acquisition Transactions."
We have extensive operating experience in both the telephone
and video industries and in the design and development of telecommunications
facilities. Our experience provides us with expertise in systems operation and
development, and gives us an established infrastructure for customer service
and billing for both voice and video services and established relationships
with suppliers of equipment and video programming. In addition, our management
team and board of directors benefit from experience gained when they managed
C-TEC, which prior to September 30, 1997 owned and operated our company.
C-TEC has 100 years of experience in the telephone business and nearly 25
years of experience in the cable television business. Both C-TEC and certain
members of management also have extensive experience in the design and
development of advanced telecommunications facilities.
We seek to exploit competitive opportunities in selected
markets where population density, favorable demographics and the aging
infrastructure of the incumbent service providers' network facilities combine
to create a particularly attractive opportunity to develop advanced fiber
optic networks. We continue to construct network facilities within the Boston
to Washington, D.C. corridor. We believe that our experience in the Northeast
will provide us with a key strategic advantage as we enter markets in the San
Francisco to San Diego corridor.
West Coast Expansion
We recently began to develop advanced fiber optic networks in
selected high density markets outside of the Boston to Washington, D.C.
corridor. Our initial west coast network is being developed in the San
Francisco Bay Area, which is densely populated and has high per capita income
and the highest per capita Internet usage in the United States. We have
received competitive local exchange carrier ("CLEC") status in California. We
have also obtained an "open video system" ("OVS") certification from the
Federal Communications Commission for the City of San Francisco and
surrounding counties and have begun to develop our network in the San
Francisco Bay Area. We expect to expand into selected markets in or near
Southern California. As is the case in our existing markets, we intend to
focus on high density markets with favorable demographics, and to apply a
subscriber-driven investment strategy. We expect to begin offering services
in the San Francisco Bay Area in 1999.
Business Strategy
Our goal is to become the leading provider of communications
services to residential customers in our target markets by pursuing the
following key strategies:
Exploit the "Last Mile" Bottleneck in Existing Local Networks:
Existing local networks are typically low capacity, single service facilities
without the bandwidth for multiple or new services and revenue streams.
Investment in the local network or "last mile" has not generally kept pace
with other industry and technological advances. In our target markets, we
seek to be the first operator of an advanced fiber optic network offering
advanced communications services to residential customers.
Continue Construction of Advanced Fiber Optic Networks: Our
advanced fiber optic networks are designed with sufficient capacity to meet
the growing demand for high speed, high capacity, voice, video and data
services. Our networks also have a significant amount of excess capacity which
will be available for the introduction of new products. We believe that our
high capacity advanced fiber optic networks provide us with certain competitive
advantages such as the ability to offer bundled services and the opportunity
to amortize the cost of our network over multiple revenue streams. In
addition, our networks generally provide superior signal quality and network
reliability relative to the typical networks of the incumbent service
providers.
Leverage our Network and Customer Base: We are able to leverage
our network by delivering a broad range of communications products and by
focusing on high density residential markets. This bandwidth capacity and
home density allows us to maximize the revenue potential per mile of
constructed network. We believe we can further exploit our network capacity
and customer base by exploring opportunities to deliver new products and
services in the future, including complementary commercial and wholesale
products and services.
Offer Bundled Voice, Video and Data Services with Quality
Customer Service: We offer our customers a single-source package of
competitively priced voice, video and data services, individually or on a
bundled basis, with quality customer service. By connecting customers to our
own network, we improve our operating economics and have complete control over
our customers' experience with us. We believe that the combination of bundled
communications services and quality customer care that we provide is superior
to services that are typically available from most incumbent telephone, cable
or other service providers.
Continue to Use Strategic Alliances: We have been able to enter
markets quickly and efficiently and to reduce the up-front capital investment
required to deploy our networks by entering into strategic alliances with
companies such as BECO, Pepco Communications, Level 3, Qwest and MCI/WorldCom.
By establishing relationships with these companies, we are able to take
advantage of their existing extensive fiber optic networks and other assets,
and our own existing cable television infrastructure, to expedite and reduce
the cost of market entry and business development. We will continue to
evaluate other strategic alliances in our existing markets and our developing
markets.
Network Development and Financing Plan
The construction and operation of our local networks are highly
scalable. The economic viability of a market area is principally dependent
upon achieving a minimum number of homes passed in the area being served by
each switching and head end facility. We phase our market entrance or
expansion projects such that we have sufficient cash on hand to reach these
home passed minimums. Additional funding accelerates our ability to enter new
markets or further expand existing ones.
Based on our current growth plan, we expect that we will
require a substantial amount of capital to expand the development of our
network and operations into new areas within our larger target markets. We
need capital to fund the construction of our advanced fiber optic networks,
upgrade our hybrid fiber/coaxial plant and fund operating losses and repay our
debts. We currently estimate that our capital requirements for the period from
January 1, 1999 through 2000 will be approximately $1.8 billion, which include
capital expenditures of approximately $700 million in 1999 and approximately
$1 billion in 2000. These capital expenditures will be used principally to
fund additional construction of our fiber optic network in high density areas
in the Boston, New York City, Washington, D.C. and San Francisco Bay area
markets as well as to expand into new markets (including selected markets in
the western United States) and to develop our information technology systems.
These estimates are forward-looking statements that may change if
circumstances related to construction, timing of receipt of regulatory
approvals and opportunities to accelerate the deployment of our networks do
not occur as we expect. In addition to our own capital requirements, our
joint venture partners are each expected to contribute approximately $275
million to the joint ventures through 2000 in connection with development of
the Boston and Washington, D.C. markets.
In order to continue growth beyond 2000, we will continue to
require additional capital to increase our network coverage and pay for other
capital expenditures, working capital, debt service requirements and
anticipated further operating losses. We may seek sources of funding from
vendor financing, public offerings or private placements of equity and/or debt
securities, and bank loans.
RCN Services
We provide a wide range of local and long distance telephone,
video programming and data services, both individually and in bundled service
options.
We provide these services through a range of facilities
including our advanced fiber optic networks in New York City, Boston and
Washington D.C., a wireless video system in New York City, our hybrid
fiber/coaxial cable systems in the states of New York (outside New York City),
New Jersey and Pennsylvania. We also provide, on a limited basis, resale
local and long distance telephony services.
Connections. The following table summarizes the development of
our subscriber base:
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
On-Net Service Connections:
Voice.......................... 1,909 3,214 4,473 11,428 20,857 30,868
Video.......................... 4,870 11,784 15,599 35,196 58,324 86,349
Data........................... 326 150 267 1,588 3,661
6,176
Subtotal On-Net................. 7,105 15,148 20,339 48,212 82,842 123,393
------- ------- ------- ------- ------- -------
Off-Net:
Voice.......................... 10,953 24,900 40,447 49,052 58,093 65,022
Video.......................... 229,198 227,619 227,558 214,164 196,776 175,313
Data........................... -- -- 370,271 398,560 470,466 491,633
------- ------- ------- ------- ------- -------
Subtotal Off-Net................ 240,151 252,519 638,276 661,776 725,335 731,968
Total Service Connections....... 247,256 267,667 658,615 709,988 808,177 855,361
======= ======= ======= ======= ======= =======
Homes Passed.................... 26,083 44,045 63,386 122,977 213,983 304,505
Marketable Homes................ -- -- -- 111,187 181,353 270,406
</TABLE>
Because we deliver a variety of services to our customers, we
account for our customer activity by the number of individual local telephone,
video programming or Internet access services, or "connections," purchased.
Consequently, a single customer purchasing local telephone, video programming
and Internet access counts as three connections.
We classify connections in the "Off-Net" category until the
relevant facilities are capable of providing voice, video and data services,
including local telephone service, through an RCN switch. During 1998, our
Allentown, Pennsylvania system was upgraded to provide a full range of
services, and the customers on that system were moved to the "On-Net"
connections category.
"Off-Net--Voice" figures in the table above represent resold
local phone service provided to customers not connected to the advanced fiber
optic networks.
Our "Off-Net--Video" figures in the table above include
approximately 31,000 wireless connections and wireline video connections
serving the University of Delaware (4,000 connections at December 31, 1998).
In areas served by our joint ventures in the Greater Boston and
Washington, D.C. areas, the subscribers are customers of the relevant joint
venture.
As of September 30, 1998, we began to report marketable homes,
which represents that segment of homes passed which are being marketed our
entire line of advanced fiber optic network products. The distinction between
homes passed and marketable homes recognizes our transition from constructing
our network to providing services to customers that have ordered our services.
Set forth below is a brief description of our services:
Voice. We offer full-featured local exchange telephone service,
including standard dial tone access, enhanced 911 access, operator services
and directory assistance. We compete with the incumbent local exchange
providers and CLECs. In addition, we offer a wide range of value-added
services, including call forwarding, call waiting, conference calling, speed
dial, calling card, 800-numbers and voice mail. We also provide Centrex
service and associated features. Our local telephone rates are generally
competitive with the rates charged by the incumbent providers. At December 31,
1998, we had approximately 30,900 telephone service connections on our advanced
fiber optic networks and approximately 65,000 customers for resold telephone
service. We also provide long distance telephone services, including
outbound, inbound, calling card and operator services. These services are
offered to residential and business customers.
Video Services. We offer a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system, we
offer from 61 to 147 channels. Our basic video programming package provides
extensive channel selection featuring all major cable and broadcast networks.
Our premium services include HBO, Cinemax, Showtime and The Movie Channel, as
well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2. StarCinema,
available on our advanced fiber optic networks, uses the latest "impulse"
technology allowing convenient impulse pay-per-view ordering of the latest hit
movies and special events instantly from the customer's remote. "Music
Choice" offers 30 different commercial-free music channels delivered to the
customer's stereo in digital CD quality sound.
As of December 31, 1998, we had approximately 86,350
subscribers for our video programming services provided over advanced fiber
optic networks. As of such date, we also had approximately 34,900 connections
attributable to the wireless video system and approximately 140,400
connections attributable to the hybrid fiber/coaxial cable systems.
Internet Access and Data Transmission. We operate as an
Internet service provider under the RCN.com brand name. We focus on serving
individuals and businesses through a network of our-owned points of presence
("POPs") which are connected to our advanced fiber optic network. Our primary
service offerings are 56K dial-up and high-speed cable modem access. We also
sell commercially oriented private line point-to-point data transmission
services such as DS-1 and OC-3 and a range of web page and server hosting
services. Our subscribers use their RCN accounts to communicate, retrieve
information, and publish information on the Internet. Following the recent
acquisitions described below under "--Recent Acquisition Transactions", we
believe that we are the largest regional provider of Internet services in the
Northeast. As of December 31, 1998, we had approximately 497,800 Internet
subscribers.
Migration of Customers to Advanced Fiber Networks
We provide wireless video services to customers located near
our advanced fiber optic network in New York City and Internet services to
acquired subscribers. We have also provided resold telephone service in the
past. Our goal is to extend our advanced fiber optic network to service many
of those customers. As our advanced fiber optic network is extended into these
areas or buildings, customers receiving wireless video service in New York
City are switched to the advanced fiber optic network from the wireless video
network. The wireless video equipment is then used to provide service to
other customers in off-network premises. Similarly, as the advanced fiber optic
network is developed, voice and data customers are switched to the advanced
fiber optic network from resale accounts. The switch to our network allows us
to gain additional revenue and higher margins from originating and terminating
access fees and to control the related services and service quality.
Strategic Relationships and Facilities Agreements
We have entered into a number of strategic alliances and
relationships which allow us to enter into the telecommunications services
market early and to reduce the cost of entry into our markets. We expect to
continue to pursue potential opportunities from entering into strategic
alliances to facilitate network expansion and entry into new markets.
BECO Joint Venture
In 1996 RCN and the Boston Edison Company ("BECO"), through
wholly owned subsidiaries, formed a joint venture to use 126 fiber miles of
BECO's fiber optic network to deliver our comprehensive communications package
in Greater Boston. A joint venture agreement provided for the organization
and operation of RCN-BECOCOM, LLC, an unregulated entity with a term
expiring in the year 2060. RCN-BECOCOM is a Massachusetts limited liability
company 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. Through RCN Telecom Services of Massachusetts,
we own 51% of the equity interest in RCN-BECOCOM and BECO, through a
subsidiary, owns the remaining 49% interest. This joint venture with BECO is
reflected on our financial statements on a consolidated basis.
We are presently in discussions with BECO about BECO converting
a portion of its interest in the BECO joint venture into our common stock.
We expect to benefit from our ability to use BECO's large fiber
optic network, its focus on innovative technology, its sales and marketing
expertise and its reach into the market. In the future, the venture may expand
into energy management and property monitoring services. Starting in Boston,
the joint venture partners have expanded into surrounding markets, including
Arlington, Sommerville and Newton. As a result of our access to the extensive
BECO network, our reliance on and use of MFS/WorldCom facilities in Boston has
been reduced significantly.
Starpower Joint Venture
In 1997, RCN Telecom Services, Inc., one of our subsidiaries,
and Potomac Capital Investment Corporation ("PCI"), a wholly owned subsidiary
of Potomac Electric Power Company, formed a joint venture to 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. Starpower, an unregulated limited liability
company with a perpetual term, was formed by RCN Telecom Services of
Washington, D.C., Inc. ("RCN Washington") and Pepco Communications. Starpower
was formed 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
covered by the joint venture contract. Through RCN Washington, we own 50% of
the equity interest in Starpower and PCI, through Pepco Communications, owns
the remaining 50% interest. Starpower is reflected on our financial
statements under the equity method of accounting.
Miscellaneous Facilities Agreements
We have also entered into agreements which have helped us
accelerate network development, including Fiber Agreements entered into with
MFS/WorldCom. MFS/World Com owns or has the right to use certain fiber optic
network facilities in the Boston, Massachusetts and New York City markets.
Under the Fiber Agreements, MFS/WorldCom agreed to construct and provide
extensions connecting the fiber optic facilities to buildings we designated.
We are also able to use certain dedicated fibers in those facilities, except
that we may not use the facilities to deliver telephone services to commercial
customers.
In June 1998, we entered into an agreement with Qwest
Communications for Qwest to provide us with capacity in its regional backbone
of fiber lines to connect to our local networks from Boston to Washington,
D.C. We also recently announced that we have entered into a letter of intent
with Level 3 for Level 3 to provide us with cross-country capacity to allow
our customers to connect to major Internet connection points in the United
States. This gives us the ability to negotiate peering agreements that will
allow the exchange of traffic as a Tier I operator.
Recent Acquisition Transactions
On January 21, 1998, we entered into a merger agreement among
us, Erols Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., a British
Virgin Islands corporation, and ENET Holding, Inc., a Delaware corporation and
one of our wholly owned subsidiaries, to acquire all of the outstanding shares
of common stock of Erols. Erols is a leading regional ISP serving residential
and business subscribers in targeted markets, including New York City,
Philadelphia, Washington, D.C. and Boston. The approximate total consideration
was $29.2 million in cash, 1,730,648 shares of our common stock plus the
assumption of approximately $5.1 million of debt. Additionally, we converted
certain Erols stock options to RCN stock options. The transaction was
completed in February 1998. After we completed the transaction, we contributed
approximately 197,000 subscribers located in the Washington, D.C. area,
certain assets and liabilities unique to the Starpower service area and a 65%
undivided ownership interest in the common network assets of Erols to our
Starpower joint venture partners. We received in exchange a $52 million
credit to our capital account in the Starpower joint venture. In addition, we
also contributed approximately 5,000 subscribers located in the Boston area
and certain assets and liabilities unique to the RCN-BECOCOM service area to
the RCN-BECOCOM joint venture. The contribution had a net agreed value of
approximately $1 million. Our joint venture partner, BECOCOM, contributed to
RCN-BECOCOM a note of the same amount, which has been fully paid.
On January 21, 1998, RCN, UNET Holdings, Inc. and UltraNet
Communications, Inc. entered into a merger agreement whereby we agreed to
acquire all of the outstanding shares of common stock of UltraNet, a leading
ISP in the Boston area serving residential and business customers in New
England. The total consideration for the acquisition was approximately $7
million in cash, 890,384 shares of RCN common stock, and $3 million in
deferred compensation. Additionally, we converted certain UltraNet stock
options to RCN stock options. The transaction was completed in February 1998.
After we completed the transaction, we contributed approximately 10,000
subscribers located in the Boston area and certain assets and liabilities
unique to the RCN-BECOCOM service area to our RCN-BECOCOM joint venture. The
contribution had a net agreed value of approximately $7 million. BECOCOM
contributed to RCN-BECOCOM a note of the same amount, which has been fully
paid.
On February 27, 1998, we entered into a merger agreement with
Lancit Media Entertainment Ltd. and LME Acquisition Corporation. We agreed to
acquire all of the outstanding shares of common stock of Lancit, a producer
of high quality children's programming. The total consideration for the
transaction was $1 in cash and 366,596 in shares of RCN common stock. All
options to purchase Lancit common stock were canceled. In addition, certain
warrants to purchase Lancit common stock became, by their terms, warrants to
purchase RCN common stock. The transaction was completed in June 1998.
On June 1, 1998, we entered into the Interport Merger Agreement
with Interport and INET Holding, Inc. and the individual shareholders of
Interport Communications, Corp. We agreed to acquire all of the outstanding
shares of Interport common stock. The total consideration for the transaction
was $1.025 million in cash and 396,442 shares of RCN common stock. In
addition, Interport stock options were converted into options to purchase
shares of RCN Common Stock and units granting the right to deferred delivery
of RCN common stock were issued. The transaction was completed in June 1998.
On June 30, 1998, we entered into the JavaNet merger agreement
with JavaNet, Inc., David Epstein, Zachary Julius, JNET Holding Inc. and
(with respect to certain provisions only) John Halpern. We agreed to acquire
all of the outstanding shares of JavaNet, an ISP with approximately 32,000
subscribers in Connecticut, Maine and Massachusetts at the time of the
acquisition. In connection with the transaction, we paid $2.37 million in cash
and issued approximately 569,000 shares of RCN common stock to JavaNet
stockholders. All options to purchase JavaNet common stock were canceled.
The transaction was completed on July 23, 1998. After we completed the
transaction, we contributed approximately 5,000 subscribers in Massachusetts
and certain assets and liabilities unique to the RCN-BECOCOM service area to
our RCN-BECOCOM joint venture. The contribution had a net agreed value of
approximately $1 million. BECOCOM contributed to RCN-BECOCOM cash in an equal
amount.
Hybrid Fiber/Coaxial Cable Systems
The following table summarizes the development of the hybrid
fiber/coaxial cable systems over the last five years:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed...... 118,216 119,761 282,836 283,940 290,612 186,485
Basic Subscribers. 87,660 92,140 176,131 179,932 184,938 140,379
</TABLE>
As of December 31, 1998, approximately 110,000 homes
(representing approximately 50,000 video connections) were converted to
advanced fiber systems.
The service areas for these cable television networks enjoy
favorable customer demographics. The New York and New Jersey systems primarily
serve affluent bedroom communities in suburban New York City. The system in
New York State serves ten municipalities in Dutchess, Putnam and Westchester
Counties, approximately 45 miles north of New York City. The New Jersey system
serves 31 contiguous municipalities in Hunterdon, Mercer, Morris and Somerset
Counties, approximately 50 miles west of Manhattan. The Pennsylvania system,
which is the largest competitive cable television system in the United States,
serves Pennsylvania's Lehigh Valley area including the cities of Allentown,
Bethlehem and Easton, and virtually all of Lehigh and Northampton Counties,
and is located less than 10 miles west of our New Jersey system. Certain of
our Hybrid Fiber/Coaxial Cable systems have been upgraded to enable the
networks to provide voice, video and data services, including local telephone
service, through an RCN switch. After the conversion to these services,
customers served by those networks are included within our "on-net
connections" category.
International
We own a 40.0% interest in Megacable, the second largest cable
television provider in Mexico. Megacable owns 22 wireline cable systems in
Mexico, principally on the Pacific and Gulf coasts and including Guadalajara,
the second largest city in Mexico, Hermosillo, the largest city in the state
of Sonora and Veracruz, the largest city in the state of Veracruz. At
December 31, 1998, their wireline systems passed approximately 733,500 homes
and served approximately 222,300 subscribers. Megacable had revenues of $37.5
million and $30.4 million for the years ended December 31, 1998 and 1997,
respectively.
Additionally, Megacable presently holds a 99% interest in
Megacable Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City, Monterrey and Guadalajara. MCM intends to use this network to
provide local voice and high-speed data service in these cities, principally
to commercial customers in Mexico City.
Competition
Overview
We compete with a wide range of service providers for each of
our services. Virtually all markets for voice and video services are extremely
competitive, and we expect that competition will intensify in the future. We
face significant competition in each of the markets in which we offer voice
and video programming services. Our competitors are often larger,
better-financed incumbent local telephone carriers and cable companies, and
many have historically dominated their local telephone and cable television
markets. These incumbents presently have numerous advantages as a result of
their historic monopoly control of their respective markets, economies of scale
and scope and control of limited conduit and pole space. They also have
well-established customer and vendor relationships. However, we believe that
most existing and potential competitors will, at least initially, offer
narrower services over limited delivery platforms compared to the wide range
of voice, video and data services that we provide over our fiber-based
networks. This gives us an opportunity to achieve important market
penetration.
We compete with the incumbent LECs for local telephone
services, as well as alternative service providers including CLECs. Cable
operators are also entering the local exchange market in some locations.
Other sources of competitive local and long distance telephone services
include: commercial mobile radio services providers, including cellular
carriers (such as Bell Atlantic Mobile Services); personal communications
services carriers such as Sprint Spectrum; and enhanced specialized mobile
radio services providers (such as NexTel). However, we believe these operators
primarily use competitive access services to transport their calls among their
radio transmitter/receiver sites through networks that largely avoid the
incumbent LECs with whom they compete.
We face, and expect to continue to face, significant
competition for long distance telephone services from the inter-exchange
carriers ("IXCs"), including AT&T, Sprint and MCI WorldCom, which account for
the majority of all long distance revenue. The major long distance service
providers benefit from established market share and from established trade
names through nationwide advertising. However, we regard our long-distance
service as a complementary service rather than a principal source of revenue.
Certain IXCs, including AT&T, MCI WorldCom and Sprint, have also announced
their intention to offer local services in major U.S. markets using their
existing infrastructure in combination with resale of incumbent LEC service,
lease of unbundled local loops or other providers' services. Internet-based
telephony, a potential competitor for low cost telephone service, is also
developing.
All of our video services face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment. Other sources include off-air
television broadcast programming, newspapers, movie theaters, live sporting
events, interactive online computer services and home video products,
including videotape cassette recorders. Alternative video distribution
technologies include traditional cable networks, wireless local video
distribution technologies, and home satellite dish earth stations. Home
satellite systems enable individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. The Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Act") contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to HSD owners certain satellite-delivered cable programming at
competitive costs. We face additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The FCC and
Congress have adopted policies providing a more favorable operating
environment for new and existing technologies that compete, or may compete,
with our various video distribution systems. These technologies include, among
others, Direct Broadcast Satellite ("DBS") service whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
We expect that our video programming services will face growing competition
from current and new DBS service providers. The FCC has recently determined
that DBS is the fastest-growing competitor to franchised cable operations. We
also compete with wireless program distribution services such as Multi-Channel
Multi-Point Distribution Service which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. We are unable to
predict whether wireless video services will have a material impact on our
operations.
The Internet access market is extremely competitive and highly
fragmented. Competition in this market is expected to intensify. Our current
and prospective competitors include established online services; local,
regional and national ISPs; national and international telecommunications
companies including Regional Bell Operating Companies ("RBOCs") such as Bell
Atlantic; and affiliates of incumbent cable providers. Increased competition
may create downward pressure on the pricing of and margins from Internet
access services.
Other new technologies, including Internet-based services, may
compete with services that we can offer. Advances in communications technology
as well as changes in the marketplace and the regulatory and legislative
environment are constantly occurring. Thus, we cannot predict the effect that
ongoing or future developments might have on the voice, video and data
industries or on our operations.
We believe that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs are most of our competitors in
the delivery of "last mile" connections for voice and video services.
Incumbent LECs
In each of our target markets for advanced fiber optic
networks, we face, and expect to continue to face, significant competition
from the incumbent LECs. The incumbent LECs include Bell Atlantic in the
Northeast Corridor, and Pacific Bell in California, both of which currently
dominate their local telephone markets. We compete with the incumbent LECs in
our markets for local exchange services on the basis of product offerings,
including the ability to offer bundled voice and video service, reliability,
state-of-the-art technology and superior customer service, as well as price.
We believe that our advanced fiber optic networks provide superior technology
for delivering high-speed, high-capacity voice, video and data services
compared to the incumbent LECs' primarily copper wire based networks. However,
the incumbent LECs have long-standing relationships with their customers.
They have also begun to expand the amount of fiber facilities in their
networks, to offer broadband digital transmission services and retail Internet
access, and to prepare to re-enter the long distance telephone service market.
The pending merger between Bell Atlantic and GTE Corporation may enhance the
combined entity's ability to compete with us in the Northeast corridor
markets. The pending merger between SBC and Ameritech may also increase
competitive pressures in the Northeast corridor if SBC, which already owns a
Connecticut incumbent LEC and several wireless franchises in this region,
continues to pursue a nationwide strategy.
Under the Telecommunications Act of 1996 (the "1996 Act"), and
ensuing federal and state regulatory initiatives, barriers to local exchange
competition are being slowly removed. The introduction of such competition,
however, also establishes the predicate for the RBOCs, such as Bell Atlantic,
to provide in-region interexchange long distance services. The RBOCs are
currently allowed to offer "incidental" long distance service in-region and
to offer out-of-region long distance service. Once the RBOCs are allowed to
offer in-region long distance services, they will also be in a position to
offer single source local and long distance service similar to what we offer
and proposed by the three largest IXCs, AT&T, MCI WorldCom and Sprint. We
expect that the increased competition made possible by regulatory reform will
result in certain pricing and margin pressures in the telecommunications
services business.
We have sought, and will continue to seek, to provide a full
range of local voice services which compete with incumbent LECs in our service
areas. We expect that competition for local telephone services will be based
primarily on quality, capacity and reliability of network facilities, customer
service, response to customer needs, service features and price, and will not
be based on any proprietary technology. Our advanced fiber optic networks,
dual backbone architecture and the state-of-the-art technology used in our
networks are recently installed by comparison, therefore we may have capital
cost and service quality advantages over some currently available local
networks the incumbent LECs rely on. We may also have a competitive advantage
because we are able to deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a
wide variety of video services directly to subscribers, which we compete with.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. We cannot predict the likelihood of success of video
service ventures by LECs or the impact such competitive ventures may have on
us. Some LECs, including Bell Atlantic, also offer Internet access services
that compete with RCN.com services.
Incumbent Cable Television Service Providers
Certain of our video service businesses compete with incumbent
wireline cable companies in their respective service areas. In particular, our
advanced fiber optic networks compete for cable subscribers with the major
wireline cable operators in our markets, such as Time-Warner Cable in New York
City and Cablevision in Boston and TCI in Washington, D.C. Our wireless video
service in New York City competes primarily with Time-Warner Cable. We believe
that the expanded capacity and fiber-to-node architecture of our advanced
fiber optic networks make it better equipped to provide high-capacity
communications services than traditional coaxial cable based networks using
"tree and branch" architecture. Our Pennsylvania hybrid fiber/coaxial cable
television system competes with an alternate service provider, Service
Electric, which also holds a franchise for the relevant service area.
Cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis, and the 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems.
Therefore, well-financed businesses from outside the cable industry, such as
the public utilities that own certain of the conduits or poles which carry
cable, may become competitors for franchises or providers of competing
services. Telephone companies or others may also enter the video distribution
market by becoming open video service operators as we have done in several
markets, pursuant to Section 653 of the Communications Act. No local
franchise is required for the provision of such service.
CLECs and Other Competitors
We also face, and expect to continue to face, competition from
other potential competitors in certain of our geographic markets. Other CLECs,
such as subsidiaries of AT&T and MCI WorldCom, compete for local telephone
services, although they have to date focused primarily on the market for
commercial customers rather than residential customers. In addition, potential
competitors capable of offering private line and special access services also
include other smaller long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators
and private networks built by large end-users, including Winstar, Dualstar and
New Vision. However, we believe that, at least initially, we are relatively
unique in our markets in offering bundled voice, video and data services
primarily to customers in residential areas over our own advanced fiber optic
network.
Internet Services
The Internet access market is extremely competitive and highly
fragmented. No significant barriers to entry exist, and accordingly
competition in this market is expected to intensify. Our current and
prospective competitors include many large companies with substantially
greater market presence and financial and other resources. RCN.com competes
directly or indirectly with:
o established online services, such as America Online, the
Microsoft Network and Prodigy;
o local, regional, and national ISPs such as PSINet, EarthLink,
Mindspring and Rocky Mountain Internet;
o the Internet services of national and international
telecommunications companies, such as AT&T, GTE, MCI
WorldCom and Cable & Wireless;
o Internet access offered by RBOCs such as Bell Atlantic; and
o online services offered by incumbent cable providers, such as
At Home and Roadrunner.
Bell Atlantic has recently asked the FCC to authorize it to
build a regional high-speed network, which would serve as an Internet
backbone, and to exempt this network from pricing and other regulatory
restrictions. The network would span the states from Maine to Virginia.
Internet access competition is likely to increase as large diversified
telecommunications and media companies acquire ISPs and as ISPs consolidate
into larger, more competitive companies. For example, AT&T is in the process
of acquiring TCI's cable television networks, which will give it a significant
ownership interest in At Home, an ISP. Diversified competitors may bundle
other services and products with Internet connectivity services, potentially
placing us at a competitive disadvantage. In addition, competitors may create
downward pressure on the pricing of and margins from Internet access services.
Competition could also impact our ability to participate in transit agreements
and peering arrangements, which could in turn adversely effect the speed of
service that we can provide to our customers.
Other new technologies may become competitive with our
services. A provider of LMDS recently began offering wireless Internet and
video programming services in New York City and has announced plans to offer
telephone service in the future. Advances in communications technology as well
as changes in the marketplace and the regulatory and legislative environment
are constantly occurring. In addition, a continuing trend toward business
combinations and alliances in the telecommunications industry may also create
significant new competitors. We cannot predict whether competition from
developing and future technologies or from future competitors will have a
material impact on our operations.
Regulation
Our telephone and video programming transmission services are
subject to federal, state and local government regulation. The 1996 Act
introduced widespread changes in the regulation of the communications industry,
including the local telephone, long distance telephone, data services, and
television entertainment segments. The 1996 Act was intended to promote
competition and decrease regulation of these segments of the industry. The law
delegates to both the FCC and the states broad regulatory and administrative
authority to implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses. The Act also preempts many of the state barriers to local
telephone service competition that previously existed in state and local laws
and regulations and sets basic standards for relationships between
telecommunications providers.
The 1996 Act removes barriers to entry in the local exchange
telephone market by preempting state and local laws that restrict competition
and by requiring LECs to provide nondiscriminatory access and interconnection
to potential competitors, such as cable operators, wireless telecommunications
providers, and long distance companies. In addition, the 1996 Act provides
relief from the earnings restrictions and price controls that have governed
the local telephone business for many years. The 1996 Act will also, once
certain thresholds are met, allow incumbent RBOCs to enter the long distance
market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as ours are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations, and implementation of several provisions of the rules was delayed
while the courts considered these appeals. On January 25, 1999, the Supreme
Court issued an opinion confirming the FCC's authority to issue regulations
implementing the pricing and other provisions of the 1996 Act and reinstating
most of the challenged rules. However, the Supreme Court vacated a key FCC
rule identifying the network elements that incumbent LECs are required to
unbundle. This decision will likely require the FCC to conduct additional
proceedings to determine new unbundling standards. The outcome of such
proceedings cannot be predicted. Also, while the Supreme Court confirmed that
the FCC has authority to issue rules implementing the 1996 Act, particular
rules still may be challenged in future court proceedings. Future regulatory
proceedings and court appeals may create delay and uncertainty in effectuating
the interconnection and local competition provisions of the 1996 Act. While
the courts were reviewing the FCC rules, we had entered into interconnection
agreements with Bell Atlantic covering all of our target market area that are
generally consistent with the FCC guidelines. Those agreements remain in
effect. We cannot assure you, however, that we will be able to obtain or
enforce future interconnection agreements, or obtain renewal of existing
agreements, on acceptable terms.
The 1996 Act establishes certain conditions before RBOCs are
allowed to offer interLATA long distance service to customers within their
local service regions. These conditions include 14 "checklist" requirements
designed to open the RBOC networks to competitors. To date, no RBOC has
received FCC authorization to provide in-region long distance service, but it
is likely that several RBOCs will seek authorization in 1999. Bell Atlantic
is likely to seek authorization for New York and possibly other states in its
region. If an RBOC is authorized to provide in-region long distance service
in one or more states, the RBOC may be able to offer "one-stop shopping"
services that compete with our service offerings. See "Business-Competition".
In addition, the RBOC will lose the incentive it now has to rapidly implement
the interconnection provisions of the 1996 Act in order to obtain in-region
authority, although the RBOC will still be subject to a legal obligation to
comply with those provisions.
The 1996 Act also makes far-reaching changes in the regulation
of video programming transmission services. These include changes to the
regulations applicable to video operators, the elimination of restrictions on
telephone company entry into the video business, and the establishment of a
new OVS regulatory structure for telephone companies and others. Under the
1996 Act and implementing rules adopted by the FCC, local telephone companies,
including both incumbent LECs such as Bell Atlantic, and CLECs such as RCN,
may provide service as traditional cable television operators subject to
municipal cable television franchises, or they may choose to provide their
programming over non- franchised open video systems subject to certain
conditions. The conditions include making available a portion of their
channel capacity for use by unaffiliated program distributors and satisfying
certain other requirements, including providing capacity for public,
educational and government channels, and paying a gross receipts fee equal to
the franchise fee paid by the incumbent cable television operator. We are one
of the first CLECs to provide television programming over an advanced fiber
optic network under the OVS regulations implemented by the FCC under the 1996
Act. As discussed below, we are currently providing OVS service in the City of
Boston, in the City of New York and in a number of communities surrounding
Boston. We are also negotiating similar agreements in Northern New Jersey,
Philadelphia and surrounding communities, and San Francisco and surrounding
communities. Starpower is negotiating similar agreements in Washington and
surrounding communities.
Regulation of Voice Services
Our voice business is subject to regulation by the FCC at the
federal level for interstate telephone services (i.e., those that originate in
one state and terminate in a different state). State regulatory commissions
have jurisdiction over intrastate communications (i.e., those that originate
and terminate in the same state).
State Regulation of Intrastate Local and Long Distance
Telephone Services. Our intrastate telephone services are regulated by the
public service commissions or comparable agencies of the various states in
which we offer these services. Our subsidiaries or affiliates have received
authority to offer intrastate telephone services, including local exchange
service, in California, Delaware, the District of Columbia, Maryland,
Massachusetts, Nevada, New Jersey, New York, Pennsylvania, Rhode Island,
Vermont and Virginia. We have applied for authority to offer these services
in Arizona, Connecticut, Maine, and New Hampshire. Starpower has separately
obtained similar authority in Maryland, Virginia and the District of Columbia.
Our resale and interconnection agreements have been approved, pursuant to
Section 252 of the Communications Act, by state regulatory commissions in
Arizona, Delaware, the District of Columbia, Maine, Maryland, Massachusetts,
New York, New Jersey, New Hampshire, Pennsylvania, Rhode Island, Vermont, and
Virginia.
RCN Long Distance Company is authorized to offer intrastate
long distance services in Pennsylvania, New York, Massachusetts and 45 other
states nationwide. RCN Long Distance Company is permitted to resell intrastate
long distance services both to other carriers, including our local operating
subsidiaries and Starpower for resale to their end user subscribers, and to
our own end user customers.
FCC Regulation of Interstate and International Telephone
Services. Through several of our subsidiaries, including RCN Long Distance
Company, we may provide domestic interstate telephone services nationwide under
tariffs on file at the FCC. We have been authorized by the FCC under Section
214 of the 1996 Act to offer worldwide international services as well.
Local Regulation of Telephone Services. Municipalities also
regulate limited aspects of our voice business by, for example, imposing
various zoning requirements. In some instances, they require
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
we will be required to obtain a telephone franchise in order to provide voice
services using our advanced fiber optic network facilities located in the
streets of New York City, although services may be provided over certain
leased or resold facilities while we wait to receive a franchise.
Regulation of Video Services
Open Video Systems. At various times between February 1997 and
July 1998, our subsidiaries and affiliates have been certified by the FCC to
operate OVS networks in New York City, Boston, Washington, Philadelphia, and
San Francisco, and communities surrounding each of these cities, and in the
Northern New Jersey area. Initiation of OVS services is subject to completion
of an open enrollment period for non- affiliated video programmers to seek
capacity on the systems and after negotiation of certain agreements with local
governments. The initial open enrollment period for each of these systems has
expired, except for the Northern New Jersey system, where the open enrollment
period has not yet begun. We executed an agreement with the City of Boston on
June 2, 1997, and initiated OVS service in the City on that day. Under our
agreement with the City of Boston, we will be required to pay a fee to the
City equal to 5% of video revenues. We have entered into similar OVS
agreements or are in the process of negotiating agreements with certain other
Boston-area municipalities, either to offer OVS services or franchised cable
television services. We entered into an agreement with the City of New York on
December 29, 1997 and have initiated OVS service in the Borough of Manhattan.
On July 10, 1998, we supplemented our agreement with the City of New York to
include all five boroughs. On October 26, 1998, Starpower entered into an
agreement with the District of Columbia and initiated OVS service in the
District in the last quarter of 1998. Starpower has entered into similar
agreements or is in the process of negotiating agreements with numerous
suburban communities near Washington, D.C., to offer either OVS services or
franchised cable television services.
In areas where we offer video programming services as an OVS
operator, we are required to hold a 90-day open enrollment period every three
years, during which times we must offer open capacity on our network to other
VPPs. Under the OVS regulations, we must offer at least two-thirds of our
capacity to unaffiliated parties, if demand for such capacity exists during
the open enrollment period. In certain areas, at the request of local
officials, we are in discussions to explore the feasibility of obtaining a
cable franchise instead of an OVS agreement. We will consider providing RCN
video service under franchise agreements rather than OVS certification, if
franchise agreements are preferred by the local authorities and can be
obtained on acceptable terms and conditions. We will consider the relative
benefits of OVS certification versus local franchise agreements, including the
possible imposition of universal service requirements, before making any
decisions.
The U.S. Court of Appeals for the Fifth Circuit has recently
released a decision approving some portions of the FCC's OVS rules but
striking down other portions. Although a number of the Court's rulings are
favorable to OVS operators, others could have an adverse impact on our OVS
operations and planning. The Court's most significant decision was to strike
down the FCC's rule preempting local authority to franchise OVS operators. The
FCC's rules had set forth a relatively simple procedure at the FCC for rapid
certification of each OVS system on a regional basis and permitted local
authorities to regulate OVS only as to rights-of-way administration and in
other minor respects. One of the principal advantages of OVS as structured by
Congress and by the FCC was to eliminate the time, expense, and uncertainty
generally required to secure a local franchise. The Court's action allowing
local governments to require area-by-area franchising may significantly reduce
the advantage of OVS operation as compared with traditional franchising and
delay achieving agreements with local governments. We believe the Court's
decision is erroneous in its application of law and plan to seek partial
reconsideration of the Court's decision. The FCC, which is the respondent
before the Fifth Circuit, has not yet made any public response to the Court's
decision. Whether the FCC will seek reconsideration, and how it will modify
its OVS policy and rules to take account of the Court's specific rulings is
not currently known. The U.S. Courts of Appeal do not routinely grant requests
to reconsider their rulings and when they do a significant period of time is
generally required for the consideration of such requests. However, in many
instances RCN, at the insistence of local authorities, has been negotiating
franchise agreements and agreeing to provisions in OVS right-of-way agreements
which to some extent erode the differences between the two modes of operation.
Accordingly, while the ruling is disadvantageous to us, we expect to continue
to expand our video service offerings.
The FCC's rules require OVS operators to make their facilities
available to video program providers on a non- discriminatory basis, with
certain exceptions. One exception is that competing in-region cable operators
are not entitled to become video program providers on an OVS except in certain
limited circumstances. The incumbent cable operator in Boston, Cablevision of
Boston, Inc., sought an order from the FCC compelling us to provide it with
certain data on our Boston OVS system and declaring Cablevision an eligible
video programming provider on our system. The FCC's Cable Services Bureau
denied its request and that denial has become final. Time Warner Cable Co.,
which operates franchised cable systems in many suburban Boston communities
included within our OVS certification, also sought an order compelling us to
release certain OVS system data and to declare it eligible for carriage on our
system. Unlike Cablevision, Time Warner is not competing with any RCN-provided
OVS service and restricted its request to communities where it is not the
franchised cable operator. Time Warner also sought to impose fines or cancel
our OVS authority. The Cable Services Bureau partially granted the data
request and partially denied it but found too little evidence to justify
further exploration of our good faith in acquiring OVS authority. We have
sought partial reconsideration of the Bureau's order, which is currently
pending. Time Warner filed a similar complaint against us in New York City
where we compete with it for video distribution business in Manhattan. Time
Warner asked for system data concerning parts of New York City in which it
does not hold a franchise for cable service. The FCC's Cable Services Bureau
partially granted Time Warner's complaint, and partially denied it, relying on
its prior decision in the Time Warner complaint in the Boston area. We have
sought partial reconsideration of that decision.
Two additional cable company complaints have been filed against
Starpower, seeking data and a determination of eligibility for carriage on the
metropolitan Washington OVS system. As in the prior complaints, they challenge
our status as an OVS operator and seek to revoke our OVS authority. These
complaints were filed by Media General Cable of Fairfax, Inc., which operates
franchised cable service within the projected service area of Starpower's OVS
system, and Media General Cable of Fredericksburg, Inc. which is an affiliate
of Media General Cable of Fairfax, Inc. and operates a cable system beyond
Starpower's service area. Both claimed to be seeking system data for areas in
which they do not provide franchised service. Starpower declined to provide
system data to Media General of Fairfax on the ground that, as an in-region
competitive cable company, it was not entitled to the data or to be carried on
the system. The request of Media General of Fredericksburg was denied on the
ground that, as an affiliate of Media General of Fairfax, it was not entitled
under FCC rules to the requested data or to be carried on the system.
Starpower responded to both Media General Complaints on December 14, 1998.
Media General has also sought to initiate discovery against Starpower.
Cable industry representatives have opposed or commented
adversely on two other RCN OVS initiatives. In respect to our application for
OVS authority in the San Francisco area, the California Cable Television
Association filed an opposition, alleging that we were misusing the OVS rules
to compete unfairly against franchised cable operators. The Pennsylvania Cable
& Telecommunications Association filed comments on our OVS application for OVS
authority in the Philadelphia region, making similar allegations but not
formally opposing the application. The Cable Services Bureau granted both of
our applications, indicating that our applications were consistent with the
rules and that the opposing parties had not provided sufficient evidence to
justify initiating any regulatory action against us. There is language in each
of these Cable Bureau determinations involving our implementation of the OVS
concept which leave open the possibility for adverse parties to challenge our
status as an OVS operator. We believe that we are operating in strict
conformity with all applicable provisions of the law and will continue to
defend our OVS roll-outs against what we believe are anti-competitive requests
for data or carriage by competing in-region cable operators. However, we
cannot assure you that the FCC will resolve the pending OVS complaints in our
favor. If the FCC were to grant any such complaints and as a result we were
obliged to share system data with our local competitors, we would be forced to
reassess the desirability of continuing to operate in certain markets as an
OVS operator as compared with seeking traditional cable franchises. We do not
believe that abandoning our OVS certifications under such circumstances would
materially adversely affect our video distribution activities.
As in the case of traditional franchised cable systems, OVS
operators must in virtually all locations have access to public rights-of-way
for their distribution plant. In a number of jurisdictions local authorities
have attempted to impose rights-of-way fees on us which we believe are in
violation of federal law. A number of FCC and judicial decisions have
addressed the issues posed by the imposition of rights-of-way fees on CLECs
and on video distributors. To date the state of the law is uncertain and may
remain so for some time. The obligation to pay local rights-of-way fees which
are excessive or discriminatory could have adverse effects on our business
activities. The incumbent cable operator in Boston, MA, Cablevision of
Boston, Inc., recently filed suit in U.S. District Court in Boston against the
City of Boston, RCN-BECOCOM, RCN, BECOCOM and others, alleging that the City
had followed a discriminatory policy in administering access to public
rights-of-way for the installation and use of underground conduit and that the
private defendants had participated in an effort to unlawfully construct and
use underground conduit. Cablevision claimed that the defendants were in
violation of the 1996 Act and Massachusetts state law, and sought a
preliminary injunction. RCN and the other defendants denied participating in
any unlawful activity. The Court has denied the preliminary injunction and
orally expressed some doubts about the underlying merits of Cablevision's
claims. We cannot assure you that Cablevision will not further pursue the
litigation nor that if it does so the outcome will be favorable to us.
Prior to our certification as an OVS provider, we offered
limited video programming services using the VDT services offered by
MFS/WorldCom in Manhattan and the City of Boston. In February 1997, the FCC
held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly adopted
OVS rules. Nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease
video programming distribution operations over the MFS/WorldCom platform. One
of the incumbent cable television companies in New York City has filed a
complaint with the New York Public Service Commission challenging the former,
pre-OVS, operations of RCN and WorldCom under the VDT framework, which remains
pending before that commission.
Wireless Video Services. Our 18 GHz wireless video services in
New York City are distributed using microwave facilities provided by Bartholdi
Cable under temporary authorizations issued to Bartholdi Cable by the FCC.
Bartholdi Cable has agreed to provide us with transmission services until we
have either converted the wireless video subscribers to our advanced fiber
optic network facilities or have obtained FCC authority to provide services
under our own wireless radio licenses. In addition, Bartholdi Cable has agreed
to transfer to us the transmission equipment on demand. Bartholdi Cable's
obligation to provide transmission services is subject to Bartholdi Cable
having licenses from the FCC to provide these services. The qualifications of
Bartholdi Cable to hold certain of the licenses needed to provide transmission
services to us are at issue in an FCC proceeding in which an initial decision
was released on March 6, 1998. In the initial decision, the Administrative Law
Judge found Bartholdi Cable unqualified with respect to 15 such licenses. The
Administrative Law Judge declared that the initial decision would become
effective 50 days after its release unless Bartholdi Cable filed exceptions to
the initial decision within 30 days of its release or the FCC elected to
review the case on its own motion. Bartholdi Cable filed exceptions to the
initial decision on April 7, 1998. Because of the uncertainty as to Bartholdi
Cable's right in the future to offer transmission services to us, we filed our
own license applications at the FCC for all of the microwave transmission
paths which are currently being used by Bartholdi Cable to provide us with
transmission services. In light of the increased uncertainties resulting from
the initial decision in the FCC proceeding, we expect now actively to pursue
our license applications. While we expect to receive authorizations to
transmit over these microwave paths, we cannot assure you that we will be able
to offer wireless video services under our own FCC licenses or that the FCC's
investigation will be resolved favorably. Our failure to obtain these
licenses or resolve these proceedings would materially adversely affect our
wireless video operations in New York City.
We cannot assure you that we will be able to obtain or retain
all necessary authorizations needed to construct advanced fiber optic network
facilities, to convert our wireless video subscribers to an advanced fiber
optic network or to offer wireless video services under our own FCC licenses.
Hybrid Fiber/Coaxial Cable. Our hybrid fiber/coaxial cable
systems are subject to regulation under the 1992 Act. The 1992 Act regulate
rates for cable services in communities that are not subject to "effective
competition," certain programming requirements, and broadcast signal carriage
requirements that allow local commercial television broadcast stations to
require a cable system to carry the station. Local commercial television
broadcast stations may elect once every three years to require a cable system
to carry the station ("must-carry"), subject to certain exceptions, or to
withhold consent and negotiate the terms of carriage ("retransmission
consent"). A cable system generally is required to devote up to one-third of
its activated channel capacity for the carriage of local commercial television
stations whether under the mandatory carriage or retransmission consent
requirements of the 1992 Act. Local non-commercial television stations are
also given mandatory carriage rights. The FCC recently issued rules
establishing standards for digital television ("DTV"). The FCC's rules
require television stations to simulcast their existing television signals
("NTSC") and DTV signals for a period of years. During this simulcast period,
it is unclear whether must-carry rules will apply to DTV signals. The FCC has
initiated a rule making proceeding seeking comment on the carriage of
broadcast DTV signals by cable and OVS operators during the transitional
period to full digital broadcasting. The FCC's proceeding addresses the need
for the digital systems to be compatible, seeks comment on possible changes to
the mandatory carriage rules, and explores the impact carriage of DTV signals
may have on other FCC rules. The cable industry has generally opposed many of
the FCC's proposals, on the grounds that they constitute excessively
burdensome obligations on the industry. The Communications Act permits
franchising authorities to require cable operators to set aside certain
channels for public, educational and governmental access programming. Cable
systems with 36 or more channels must designate a portion of their channel
capacity for commercial leased access by third parties to provide programming
that may compete with services offered by the cable operator.
On September 8, 1997, we were notified by the FCC that it had
ruled that certain of our upper levels of service for our New Jersey systems
were regulated levels of service and that our rates for these levels of
service exceeded the rates allowed by the FCC rate regulation rules. Since
that time, RCN and the FCC have negotiated a settlement under which the FCC
finds that our upper levels of service for our New Jersey and certain New York
systems are "New Product Tiers". Our rates for 1997 and prior years for those
systems are approved, except that we will give a $5.00 per subscriber refund
to all subscribers in our New Jersey systems and a refund of $3.30 per
subscriber in certain of our New York systems. The settlement has been
subject to public comment and is now awaiting final approval by the FCC. We do
not believe that the ultimate resolution of this matter, whether the
settlement is finally approved or not, will have a material impact on our
results of operations or financial condition.
Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and local
regulation, typically imposed through the franchising process. The terms and
conditions of state or local government franchises vary materially from
jurisdiction to jurisdiction. Generally, they contain provisions governing
cable service rates, franchise fees, franchise term, system construction and
maintenance obligations, customer service standards, franchise renewal, sale
or transfer of the franchise, territory of the franchisee and use and
occupancy of public streets and types of cable services provided. Local
franchising authorities may award one or more franchises within their
jurisdictions and prohibit non-grandfathered cable systems from operating
without a franchise. The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits franchise fees to 5% of revenues derived from cable operations and
permits the cable operator to modify the franchise requirements through the
franchise authority or judicial action changed circumstances warranted it.
Our ability to provide franchised cable television services
depends largely on our ability to obtain and renew our franchise agreements
from local government authorities on generally acceptable terms. We currently
have 91 franchise agreements relating to the hybrid fiber/coaxial cable
systems in New York (outside New York City), New Jersey and Pennsylvania.
These franchises typically contain many conditions, such as time limitations on
commencement and completion of construction, conditions of service, including
the number of channels, the provision of free service to schools and certain
other public institutions, and the maintenance of insurance and indemnity
bonds. These franchises provide for the payment of fees to the issuing
authorities and generally range from 3% to 5% of revenues. The duration of
these outstanding franchises presently varies up to the year 2011. To date,
all of our cable franchises have been renewed or extended, generally at or
before their stated expirations and on acceptable terms. Approximately 39 of
our hybrid fiber/coaxial cable systems' franchises are due for renewal within
the next three years. We cannot assure you that we will be able to renew our
franchises on acceptable terms. No one franchise accounts for more than 7% of
our total revenue. Our five largest franchises account for approximately 27%
of our total revenue.
The hybrid fiber/coaxial cable systems are also subject to
certain service quality standards and other obligations imposed by the FCC
and, where effective competition has not been demonstrated to exist, to rate
regulation by the FCC as well. Our cable television system in Pennsylvania has
been operating in a competitive cable environment for almost 30 years, with
approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, our Pennsylvania cable
system is exempt from many FCC cable television regulations, including rate
regulation. Our other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. As required by the
1996 Act, however, all cable programming services will be deregulated if
effective competition is shown to exist in the franchise area, or by March 31,
1999, whichever date is sooner. There has been widespread discussion in
Congress about possible legislation to keep cable rate regulation in effect
longer. We cannot assure you that legislation will not be adopted. We
anticipate that the remaining provisions of the 1992 Act that do not relate to
rate regulation, including provisions relating to retransmission consent and
customer service standards, will remain in place and may reduce the future
operating margins of our hybrid fiber/coaxial cable television businesses as
video programming competition develops in our cable television service
markets.
The FCC is required to regulate the rates, terms and conditions
imposed by public utilities for cable systems' use of utility pole and conduit
space unless state authorities can demonstrate that they adequately regulate
pole attachment rates. In the absence of state regulation, the FCC administers
pole attachment rates on a formula basis. In some cases, utility companies
have increased pole attachment fees for cable systems that have installed fiber
optic cables and that are using these cables for the distribution of non-video
services. The FCC concluded that, in the absence of state regulation, it can
determine whether utility companies have justified their demand for additional
rental fees and that the Communications Act does not permit disparate rates
based on the type of service provided over the equipment attached to the
utility's pole. The 1996 Act and the FCC's implementing regulations modify the
current pole attachment provisions of the Communications Act. It immediately
permits certain providers of telecommunications services to rely upon the
protections of the current law and require that utilities provide cable
systems and telecommunications carriers with nondiscriminatory access to any
pole, conduit or right-of-way, controlled by the utility. The FCC has recently
adopted new regulations to govern the charges for pole attachments used by
companies providing telecommunications services, including cable operators.
These new pole attachment rate regulations will become effective five years
after enactment of the 1996 Act, and any increase in attachment rates
resulting from the FCC's new regulations will be phased in equal annual
increments over a period of five years beginning on the effective date of the
new FCC regulations. The ultimate outcome of these rulemakings and the
ultimate impact of any revised FCC rate formula or of any new pole attachment
rate regulations on us or our businesses cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors. These programmers are required to
sell their programming to other multichannel video distributors. These
provisions limit the ability of program suppliers affiliated with cable
companies or with common carriers providing satellite delivered video
programming directly to their subscribers to offer exclusive programming
arrangements to their affiliates. The Communications Act also includes
provisions concerning horizontal and vertical ownership of cable systems,
customer service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
In addition to the FCC regulations previously discussed, there
are other FCC regulations covering areas such as:
o equal employment opportunity;
o syndicated program exclusivity;
o network program non-duplication;
o registration of cable systems;
o maintenance of various records and public inspection files;
o microwave frequency usage;
o lockbox availability;
o sponsorship identification;
o antenna structure notification;
o tower marking and lighting;
o carriage of local sports broadcast programming;
o application of rules governing political broadcasts;
o limitations on advertising contained in non-broadcast
children's programming;
o consumer protection and customer service;
o ownership of home wiring;
o indecent programming;
o programmer access to cable systems;
o programming agreements;
o technical standards; and
o consumer electronics equipment compatibility and closed
captioning.
The FCC has the authority to enforce its regulations through
imposing substantial fines, issuing cease and desist orders and/or imposing
other administrative sanctions, such as revoking FCC licenses needed to operate
certain transmission facilities often used in connection with cable
operations. We have difficulty gaining access to the video distribution wiring
in certain multiple dwelling units in the City of Boston in which Cablevision
is the incumbent provider of video services. In some buildings the management
will not permit us to install our own distribution wiring and Cablevision has
not been willing to permit us to use the existing wiring on some equitable
basis when we wish to initiate service to an individual unit previously served
by Cablevision. We have sought a ruling from the FCC's Cable Services Bureau
that existing FCC inside wiring rules require Cablevision to cooperate with us
to make such wiring available to it. The matter is currently pending before
the FCC's Cable Services Bureau staff.
Other bills and administrative proposals pertaining to cable
television have previously been introduced in Congress or considered by other
governmental bodies over the past several years. There will likely be
legislative proposals in the future by Congress and other governmental bodies
relating to the regulation of communications services.
Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals.
Other Regulatory Issues. The data services business, including
Internet access, is largely unregulated at this time apart from Federal,
state, and local laws and regulations applicable to businesses in general.
However, we cannot assure you that this business will not become subject to
regulatory restraints. Some federal, state, local and foreign governmental
organizations are considering a number of legislative and regulatory proposals
with respect to Internet user privacy, infringement, pricing, quality of
products and services and intellectual property ownership. We are also unsure
how existing laws will be applied to the Internet in areas such as property
ownership, copyright, trademark, trade secret, obscenity and defamation.
Additionally, some jurisdictions have sought to impose taxes and other burdens
on providers of data services, and to regulate content provided via the
Internet and other information services. We expect that proposals of this
nature will continue to be debated in Congress and state legislatures in the
future. In addition, although the FCC has on several occasions rejected
proposals to impose additional costs on providers of Internet access service
and other data services for the use of local exchange telephone network
facilities for access to their customers, the FCC or Congress may consider
similar proposals in the future. The adoption of new laws or the adaption of
existing laws to the Internet may decrease the growth in the use of the
Internet, which could in turn have a material adverse effect on our Internet
business.
We have interconnection agreements with Bell Atlantic and other
incumbent local exchange carriers that entitle us to collect reciprocal
compensation payments from them for local telephone calls that terminate on our
facilities. We make similar payments for outbound local calls we deliver to
the incumbent local exchange carriers. However, Bell Atlantic and other
incumbent local exchange carriers have claimed that these payments should not
apply to calls terminating at an Internet service provider's points of
presence. They argue that Internet traffic is inherently interstate, not
local, in nature. We expect to receive large volumes of incoming local calls
that will terminate at our Internet service provider points of presence, and
believe that we should collect reciprocal compensation payments for completing
these calls. To date, over 25 state public utility commissions have issued
final orders on this issue, some of which are subject to court appeals. Every
order has affirmed that local calls to Internet service providers are subject
to reciprocal compensation. In the regions we are focusing on, the California,
Massachusetts, New York, Pennsylvania, Maryland, and Virginia public utility
commissions have issued such orders. However, the FCC has announced a plan to
release a decision of nationwide scope on this issue in early 1999. We cannot
assure you that this decision will be favorable to our interests.
In order to develop our networks, we must obtain local
franchises and other permits, as well as building access agreements and rights
to use underground conduit and pole space, private easements and other
rights-of-way and fiber capacity from entities such as incumbent local
exchange carriers and other utilities, railroads, long distance companies,
state highway authorities, local governments and transit authorities. We
cannot assure you that we will be able to maintain our existing franchises,
permits and rights or to obtain and maintain the other franchises, permits,
building access agreements and rights needed to implement our business plan on
acceptable terms. Although we do not believe that any of the existing
arrangements will be canceled or will not be renewed as needed in the near
future, certain cancellation or non-renewal of these arrangements could
materially adversely affect our business. In addition, our failure to enter
into and maintain any such required arrangements for a particular network,
including a network which is already under development, may affect our ability
to acquire or develop that network.
We have summarized present and proposed federal, state, and
local regulations and legislation affecting the telephone, video programming
and data service industries. This summary is not complete. Other existing
federal regulations, copyright licensing, and, in many jurisdictions, state
and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the operations of communications companies. The
ultimate outcome of these proceedings, and the ultimate impact of the 1996 Act
or any final regulations adopted under the new law on us or our businesses
cannot be determined at this time.
Employees
As of December 31, 1998, we had approximately 2,350 full-time
employees including joint ventures, general office and administrative
personnel. We consider relations with our employees to be good.
Legal Proceedings
In the normal course of business, there are various legal
proceedings outstanding, including both commercial and regulatory litigation.
In the opinion of management, these proceedings will not have a material
adverse effect on our results of operations or financial condition.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is based upon
our certificate of incorporation ("Certificate of Incorporation"), our bylaws
("Bylaws") and applicable provisions of law. We have summarized certain
portions of the Certificate of Incorporation and Bylaws below. The summary is
not complete. The Certificate of Incorporation and Bylaws are incorporated by
reference to the registration statement for these securities that we have
filed with the SEC, and have been filed as exhibits to our 10-K for the year
ended December 31, 1997. You should read the Certificate of Incorporation and
Bylaws for the provisions that are important to you.
Certain provisions of the Delaware General Corporation Law
("DGCL"), the Certificate of Incorporation and the Bylaws summarized in the
following paragraphs may have an anti-takeover effect. This may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might
consider in its best interests, including those attempts that might result in
a premium over the market price for its shares.
Authorized Capital Stock
Our Certificate of Incorporation authorizes us to issue 200
million shares of common stock, par value $1.00 per share, 400 million shares
of Class B common stock, par value $1.00 per share, and 25 million shares of
preferred stock par value $1.00 per share.
Common Stock
Subject to the rights of the holders of any preferred stock
which may be outstanding, each holder of common stock is entitled to receive
any dividends our Board of Directors declares out of funds legally available
to pay dividends. If we liquidate our business, holders of common stock are
entitled to share equally in any distribution of our assets after we pay our
liabilities and the liquidation preference of any outstanding preferred stock.
Each holder of common stock is entitled to one vote per share, and is entitled
to vote on all matters presented to a vote of shareholders, including the
election of directors. Holders of common stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities. In addition, there are no conversion rights or redemption or
sinking fund provisions. On December 31, 1998, there were 64,290,493 shares of
common stock issued and outstanding. The common stock is admitted for trading
on the Nasdaq National Market.
The Certificate of Incorporation contains no restrictions on
the alienability of the common stock. Except as disclosed in the section
entitled "Charter and Bylaw Provisions," below, there are no provision in the
Certificate of Incorporation or Bylaws and or any agreement or plan involving
RCN that would discriminate against any existing or prospective holder of
common stock as a result of a holder owning a substantial amount of common
stock.
Class B Stock
The Class B common stock is virtually identical to the Common
Stock except that:
o the Class B common stock is generally non-voting,
o the common stock is convertible at the option of the holder
into Class B common stock and
o in certain mergers, distributions and other transactions in
which the holders of common stock are entitled to receive
equity interests of one or more corporations (including
RCN), the equity interests distributed to holders of
common stock and the Class B common stock may have rights
and privileges that are substantially equivalent to the
current rights and privileges of the common stock and the
Class B common stock, respectively.
As of January 28, 1999, there are no outstanding shares of
Class B common stock and we do not have any current plan or intention to issue
any Class B common stock.
Preferred Stock
This prospectus describes certain general terms and provisions
of our preferred stock. When we offer to sell a particular series of
preferred stock, we will describe the specific terms of the securities in a
supplement to this prospectus. The prospectus supplement will also indicate
whether the general terms and provisions described in this prospectus apply to
the particular series of preferred stock. The preferred stock will be issued
under a certificate of designations relating to each series of preferred
stock, and is also subject to our Certificate of Incorporation.
We have summarized certain terms of the certificate of
designations below. The summary is not complete. The certificate of
designations will be filed with the SEC in connection with an offering of
preferred stock.
Under the Certificate of Incorporation, our Board of Directors
has the authority to
o create one or more series of preferred stock,
o issue shares of preferred stock in any series up to the
maximum number of shares of preferred stock authorized, and
o determine the preferences, rights, privileges and
restrictions of any series.
Our Board may issue authorized shares of preferred stock, as
well as authorized but unissued shares of common stock, without further
shareholder action, unless shareholder action is required by applicable law or
by the rules of a stock exchange or quotation system on which any series of
our stock may be listed or quoted.
The prospectus supplement will describe the terms of any
preferred stock being offered, including:
o the number of shares and designation or title of the shares;
o any liquidation preference per share;
o any date of maturity;
o any redemption, repayment or sinking fund provisions;
o any dividend rate or rates and the dates of payment (or the
method for determining the dividend rates or dates of
payment);
o any voting rights;
o if other than the currency of the United States, the currency
or currencies including composite currencies in which the
preferred stock is denominated and/or in which payments will
or may be payable;
o the method by which amounts in respect of the preferred stock
may be calculated and any commodities, currencies or indices,
or value, rate or price, relevant to such calculation;
o whether the preferred stock is convertible or exchangeable
and, if so, the securities or rights into which the preferred
stock is convertible or exchangeable, and the terms and
conditions of conversion or exchange;
o the place or places where dividends and other payments on the
preferred stock will be payable; and
o any additional voting, dividend, liquidation, redemption and
other rights, preferences, privileges, limitations and
restrictions.
All shares of preferred stock offered will be fully paid and
non-assessable. Any shares of preferred stock that are issued will have
priority over the common stock with respect to dividend or liquidation rights
or both.
Our Board of Directors could create and issue a series of
preferred stock with rights, privileges or restrictions which effectively
discriminates against an existing or prospective holder of preferred stock as
a result of the holder beneficially owning or commencing a tender offer for a
substantial amount of common stock. One of the effects of authorized but
unissued and unreserved shares of capital stock may be to make it more
difficult or discourage an attempt by a potential acquirer to obtain control
of our company by means of a merger, tender offer, proxy contest or otherwise.
This protects the continuity of our management. The issuance of these shares
of capital stock may defer or prevent a change in control of our company
without any further shareholder action.
The transfer agent for each series of preferred stock will be
described in the prospectus supplement.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. Our Board
of Directors are divided into three classes. The term of office of the first
class expires at the 2001 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting, beginning
with the 1999 annual meeting, a class of directors will be elected to replace
the class whose term has just expired. As a result, approximately one-third of
the members of our Board of Directors will be elected each year and generally,
each of the directors serves a staggered three-year term. Moreover, as the
DGCL permits in the case of a corporation having a classified board, our
directors may be removed only for cause.
These provisions could prevent a shareholder or a group of
shareholders having majority voting power from obtaining control of our Board
of Directors until the second annual meeting following the date the shareholder
obtains majority voting power. Accordingly, these provisions could have the
effect of discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
Shareholder Action by Written Consent; Special Meetings. No
action required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting. No action may be taken by the
written consent of shareholders instead of a meeting. Only our Board, our
Chairman of the Board or our Chief Executive Officer may call a special
meeting of shareholders. These provisions may make it more difficult for
shareholders to take action opposed by our Board.
Advance Notice Provisions. Shareholders seeking to nominate
candidates to be elected as directors at an annual meeting or to bring
business before an annual meeting must comply with an advanced written
procedure. Only persons who are nominated by or at the direction of our
Board, or by a shareholder who has given timely written notice to our
Secretary before the meeting to elect directors, will be eligible as
directors. At any shareholders' meeting the business to be conducted is
limited to business brought before the meeting by or at the direction of the
Board of Directors, or a shareholder who has given timely written notice to
our Secretary of its intention to bring business before an annual meeting. A
shareholder must give notice which is received at our principal executive
offices in writing between 60 to 90 days before the meeting. If, however, we
gave less than 70 days' notice or prior public disclosure of the meeting date,
we must receive the shareholder's notice no later than the close of business
on the 10th day following the day we gave the notice or public disclosure of
the meeting date. A shareholder's notice must also contain certain information
specified in the Bylaws. These provisions may preclude or deter some
shareholders from bringing matters before, or making nominations for directors
at, an annual meeting.
Amendment of Certain Charter and Bylaw Provisions. Our Board
may adopt, amend or repeal any provision of the Bylaws. Bylaw provisions may
be adopted, amended or repealed by the affirmative vote of shareholders
holding at least 66 2/3% of the total number of votes entitled to be cast in
the election of directors.
Any amendment, modification or repeal of the provisions of the
Certificate of Incorporation relating to
o the election and removal of directors,
o the right to call special meetings,
o the prohibition on action by written consent,
o amendment of the Bylaws and
o the limitation of liability and indemnification of officers
and directors
will require approval by the affirmative vote of shareholders
holding at least 66 2/3% of the total number of votes entitled to vote in the
election of directors.
Delaware Takeover Statute
We are subject to Section 203 of the DGCL ("Section 203"). In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of three years following the date that the shareholder became an
interested shareholder, unless:
(a) before such date either the business combination or the
transaction which resulted in the shareholder becoming an
interested shareholder is approved by the board of
directors of the corporation,
(b) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the
interested shareholder owns at least 85% of the voting
stock of the corporation outstanding at the time the
transaction commenced (excluding for purposes of
determining the number of shares outstanding, shares
owned by
(1) persons who are both directors and officers and
(2) employee stock plans in certain circumstances), or
(c) on or after such date the business combination is approved
by the board and authorized at an annual or special
meeting of shareholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the
interested shareholder.
A "business combination" includes a merger, consolidation,
asset sale, or other transaction resulting in a financial benefit to the
interested shareholder. An "interested shareholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of the corporation's voting stock.
The restrictions imposed by Section 203 will not apply to a
corporation if, among other things:
(a) the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed
by Section 203 or
(b) 12 months have passed after the corporation, by action of
its shareholders holding a majority of the outstanding
stock, adopts an amendment to its certificate of
incorporation or bylaws expressly electing not to be
governed by Section 203.
The restrictions imposed by Section 203 will apply to us since
we have not elected not to be governed by that section. Our Board of
Directors approved of Level 3 becoming an interested shareholder and,
consequently, Section 203 would not apply to any business combination with
Level 3.
Liability and Indemnification of Directors and Officers
Certain provisions of the DGCL and the Certificate of
Incorporation and the Bylaws relate to the limitation of liability and
indemnification of our directors and officers. These various provisions are
described below.
Our Certificate of Incorporation provides that our directors
are not personally liable to us or our shareholders for monetary damages for
breach of their fiduciary duties as a director to the fullest extent permitted
by the DGCL. Under the DGCL, directors would not be personally liable to us or
our shareholders for monetary damages for breach of their fiduciary duties as
a director, except for
(a) any breach of the director's duty of loyalty to us or our
shareholders,
(b) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law,
(c) any transaction from which the director derived improper
personal benefit or
(d) the unlawful payment of dividends or unlawful stock
repurchases or redemptions.
This exculpation provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or us from bringing a lawsuit against our directors for
breach of their fiduciary duties as directors. However, the provision does not
affect equitable remedies such as an injunction or rescission from being
available.
We will indemnify and hold harmless to the fullest extent
permitted by the DGCL each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or proceeding.
These include civil, criminal, administrative or investigative proceedings, if
that person is or was a director or officer of RCN or is or was serving at our
request as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. We will also pay the expenses incurred in
connection with these proceedings before its final disposition to the fullest
extent authorized by the DGCL. This right to indemnification is a contract
right. By action of our Board of Directors, we provide indemnification to our
employees and agents to the extent our Board determines to be appropriate and
authorized by the DGCL.
We purchase and maintains insurance on behalf of any person who
is or was a director, officer, employee or agent of RCN, or is or was serving
at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her status, whether
or not we would have the power or the obligation to indemnify him or her
against the liability under the Certificate of Incorporation.
SELLING SHAREHOLDERS
The shares offered hereby may be offered by the shareholders
named herein or by pledgees, donees, transferees or other successors in interest
that receive such shares as a gift, partnership distribution or other non-sale
related transfer. The table below sets forth certain information with respect to
the selling shareholders and their beneficial ownership of shares as of January
15, 1998. Except as specified in the table below, none of the selling
shareholders or their affiliates hold any positions or offices, or had any other
material relationships with RCN, or any of its predecessors or affiliates,
during the past three years. RNC's authorized capital stock includes common
stock, Class B common stock and preferred stock. The economic rights of each
class of RCN's common equity are identical, but voting and conversion rights
differ. Holders of common stock are entitled to one vote per share and holders
of Class B stock are not entitled to vote. Shares of common stock are
convertible into shares of Class B common stock. See "Description of Capital
Stock."
<TABLE>
<CAPTION>
Number of
Shares of
RCN
Common
Stock
Owned prior
to the
Name Offering*
- - ---- -----------
<S> <C>
Amcito Partners, L.P. (William Brian Little).......... 37,554
William H. Berkman.................................... 15,718
William Bernhard...................................... 4,267
Robert A. Bernhard.................................... 4,267
Kim G. Bierwert....................................... 1,746
Roy R. Boling......................................... 1,397
Marcus Canty.......................................... 4,366
Jay Chiat............................................. 17,078
Continental Computer Systems, Inc..................... 1,704
Kenneth S. Davidson................................... 8,539
Trevor R. Dayton...................................... 349
Richard A. Eisner..................................... 2,133
Andrew D. Epstein..................................... 1,746
Max Epstein........................................... 436
Mischa Epstein........................................ 436
Daniel C. Farrell..................................... 1,746
Stephen Found......................................... 1,903
Scott Fuchs........................................... 1,746
GAFHN Holdings, Inc................................... 19,204
Keith R. Gollust...................................... 25,605
Kenneth Greenhut...................................... 8,539
Gaymark Associates.................................... 25,605
Martin Gregge......................................... 3,493
John Halpern.......................................... 81,081
Michael E. Halpern.................................... 8,535
Stanley F. Hart....................................... 2,133
Erich Hegenberger..................................... 3,517
Impress, Inc. (Mans Teensma).......................... 1,746
Robert P. Julius...................................... 3,493
Neil Kreisel.......................................... 4,267
Joseph Lardner........................................ 192
Kenneth Lebow......................................... 2,133
David B. Leener....................................... 4,366
V. David Levitt....................................... 3,493
Gregory Little........................................ 5,120
Christopher M. Lukas(1).............................. 4,548
William S. Lyman, Jr.................................. 2,844
Mathers Associates.................................... 6,402
Joseph D. McKeown..................................... 2,475
John R. McNickle...................................... 572
Eugene Mercy, Jr...................................... 17,078
Angela Millan-Epstein................................. 1,746
Steven Morin.......................................... 3,807
Arnold S. Moss........................................ 2,133
John T. O'Leary....................................... 572
Kenneth V. Packard.................................... 192
Donald M. Roberts..................................... 8,539
Wesley M. Rosner...................................... 279
John B. Ryan.......................................... 8,539
Richard Sauerwein..................................... 5,239
Alan Seligson......................................... 8,535
Arthur T. Shorin...................................... 14,082
Sylvia W. Silver...................................... 961
Barry Smith........................................... 1,746
Henry H. Stehli....................................... 3,493
Mitchell S. Steir..................................... 2,133
Philip Suarez......................................... 12,802
John Swanson.......................................... 6,400
Michael J. Sweedler................................... 2,133
Patricia Sweetser..................................... 1,746
Susan Towner.......................................... 4,366
John Tucker........................................... 4,267
</TABLE>
- - ---------------
(*) In all cases, less than 1% of outstanding shares.
(1) Includes 1,704 shares held by Continental Computer Systems, Inc.
The selling shareholders may sell all or part of the shares and
as a result no estimate can be given as to the number of shares that will be
held by any selling shareholder upon termination of any offering made hereby.
RCN and the selling shareholders are parties to a registration
rights agreement between RCN and the selling shareholders listed above, dated as
of July 23, 1998 (the "JavaNet Registration Rights Agreement") pursuant to which
RCN granted certain registration rights to the selling shareholders.
Pursuant to the JavaNet Registration Rights Agreement, RCN agreed to prepare and
file with the SEC a registration statement providing for the sale by the selling
shareholders of shares from time to time on a delayed or continuous basis
pursuant to Rule 415 under the Act. Under the terms of the JavaNet Registration
Rights Agreement, RCN has agreed to pay the fees and expenses incurred in
connection with the registration; provided, however, that RCN will not pay any
underwriting fees, discounts or commissions and fees and disbursements of
counsel for the selling shareholders attributable to the sale of the shares.
PLAN OF DISTRIBUTION
Any distribution hereunder of the shares by the selling
shareholders may be effected from time to time in one or more of the following
transactions: (a) through brokers, acting as principal or agent, in
transactions (which may involve block transactions) in The Nasdaq National
Market or otherwise, in special offerings, in the over-the-counter market,
or otherwise, at market prices obtainable at the time of sale, at prices
related to such prevailing market prices, at negotiated prices or at fixed
prices, (b) to underwriters who will acquire the shares for their own
account and resell them in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices
determined at the time of sale (any public offering price and any discount
or concessions allowed or reallowed or paid to dealers may be changed from
time to time), (c) directly or through brokers or agents in private sales
at negotiated prices, (d) to lenders pledged as collateral to secure loans,
credit or other financing arrangements and any subsequent foreclosure, if
any, thereunder, (e) through put or call options transactions relating to
the shares, (f) through short sales of shares or (g) by any other legally
available means. Also, offers to purchase shares may be solicited by
agents designated by the selling shareholders from time to time.
Underwriters or other agents participating in an offering made pursuant to
this prospectus (as amended or supplemented from time to time) may receive
underwriting discounts and commissions under the Securities Act, and
discounts or concessions may be allowed or reallowed or paid to dealers,
and brokers or agents participating in such transactions may receive
brokerage or agent's commissions or fees. The selling shareholders may
effect sales of shares to or through broker-dealers, and such broker-
dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders and/or the purchasers of the
shares for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions).
At the time a particular offering of any shares is made
hereunder, to the extent required by law, a prospectus supplement will be
distributed which will set forth the amount of shares being offered and the
terms of the offering, including the purchase price or public offering price,
the name or names of any underwriters, dealers or agents, the purchase price
paid by any underwriter for any shares purchased from the selling
shareholders, any discounts, commissions and other items constituting
compensation from the selling shareholders and any discounts, commissions or
concessions allowed or filed or paid to dealers. The shares may be sold from
time to time in one or more transactions at a fixed offering price, which may
be changed, or at varying prices determined at the time of sale or at
negotiated prices. Such prices will be determined by the selling shareholders
or by agreement between the selling shareholders and underwriters or dealers,
if any. The selling shareholders also may, from time to time, authorize
dealers, acting as selling shareholders' agents, to solicit offers to purchase
the shares upon the terms and conditions set forth in any prospectus
supplement.
In order to comply with the securities laws of certain states,
if applicable, the shares will be sold hereunder in such jurisdictions only
through registered or licensed brokers or dealers.
RCN has been advised that, as of the date hereof, the selling
shareholders have made no arrangement with any broker for the sale of their
shares. The selling shareholders and any underwriters, brokers or dealers
involved in the sale of the shares may be considered "underwriters" as that
term is defined by the Securities Act, although the selling shareholders
disclaim such status. Under the Registration Rights Agreement, RCN has agreed
to indemnify the selling shareholders, their officers, directors, partners,
and agents, any underwriter and each person or entity who controls such
selling shareholder or underwriter, as the case may be, against certain
liabilities which may be incurred in connection with the sale of the shares
under this prospectus. In addition, the selling shareholders have agreed to
indemnify RCN against certain liabilities. The Registration Rights Agreement
also provides for rights of contribution if such indemnification is not
available. RCN has agreed to pay certain expenses incident to the registration
statement and the sale of the shares hereunder to the public, other than
commissions, fees and discounts of underwriters, agents or dealers. RCN will
not receive any proceeds from any sales of the shares pursuant to this
prospectus.
Under applicable rules and regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any person engaged in
the distribution of the shares may not simultaneously engage in market making
activities with respect to the common stock of RCN for a period of two
business days prior to the commencement of such distribution. In addition and
without limiting the foregoing, each selling shareholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of RCN's common stock by the
selling shareholders.
In connection with any underwritten offering, certain
underwriters and/or selling group members may engage in passive market making
transactions in the shares on NASDAQ in accordance with Regulation M under the
Exchange Act. Regulation M permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also NASDAQ market makers in the security being
distributed to engage in limited market making transactions during the period
when Regulation M under the Exchange Act would otherwise prohibit such
activity. Regulation M prohibits underwriters and selling group members
engaged in passive market making, generally, from entering a bid or effecting
a purchase at a price that exceeds the highest bid for those securities
displayed on NASDAQ by a market maker that is not participating in the
distribution. Under Regulation M, each underwriter and selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
calendar months immediately preceding the date of the filing of the
registration statement under the Securities Act pertaining to the security to
be distributed.
LEGAL MATTERS
The validity of the shares of common stock in respect of which
this prospectus is being delivered will be passed on for RCN by Davis Polk &
Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, appearing in the RCN 10-K and incorporated by reference into this
registration statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon incorporated by
reference herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Erols Internet, Inc. at December
31, 1996 and 1997 and for the period from August 1, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997,
appearing in the RCN 8-K dated May 8, 1998 and incorporated by reference into
the registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon incorporated by reference
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
<TABLE>
<S> <C>
=========================================================== ================================================================
No person has been authorized to provide you with any
information or to make any representations, other than
those contained in this prospectus, in connection with
the offering made hereby. If such information or
representations are made to you, you may not rely on
them as having been authorized by RCN. Neither the
delivery of this prospectus nor any sale made
hereunder implies that there has been no change in the LOGO
affairs of RCN since the date of this prospectus. This RCN CORPORATION
prospectus is not an offer to sell securities and is not
soliciting an offer to buy securities in any jurisdiction
where the offer or sale is not permitted. Common Stock
TABLE OF CONTENTS ---------------------
Page PROSPECTUS
---- ---------------------
Prospectus Summary......................................3
Risk Factors............................................6
Where You Can Find More Information ...................12
Special Note on Forward-Looking Statements ............12
Use of Proceeds........................................13
Dividends..............................................13
Selected Historical Consolidated Financial
Data..................................................14 March , 1999
Unaudited Pro Forma Consolidated Statements of
Operations.............................................16
Description of Capital Stock...........................40
Selling Shareholders...................................45
Plan of Distribution...................................47
Legal Matters..........................................48
Experts................................................48
=========================================================== ================================================================
</TABLE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Spin-off
The following table sets forth the costs and expenses payable
by the Registrant in connection with the sale of the securities being
registered hereby. All amounts are estimates except the registration fee.
<TABLE>
<S> <C>
Amount to be Paid
-----------------
Registration fee........................... $ 1,720
Printing................................... $15,000
Legal fees and expenses.................... $50,000
Accounting fees and expenses............... $20,000
Miscellaneous.............................. $ 5,000
-------
TOTAL.................................. $91,720
=======
</TABLE>
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law, which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty,
except (i) for any breach of the director's duty of loyalty to the corporation
or it stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the Delaware General Corporation Law (providing for
liability of directors for the unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director
derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law empowers
the Company to indemnify, subject to the standards set forth therein, any
person in connection with any action, suit or proceeding brought before or
threatened by reason of the fact that the person was a director, officer,
employee or agent of such company, or is or was serving as such with respect
to another entity at the request of such company. The Delaware General
Corporation Law also provides that the Company may purchase insurance on
behalf of any such director, officer, employee or agent.
RCN's Amended and Restated Articles of Incorporation provides
in effect for the elimination of the personal liability of RCN directors for
breaches of fiduciary duty and for the indemnification by the Company of each
director and officer of the Company, in each case, to the fullest extent
permitted by applicable law.
RCN purchases and maintains insurance on behalf of any person
who is or was a director, officer, employee or agent of RCN, or is or was
serving at the request of RCN as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not RCN would have the power or the obligation to
indemnify him or her against such liability under the provisions of the RCN
Certificate of Incorporation.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Document
- - ------- --------
<S> <C>
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable
Michigan, Inc. and RCN Corporation (incorporated by reference to
Exhibit 2.1 to Amendment No. 2 to RCN's Information Statement on
Form 10/A ("Form 10") filed on September 5, 1997)
2.2* Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan,
Inc. and the Registrant (incorporated by reference to Exhibit 10.1
to RCN's Form 10)
2.3* Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN
Corporation and ENET Holding, Inc. (incorporated by reference to
Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998 8-K")
filed on March 6, 1998)
2.4* Amendment No. 1 to Agreement and Plan of Merger dated as of January
21, 1998 among Erols Internet, Inc., Erol Onaran, Gold & Appel
Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1* Indenture dated as of February 6, 1998 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the 9.80%
Senior Discount Notes due 2008 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission
File No. 333-48487) ("1998 Form S-4") filed on March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008, Series B (included
in Exhibit 4.1) (incorporated by reference to Exhibit 4.2 to RCN's
1998 Form S-4)
4.3* Indenture dated as of October 17, 1997 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the 10%
Senior Notes due 2007 (incorporated by reference to Exhibit 4.1 to
RCN's Registration Statement on Form S-4 (Commission File No. 333-
41081) ("Form S-4") filed on November 26, 1997)
4.4* Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit
4.4) (incorporated by reference to Exhibit 4.2 to RCN's Form S-4)
4.5* Indenture dated as of October 17, 1997 between the Company, as Issuer,
and The Chase Manhattan Bank, as Trustee, with respect to the 11
1/8% Senior Discount Notes due 2007 (incorporated by reference to
Exhibit 4.3 to RCN's Form S-4)
4.6* Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included
in Exhibit 4.6) (incorporated by reference to Exhibit 4.4 to RCN's
Form S-4)
4.7* Indenture dated June 24, 1998 between the Company, as Issuer, and The
Chase Manhattan Bank, as Trustee, with respect to the 11% Senior
Discount Notes due 2008 (incorporated by Reference to Exhibit 4.8
to RCN's Registration Statement on Form S-1 (Commission File No.
333-55673))
4.8* Form of 11% Senior Discount Note due 2008 (included in Exhibit 4.8)
(incorporated by reference to Exhibit 4.8 to RCN's Registration
Statement on Form S-1 (Commission File No. 333-55673))
4.9* Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as
Trustee under the Indenture (as defined therein), and the Company
(incorporated by reference to Exhibit 4.6 to RCN's Form S-4)
4.10* Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems,
Inc., ComVideo Systems, Inc., C-TEC Cable Systems of New York, Inc.
and First Union National Bank, as agent<F2> (incorporated by
reference to Exhibit 4.1 to RCN's Form 10)
4.11* Registration Rights Agreement dated as of July 23, 1998 among certain
shareholders of JavaNet, Inc. and RCN Corporation
5.1* Opinion of Davis Polk & Wardwell
11.1* Statement regarding Computation of Per Share Earnings (included in
the Notes to the Consolidated Financial Statements)
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
23.2* Consent of Ernst & Young LLP, Independent Auditors, with respect to
Erols Internet, Inc.
24.1* Power of Attorney (included on the signature page of the Registration
Statement)
</TABLE>
- - ---------------
* Previously filed.
** Exhibits and schedules which have not been filed with Exhibit 4.10 will be
provided to the Commission by the Registrant upon request.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made of securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii) to include any material information with respect
to the plan of distribution not previously disclosed in
the registration statement or any material change to such
information in the registration statement;
provided, however, that the undertakings set forth in
paragraph (i) and (ii) above do not apply if the
information required to be included in a post-effective
amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
term ination of the offering.
(b) The undersigned registrant hereby understands that, for
purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new
registration statement relating to the securities offered
herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrants pursuant
to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Princeton, State of New
Jersey, on March 10, 1999.
RCN CORPORATION
By: /s/ Bruce C. Godfrey
---------------------------------
Bruce C. Godfrey
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*
- - -----------------------
David C. McCourt Director, Chairman and Chief March 10, 1999
Executive Officer
*
- - -----------------------
Michael J. Mahoney Director, President and Chief March 10, 1999
Operating Officer
/s/ Bruce C. Godfrey
- - -----------------------
Bruce C. Godfrey Director, Executive Vice President March 10, 1999
and Chief Financial Officer
*
- - -----------------------
James Q. Crowe Director March 10, 1999
*
- - -----------------------
Alfred Fasola Director March 10, 1999
*
- - -----------------------
Stuart E. Graham Director March 10, 1999
*
- - -----------------------
Richard R. Jaros Director March 10, 1999
*
- - -----------------------
Thomas May Director March 10, 1999
*
- - -----------------------
Thomas P. O'Neill, III Director March 10, 1999
*
- - -----------------------
Eugene Roth Director March 10, 1999
*
- - -----------------------
Walter Scott, Jr. Director March 10, 1999
*
- - -----------------------
Michael B. Yanney Director March 10, 1999
*
- - -----------------------
Ralph S. Hromisin Senior Vice President and Chief March 10, 1999
Accounting Officer
</TABLE>
* By: /s/ Bruce C. Godfrey
-----------------------
Bruce C. Godfrey
Attorney-in-Fact
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
of RCN Corporation on Form S-3 and the related Prospectus, of our report dated
March 13, 1998, except Note 2, as to which the date is May 20, 1998, on our
audits of the consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995. We also consent to the reference of our Firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 10, 1999
