As filed with the Securities and Exchange Commission on February 1, 1999
Registration No. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM S-3
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. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Maximum
Title of Each Class Aggregate Offering Amount of
of Securities to be Registered Price(1)(2) Registration Fee
- --------------------------------------------------------------------------------
Common Stock, Preferred
Stock, Debt Securities................ $1,000,000,000 $278,000
================================================================================
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(1) Such indeterminate number or amount of Common Stock, Preferred Stock and
Debt Securities as may from time to time be issued at indeterminate prices.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457(o) and exclusive of accrued interest and
dividends, if any.
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.
==============================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 1999
PROSPECTUS
[LOGO]
$1,000,000,000
RCN Corporation
Common Stock, Preferred Stock, Debt Securities
-------------
We will offer from time to time common stock, preferred stock
or debt securities. We will provide specific terms of these securities in
supplements to this prospectus. You should read this prospectus and any
supplement carefully before you invest.
-------------
Investing in these securities involves certain risks. See
"Risk Factors" beginning on page 11.
-------------
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.
The date of this prospectus is , 1999
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
<PAGE>
You should rely only on the information contained in or
incorporated by reference in this prospectus. We have not authorized
anyone to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted.
You should not assume that the information contained in or incorporated by
reference in this prospectus is accurate as of any date other than the date
on the front of this prospectus.
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TABLE OF CONTENTS
Page
----
About the Prospectus.........................................................2
Where You Can Find More Information..........................................2
Special Note on Forward-Looking Statements...................................3
Summary......................................................................4
Risk Factors................................................................11
Use of Proceeds.............................................................17
Dividends...................................................................17
Market Price and Dividend Information.......................................17
Selected Historical Consolidated Financial Data.............................19
Unaudited Pro Forma Consolidated Statements of Operations...................23
Business....................................................................29
Description of Capital Stock................................................48
Description of Debt Securities..............................................53
Plan of Distribution........................................................63
Legal Matters...............................................................64
Experts.....................................................................64
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission utilizing a "shelf"
registration process. Under this shelf process, we may, over the next two
years, sell any combination of the securities described in this prospectus in
one or more offerings up to a total dollar amount of $1,000,000,000. This
prospectus provides you with a general description of the securities we may
offer. Each time we sell securities, we will provide a prospectus supplement
that will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described under the heading
WHERE YOU CAN FIND MORE INFORMATION.
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 Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.
You may also inspect our filings at the regional offices of the Commission
located at Citicorp, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, New York, New York 10048 or over the Internet
at the Commission's home page at http://www.sec.gov.
This prospectus constitutes part of a Registration Statement on
Form S-3 filed with the Commission under the Securities Act of 1933 (the
"Securities Act"). It omits some of the information contained in the
Registration Statement, and reference is made to the Registration Statement
for further information with respect to RCN Corporation and the shares of
common stock offered hereby. Any statement contained in this prospectus
concerning the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission is not
necessarily complete, and in each instance reference is made to the copy of
the document filed.
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 (the "RCN 10-K");
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
(the "RCN March 10-Q");
(c) Current Report on Form 8-K dated May 8, 1998 (the "RCN May 8-K");
(d) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(the "RCN June 10-Q"); and
(e) Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 (the "RCN September 10-Q")
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.
2
<PAGE>
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 RCN Corporation, 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 undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions,
the forward-looking events discussed in this prospectus might not occur.
3
<PAGE>
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.
Unless the context indicates otherwise, the words "RCN", "the Company", "we",
"our", "ours" and "us" refer to RCN Corporation and its subsidiaries and joint
ventures (including unconsolidated entities).
We provide a wide range of telecommunications services through
high speed, high capacity advanced fiber optic networks. Our current services
include local and long distance telephone, video programming and data services
(including high speed Internet access), which we provide primarily to
residential customers in selected markets with high levels of population
density and favorable demographics. 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 intend to
leverage our customer base through strategic alliances and opportunistic
development of complementary products. In addition, we intend to leverage
excess capacity in our fiber optic networks by providing 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, Boston and its surrounding communities, and in the Washington, D.C.
area. In the Boston and Washington, D.C. markets we operate our advanced
fiber optic networks through joint ventures with the Boston Edison Company and
Pepco Communications, L.L.C., respectively. We believe that these joint
ventures provide us with a number of important advantages including access to
rights of way and the use of existing fiber optic facilities, the ability to
enter our target markets quickly and efficiently and a reduction in the
up-front capital investment required to develop our networks. In addition, our
joint venture partners provide access to additional assets, equity capital and
established customer bases. We also benefit from our relationship with our
largest shareholder, Level 3 Communications, Inc. ("Level 3"), 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.
We continue to construct network facilities within the Boston
to Washington, D.C. corridor and have commenced developing advanced fiber
optic networks in the San Francisco to San Diego corridor, initially in the
San Francisco Bay area. See "Business--West Coast Expansion."
Because we deliver multiple services, we report the total
number of our various revenue generating service connections (for local
telephone, video programming and Internet access) rather than the number of
customers. The table below demonstrates our growth in total connections and
connections attributable to customers connected to advanced fiber optic
networks ("On-Net Connections") as well as our progress in developing our
network as measured by route miles and homes passed.
4
<PAGE>
As of
-------------------------------------------------------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
-------- ------- ------- ------- --------
Connections:
Voice.............. 28,114 44,950 60,480 78,950
Video.............. 239,403 243,157 249,360 255,100
Data............... 150 370,538 400,148 474,127
Total............ 267,667 658,645 709,988 808,177
------- ------- ------- -------
On-Net Connections.. 15,148 20,339 48,212 82,842
Homes Passed........ 44,045 63,386 122,977 213,983
Marketable Homes.... -- -- 111,187 181,353
Network Route Miles. 406 492 673 980
Our off-net connections are delivered through a variety of
facilities including hybrid fiber/coaxial cable systems and a wireless
video system.
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:
o Exploit the "Last Mile" Bottleneck in Existing Local Networks
o Continued Construction of Advanced Fiber Optic Networks
o Leverage our Network and Customer Base
o Offer Bundled Voice, Video and Data Services with Quality
Customer Service
o Continue to Utilize Strategic Alliances
Network Development and Financing Plan
We will require a substantial amount of capital to fund network
development and operations, including funding the construction of our advanced
fiber optic networks, upgrading our hybrid fiber/coaxial plant and funding
operating losses and debt service requirements. 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 the buildout of
our fiber optic network in high density areas in the Boston, New York and
Washington, D.C. markets as well as to expand into new markets and to develop
IT systems. These estimates are forward-looking statements that are subject
to change depending on factors such as circumstances related to construction,
timing of receipt of regulatory approvals and opportunities to accelerate
network deployment. In addition to our own capital requirements, our joint
venture partners are each expected to contribute approximately $275 million in
capital to the joint ventures through 2000 in connection with development of
the Boston and Washington, D.C. markets.
After 2000, we will continue to require additional capital for
planned increases in network coverage and other capital expenditures, working
capital, debt service requirements and anticipated further operating losses.
Sources of funding for our further financing requirements may include 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. See "Risk Factors--Further Capital Requirements".
5
<PAGE>
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Our principal executive offices are located at 105 Carnegie
Center, Princeton, New Jersey, 08540, and our telephone number is (609)
734-3700. We maintain a website at 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.
Risk Factors
Prospective investors should carefully consider all of the
information set forth in this prospectus and, in particular, should evaluate
the specific risk factors set forth under the caption "Risk Factors",
beginning on page 11.
6
<PAGE>
Summary Pro Forma Financial Data
The following unaudited summary pro forma financial data
include adjustments to our historical statements of operations for the nine
months ended September 30, 1998 and the year ended December 31, 1997 as if each
of the transactions described under "Unaudited Pro Forma Consolidated
Financial Statements" had occurred on the first day of the respective periods.
Such adjustments result primarily from changes in our capital structure and
accounting for the acquisition of Erols Internet, Inc. The following
unaudited pro forma financial data for the respective periods are provided for
information purposes only and should not be construed to be indicative of our
results of operations or financial condition had such transactions occurred on
the dates assumed, may not reflect the results of operations or financial
condition which would have resulted had we been operated as a separate,
independent company during such period, and are not necessarily indicative of
our future results of operations or financial condition.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1997 1998
------------- -------------
(dollars in thousands)
<S> <C> <C>
Statement of Operations Data:
Total Sales................................................................... $141,273 $151,447
Costs and expenses, excluding depreciation and amortization................... 154,032 185,841
Nonrecurring charges.......................................................... 10,000 51,667
Depreciation and amortization................................................. 61,421 58,337
-------- -------
Operating (loss).............................................................. (84,180) (144,398)
Interest income............................................................... 14,138 43,232
Interest expense.............................................................. (124,756) (92,946)
Other (expense) income, net................................................... 82 (1,952)
-------- -------
(Loss) before income taxes.................................................... (194,716) (196,064)
(Benefit) for income taxes.................................................... (61,794) (9,923)
-------- -------
(Loss) before equity in unconsolidated entities and minority interest......... (132,922) (186,141)
Equity in loss of unconsolidated entities..................................... (17,224) (9,871)
Minority interest in loss of consolidated entities............................ 7,296 11,545
-------- -------
(Loss) before extraordinary charge............................................ $(142,850) (184,467)
======== =======
Other Data:
EBITDA before nonrecurring charges(1)......................................... $(7,882) $(32,765)
Capital expenditures.......................................................... $90,392 $190,460
Connections (at end of period)................................................ 593,646 808,177
Full Time Employees (at end of period)........................................ 1,446 2,200
</TABLE>
Nine Months
Ended September
30, 1998
(dollars in
thousands)
---------------
Balance Sheet Data:
Cash, temporary cash investments and short-term investments. $1,117,238
Cash restricted for debt service............................ 22,650
Total assets................................................ 1,890,447
Total long-term debt........................................ 1,248,681
Shareholders' equity........................................ 401,821
- ------------
(1) EBITDA represents earnings before interest, depreciation and amortization,
and income taxes. EBITDA is commonly used in the communications industry
to analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the period
and should not be considered as an alternative to cash flows from
operating, investing or financing activities as determined in accordance
with U.S. GAAP. EBITDA is not a measurement under U.S. GAAP and may not be
comparable with other similarly titled measures of other companies.
7
<PAGE>
Supplemental Unaudited Financial Data
We conduct portions of our business through joint ventures, including our
joint ventures with Boston Edison Company ("BECO") (which is consolidated in
our historical results of operations) and with Pepco Communications, L.L.C.
("Pepco Communications") (which is accounted for under the equity method in
our historical results of operations). The supplemental unaudited financial
information set forth below presents our results of operations as if all
domestic joint ventures were fully consolidated (hereinafter referred to as
"Pro Forma Total RCN"), and shows the ownership share of our domestic joint
venture partners as minority interests. We believe that this supplemental
unaudited financial data provides useful disclosure in analyzing our business.
<TABLE>
<CAPTION>
Pro Forma Total RCN (as defined above)
----------------------------------------------------------------
Year Ended Nine Months Ended
December 31, September 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales:
Voice..................................... $237 $830 $4,007 $1,869 $15,963
Video..................................... 65,699 87,470 103,371 76,896 83,389
Data...................................... -- 4 41 25 47,520
Commercial and other...................... 26,061 16,606 19,878 13,064 24,258
Total sales................................ 91,997 104,910 127,297 91,854 171,130
Costs and expenses, excluding
depreciation and amortization:
Direct expenses........................... 39,604 35,226 51,757 35,113 76,719
Operating, selling, general and
administrative........................... 35,399 43,881 83,422 56,070 127,176
EBITDA before nonrecurring charges......... 16,994 25,803 (7,882) 671 (32,765)
Depreciation and amortization.............. 22,336 38,881 53,205 39,135 71,813
Nonrecurring charges....................... -- -- 10,000 10,000 51,667
Operating (loss)........................... (5,342) (13,078) (71,087) (48,464) (156,245)
Interest income............................ 29,001 25,602 22,824 13,442 43,808
Interest expense........................... (16,517) (16,046) (25,602) (10,460) (80,811)
Other income (expense), net................ (304) (546) 131 229 (1,978)
(Loss) income before income taxes.......... 6,838 (4,068) (73,734) (45,253) (195,226)
(Benefit) provision for income taxes....... 1,119 979 (20,849) (11,907) (9,923)
(Loss) income before equity in
unconsolidated entities, minority
interest and extraordinary item........... 5,719 (5,047) (52,885) (33,346) (185,303)
Equity in loss of unconsolidated entities.. (3,461) (2,282) (3,698) (2,650) (2,008)
Minority interest in loss (income) of
consolidated entities..................... (144) 1,340 7,402 3,931 17,704
(Loss) income before extraordinary
item................................... 2,114 (5,989) (49,181) (32,065) (169,607)
Extraordinary charge-- debt
prepayment penalty........................ -- -- (3,210) (3,210) --
Net (loss) income.......................... $2,114 $(5,989) $(52,391) $(35,275) $(169,607)
</TABLE>
<TABLE>
<CAPTION>
Pro forma Total RCN (as previously defined)
-----------------------------------------------------------------
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash, temporary cash investments and
short-term investments........................ $158,485 $108,674 $638,513 $183,337 $1,117,238
Property, plant and equipment.................. 173,373 220,357 307,759 273,960 533,250
Accumulated depreciation....................... 71,293 84,529 107,419 101,544 152,293
Net property, plant and equipment.............. 102,080 135,828 200,340 172,416 380,957
Long-term debt (including current portion)..... 161,000 131,250 686,103 110,000 1,248,681
</TABLE>
8
<PAGE>
Summary Historical Consolidated Financial Data
The table below sets forth our selected historical consolidated
financial data. This data reflects periods during which RCN Corporation did not
operate as an independent company and, accordingly, certain assumptions were
made in preparing such data. Therefore, such data may not reflect the results of
operations or the financial condition which would have resulted if we had
operated as a separate, independent company during such periods, and are not
necessarily indicative of our future results of operations or financial
condition.
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 as of September 30, 1997 are derived from our
unaudited historical consolidated financial statements not included in this
prospectus. The selected historical consolidated financial data for the years
ended December 31, 1997, 1996 and 1995 and as of December 31, 1997 and 1996
are derived from and should be read in conjunction with our audited historical
consolidated financial statements (the "Financial Statements") incorporated
herein by reference to the RCN 10-K. The selected historical consolidated
financial data for the nine month periods ended September 30, 1997 and 1998
and as of September 30, 1998 are derived from and should be read in
conjunction with our unaudited historical consolidated financial statements
incorporated herein by reference to the RCN September 10-Q.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total Sales........................................ $91,997 $104,910 $127,297 $91,854 $148,118
Costs and expenses, excluding depreciation and
amortization...................................... 75,003 79,107 134,967 91,183 182,632
Nonrecurring charges(1)............................ -- -- 10,000 10,000 51,667
Depreciation and amortization...................... 22,336 38,881 53,205 39,135 57,199
------- ------- ------- ------- --------
Operating (loss) income............................ (5,342) (13,078) (70,875) (48,464) (143,380)
Interest income.................................... 29,001 25,602 22,824 13,442 43,232
Interest expense................................... (16,517) (16,046) (25,602) (10,460) (80,811)
Other (expense) income, net........................ (304) (546) 131 229 (1,947)
(Benefit) provision for income taxes............... 1,119 979 (20,849) (11,907) (9,923)
Equity in loss of unconsolidated entities.......... (3,461) (2,282) (3,804) (2,650) (8,169)
Minority interest in loss (income) of consolidated
entities.......................................... (144) 1,340 7,296 3,931 11,545
Extraordinary charge- debt prepayment penalty,
net of tax of $1,728.............................. -- -- (3,210) (3,210) --
Net (loss) income.................................. $2,114 $(5,989) $(52,391) $(35,275) $(169,607)
======= ======= ======== ======== =========
9
<PAGE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Cash, temporary cash investments and short-term
investments....................................... $158,485 $108,674 $638,513 $183,337 $1,117,238
Cash restricted for debt service................... -- -- 22,500 -- 22,650
Total assets....................................... 649,610 628,085 1,150,992 598,679 1,890,447
Long-term debt..................................... 135,250 131,250 686,103 110,000 1,248,681
Shareholders' equity............................... 394,069 390,765 356,584 373,760 401,821
Other Data:
EBITDA before nonrecurring charges(2).............. 16,994 25,803 (7,670) 671 (34,514)
Cash Provided by
(Used in):
Operating Activities............................... 48,559 23,831 1,661 202 28,046
Investing Activities............................... (146,203) (9,377) (475,860) (21,270) (478,013)
Financing Activities............................... (31,203) 9,391 635,266 142,562 666,874
- ----------
(1) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to
RCN's wireless video services, and in 1998 represent nonrecurring costs
of $51,667 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.
(2) EBITDA before nonrecurring charges represents earnings before
interest, depreciation and amortization, and income taxes. Because of
the capital intensive nature of the business and resulting large non-
cash charges for depreciation, EBITDA is commonly used in the
communications industry by management, investors, and analysts to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended to represent cash flows for the
period and should not be considered as an alternative to cash flows
from operating, investing or financing activities as determined in
accordance with U.S. GAAP. EBITDA is not a measurement under U.S.
GAAP and may not be comparable with other similarly titled measures of
other companies. Certain of the Company's debt agreements contain
certain covenants that, among other things, limit the ability of the
Company and its subsidiaries to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell
assets and engage in mergers and consolidations. Certain of such
covenants are based on EBITDA performance measures.
</TABLE>
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this
prospectus, you should carefully review the following factors.
Limited Operating History; Negative Cash Flow; Operating Losses
We have only recently begun operating a voice, video and data
services business and, accordingly, this business has a limited operating
history upon which investors may base an evaluation of its performance. In
connection with entering this business, 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. The extent to which
we continue to experience negative cash flow in the future will be affected by a
variety of factors including:
o the pace of entry into new markets;
o the time and expense required for building out our planned network;
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 $70,875,000, $13,078,000 and $5,342,000 for the
years ended December 31, 1997, 1996 and 1995 and $143,380,000 for the nine
months ended September 30, 1998. We can not assure you that we will
achieve or sustain profitability or positive cash flows from operating
activities in the future.
Further Capital Requirements
We expect that we will require a substantial amount of capital
to fund the network development and operations in our target markets,
including funding the development of our advanced fiber optic networks,
upgrading our hybrid fiber/coaxial plant and funding operating losses and debt
service requirements. 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 estimates are forward-looking
statements that are subject to change depending on factors such as
circumstances related to construction, timing of receipt of regulatory
approvals and opportunities to accelerate network deployment. Additional
funds will be required to fund operating losses during this period. We are
accelerating our capital expenditure program due to deployment of our fiber
optic network ahead of schedule, recent acquisitions of several Internet
service providers and the anticipated development of new markets outside the
Boston to Washington, D.C. corridor. These capital expenditures do not
include amounts to be funded by our joint venture partners in connection with
the Boston and Washington, D.C. joint ventures. We are obligated to fund our
portion of any capital contributions required by the joint ventures' annual
budget or capital contribution schedule. Failure by our joint venture
partner(s) to make anticipated capital contributions could have a material
adverse effect on our company.
Before any additional financing, we expect to have sufficient
liquidity to meet our capital requirements into the second quarter of 2000.
Our principal sources of liquidity are our cash and temporary cash investments
(approximately $439.8 million at September 30, 1998) and short-term
investments (approximately $668 million at September 30, 1998). Our cash
balances and short term investments were funded by aggregate net proceeds of
approximately $1,161 million from three offerings of debt and equity
securities completed between October 1997 and June 1998. At September 30,
1998, our only committed source of available borrowing was $20 million
available under the credit agreement (the "Credit Agreement") dated as of July
1, 1997 between certain of our subsidiaries and a group of lenders for whom
First Union National Bank acts as agent.
The actual timing and amount of capital required for the
rollout of our network and to fund operating losses may vary materially from
our estimates and additional funds will be required in the event of
11
<PAGE>
significant departures from the current business plan, unforeseen delays
(including those associated with adverse weather conditions), cost overruns,
engineering design changes and other technological risks or to meet other
unanticipated expenses. We will continue to require additional capital for
planned increases in network coverage and other capital expenditures, working
capital, debt service requirements and anticipated further operating losses.
The proposed development of new networks in selected markets in the western
United States will substantially increase our capital requirements. Our
initial network development plan for expansion into our target markets in the
western United States will require funding of approximately $350 million
(including operating losses) through the year 2000; however, the actual timing
and amount of capital required may vary materially from our initial estimates.
Sources of funding for our further financing requirements may include 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. Failure to obtain such financing could result
in the delay or curtailment of our development and expansion plans and
expenditures. Any of these events could impair our ability to meet our debt
service requirements and could have a material adverse effect on our business.
Substantial Indebtedness; Effect of Financial Leverage
We have indebtedness that is substantial in relation to our
shareholders' equity and cash flow. As of September 30, 1998, we had an
aggregate of approximately $1,249 million of indebtedness outstanding and had
the ability to borrow up to an additional $20 million under the Credit
Agreement. The Credit Agreement contains customary covenants for facilities
of this nature, including covenants limiting debt, liens, investments,
consolidations, mergers, acquisition and sales of the assets, payment of
dividends and other distributions, making of capital expenditures and
transactions with affiliates. As a result of our substantial indebtedness,
fixed charges are expected to exceed earnings for the foreseeable future and
there can be no assurance that our operating cash flow will be sufficient to
pay principal and interest on our various debt securities. In addition, we
will require substantial additional indebtedness, particularly in connection
with the buildout of our networks and the introduction of telecommunications
services to new markets. The extent of our leverage may 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 the payment of 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 less leveraged
competitors; and
o render us more vulnerable in the event of a downturn in our business.
Holding Company Structure; Structural Subordination
RCN Corporation is a holding company with limited assets that
conducts substantially all of its operations through subsidiaries and joint
ventures. The securities will be solely obligations of RCN Corporation and no
other entity has any obligation, contingent or otherwise, to make any payments
in respect of the securities. Accordingly, we will be dependent on dividends
and other distributions from subsidiaries and joint ventures to generate the
funds necessary to meet our obligations, including the payment of principal
and interest on the debt securities. The ability of our subsidiaries and
joint ventures to pay dividends to us will be subject to, among other things,
the terms of any debt instruments and applicable law. In addition, the terms
of our joint ventures require our consent and the consent of our joint venture
partner to distribute or advance funds to us. Claims of holders of the debt
securities will be effectively subordinated to the indebtedness and other
liabilities and commitments of our subsidiaries and joint ventures and our
interest in joint ventures will be limited to the extent of our direct or
indirect equity interest in such entities. Consequently, in the event of an
insolvency, liquidation, reorganization, dissolution or other winding up of
our subsidiaries and joint ventures, the ability of our creditors, including
holders of the debt securities, will be subject to the prior claims of those
entities' creditors, including trade creditors, and any prior or equal claim
of any joint venture partner. Any distributions in respect of our equity
interests in non-wholly owned subsidiaries or in joint ventures may be
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<PAGE>
expected to be made on a pro rata basis to all equity holders. We expect that
a majority of our cash flow in the advanced fiber optic network business will
ultimately be derived from our joint venture investments. The indenture under
which the debt securities will be issued will permit substantial indebtedness
to be incurred by our subsidiaries and joint ventures and does not, except
under limited circumstances, require a guarantee by our subsidiaries. In
addition, such indenture will permit our subsidiaries and joint ventures to
become parties to debt instruments that limit such entities' ability to pay
dividends or make distributions to us.
Ability to Manage Growth; Risks Related to Acquisitions
The expansion and development of our operations (including the
construction and development of additional networks) will depend on, among
other things, our ability to access markets, design fiber optic network
backbone routes, install or lease fiber optic cable and other facilities,
including switches, and obtain rights-of-way, building access rights and any
required government authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. In
addition to markets presently being developed, we are continually evaluating
other potential markets, both within the Boston to Washington, D.C. corridor
and 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. There can be no assurance
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 were not able to manage our
planned expansion effectively, it could have a material adverse effect on our
company.
We recently announced our intention to commence developing
advanced fiber optic networks in selected high density markets outside of the
Boston to Washington, D.C. corridor, initially in the San Francisco Bay Area.
The proposed expansion into non-contiguous markets could place additional
strain on management resources. Furthermore, although we believe that our
experience in the Northeast will provide us with strategic advantages in
developing new markets, there can be no assurance that our experience in the
Boston to Washington, D.C. corridor 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. Such acquisitions may place a significant strain on our resources, and
could subject us to additional expenses during the integration process. For
instance, the process of integrating the Internet service provider businesses
acquired in 1998 may take a significant period of time and require significant
expenditure (including costs to upgrade the systems and controls of these
businesses). As a result, we cannot assure you that we will be able to
successfully integrate these businesses successfully or in a timely manner.
Rapid Technological Changes
The telecommunications industry is subject to rapid and
significant changes in technology. While we believe that for the foreseeable
future these changes will neither materially affect the continued use of fiber
optic telecommunications networks nor materially hinder our ability to acquire
necessary technologies, the effect of technological changes on our business
cannot be predicted. There can be no assurance that technological developments
in telecommunications will not have a material adverse effect on our company.
Dependence on Strategic Relationships; Terms of Joint Venture Arrangements
We have entered into a number of strategic alliances and
relationships in order to provide us with early entry into the market for
telecommunications services. As our network is further developed, we will be
dependent on these arrangements to provide the full range of
telecommunications service offerings. Our key strategic relationships
include:
13
<PAGE>
o our arrangements with MFS Communications Company, Inc. ("MFS/WorldCom")
(a subsidiary of WorldCom, Inc.) to, among other things, lease portions
of MFS/WorldCom's fiber optic network in New York City and Boston;
o the joint venture with BECO under which we have access to BECO's
extensive fiber optic network in Greater Boston;
o the 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.
In addition, any disruption of our relationships or arrangements
with incumbent local exchange carriers, such as resale or interconnection
agreements, could have a material adverse effect on our company. There can be no
assurance that we will successfully negotiate agreements with the incumbent
local exchange carrier in new markets or renewals of existing agreements. The
failure to negotiate or renew required interconnection and resale agreements
could have a material adverse effect on our company.
The agreements governing our joint ventures with BECO and Pepco
Communications contain material provisions for the management, governance and
ownership of the Greater Boston and Washington, D.C. businesses, respectively.
As a result of these agreements, certain matters beyond our control, such as a
change of control or an inability to agree on certain proposed actions, could
result in us being forced to sell our interest in the relevant joint venture
or buy out the interest of the other joint venturer. In addition, although
certain covenants contained in the indentures applicable to our debt
securities are applicable to the joint venture companies, neither the joint
venture companies nor our joint venture partners are parties to these
indentures and accordingly are not bound to comply with their terms. 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 and give rise to a deadlock event
triggering buy/sale provisions in the joint venture agreements.
Competition
We compete with a wide range of service providers for each of
the services that we provide. Virtually all markets for voice, video and data
services are extremely competitive, and we expect that competition will
intensify in the future. In each of the markets in which we offer voice and
video programming services, we face significant competition often from larger,
better-financed incumbent local telephone carriers and cable companies, and
often compete directly with incumbent providers which have historically
dominated their respective local telephone and cable television markets.
Other new technologies may become competitive with services
that 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 whether competition from such developing and
future technologies or from such future competitors will have a material
impact on our operations.
Regulation
The telephone and video programming transmission services which
we offer are subject to federal, state, and local government regulation which
are subject to change. These regulations often have a direct or indirect
impact on the costs of operating our networks, and therefore the profitability
of our services. We cannot assure you that we will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities in order to convert our wireless video subscribers to an
advanced fiber optic network. In addition, it is possible that changes in
existing regulations could have an adverse impact on our business.
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<PAGE>
Ability to Procure Programming Services
Our video programming services are dependent upon 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.
Risks Relating to Provision of Internet Services
Evolving Industry Standards; Contractual Arrangements. New
industry standards have the potential to replace or provide lower-cost
alternatives to existing services. The adoption of such new industry standards
could render our existing services obsolete and unmarketable or require
reduction in the fees charged for services. Internet service providers
participate in the Internet through contractual "transit agreements" and
"peering arrangements" with Internet companies. These contractual arrangements
are not subject to regulation and could be subject to revision in terms,
conditions or costs over time.
Constraints on Capacity and Supply of Equipment. Our ability
to provide Internet service will depend in part on our ability to provide
sufficient capacity, both at the level of particular point of presence
(affecting only subscribers attempting to use that point of presence) and in
connection with system-wide services (such as e-mail and news services, which
can affect all subscribers). In addition, we will be dependent in part on the
availability of equipment such as modems, servers and other equipment. Any
shortage of such equipment or capacity of servers could result in a strain on
incoming access lines during peak times, causing busy signals and/or delays for
subscribers.
Reliance on Network Infrastructure; Risk of System Failure;
Security Risks. Internet network infrastructure is vulnerable to computer
viruses and other similar disruptive problems. Computer viruses and other
problems could lead to interruptions of, delays in, or cessation of service by
us, as well as corruption of our or our subscribers' computer systems. In
addition, we cannot assure you that subscribers or others will not assert
claims of liability against us as a result of events such as computer viruses,
other inappropriate uses or security breaches.
Reciprocal Compensation. Our interconnection agreements with
Bell Atlantic and other incumbent local exchange carriers entitle us, among
other things, to collect reciprocal compensation payments from the incumbent
local exchange carriers for local telephone calls terminating on our
facilities (as well as obligating us to 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 Internet service provider
("ISP") points of presence, based on the argument 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 ISP points of
presence, and believe our telecommunications services subsidiaries 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), and every such order has
affirmed that local calls to ISPs 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 January 1999, and we cannot assure you that
this decision will be favorable to our interests. In addition, we cannot assure
you that the current reciprocal compensation arrangements will be renewed on
their existing terms when they expire (in most cases, in mid-1999).
State and Local Taxes on Internet Services. We are currently
subject to certain state and local taxes on certain of our telecommunications,
data and Internet access services. We may become subject to additional state
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<PAGE>
and local taxes on such services as we continue to expand and develop more
services to customers throughout the United States and as more state and local
taxing authorities become familiar with such services.
Government Regulation and Legal Uncertainties. Few laws or
regulations are directly applicable to access or commerce on the Internet.
However, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations
and, as a result, a number of laws or regulations may be adopted with respect
to Internet user privacy, taxation, infringement, pricing, quality of products
and services and intellectual property ownership. It is also uncertain as to
how existing laws will be applied to the Internet in areas such as property
ownership, copyright, trademark, trade secret, obscenity and defamation. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn have a
material adverse effect on our Internet business.
Control by Level 3 Telecom Holdings, Inc.; Conflicts of Interest
Level 3 Telecom beneficially owns approximately 46% of the
common stock of RCN Corporation. Consequently, Level 3 Telecom effectively
has the power to elect a majority of our directors and to determine the
outcome of substantially all matters to be decided by a vote of shareholders.
This may tend to deter non-negotiated tender offers or other efforts to obtain
control of our company and thereby deprive shareholders of opportunities to
sell shares at prices higher than those prevailing in the market. Moreover, a
disposition by Level 3 Telecom of a significant portion of RCN Corporation's
common stock, or the perception that such a disposition may occur, could
affect the trading price of such common stock and could affect the control of
our company. The common stock of Level 3 Telecom is owned 90% by Level 3 and
10% by David C. McCourt, the Chairman and Chief Executive Officer of RCN
Corporation. 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 September 30, 1998, 24.2%
of the common stock of Level 3 was owned by directors and executive officers
thereof, five of whom (Walter Scott, Jr., Richard R. Jaros, David C. McCourt,
James Q. Crowe and Michael B. Yanney) are executive officers or directors of
RCN Corporation. 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 shares of RCN
Corporation to holders of common equity of Commonwealth Telephone, there exist
relationships that may lead to conflicts of interest. Level 3 Telecom
effectively controls both RCN Corporation and Commonwealth Telephone
Enterprises, Inc. ("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 of
involvement of our officers and directors in our business and the abilities of
officers, directors and employees in managing both our company and the
operations of Commonwealth Telephone. Potential conflicts of interest will be
dealt with on a case-by-case basis taking into consideration relevant factors
including the requirements of The Nasdaq National Market and prevailing
corporate practices.
On January 12, 1999, we announced that we had entered into an
agreement with Level 3, pursuant to which Level 3 agreed to provide us with
access to its cross-country fiber network. Although this agreement is designed
to reflect one that would have been agreed upon 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.
Absence of Public Market for the Debt Securities and Preferred Stock
Prior to an offering, there has been no public market for the
debt securities and the preferred stock. We cannot assure you that any market
will develop for the debt securities or the preferred stock. If the debt
securities or the preferred stock are traded after their initial issuance,
they may trade at prices that may be higher or lower from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities and other factors, including economic conditions and our
financial condition, performance and prospects. Historically, the market for
non-investment grade securities has demonstrated substantial volatility in the
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<PAGE>
prices of securities similar to the debt securities that we may issue
hereunder. There can be no assurance that the future market for our debt
securities will not be subject to similar volatility.
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus
supplement, the net proceeds from the sale of shares of common stock will be
used to fund operating losses and for general corporate purposes.
DIVIDENDS
RCN anticipates that future revenues will be used
principally to support operations and finance growth of the business and,
thus, RCN does not intend to declare or pay cash dividends on the common
stock in the foreseeable future. The declaration or payment of any cash
dividends in the future will be at the discretion of RCN's Board of
Directors. The declaration of any dividends and the amount thereof will
depend on a number of factors, including RCN's financial condition, capital
requirements, funds from operations, future business prospects and such
other factors as RCN's Board of Directors may deem relevant. RCN is a
holding company and its ability to pay cash dividends is dependent on its
ability to receive cash dividends, advances and other payments from its
subsidiaries. The credit agreement into which certain subsidiaries of RCN
have entered contains restrictions on the payment of dividends by those
subsidiaries. In addition, RCN has entered into indentures in connection
with its debt securities which restrict RCN's and certain of its
subsidiaries' ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the RCN 10-K
and the RCN September 10-Q incorporated herein by reference.
MARKET PRICE AND DIVIDEND INFORMATION
The common stock (symbol: "RCNC") currently trades on the
Nasdaq National Market.
The following table sets forth the high and low bid prices per
share of the common stock on the Nasdaq National Market and cash dividends
declared on the common stock since September 30, 1997:
Common stock(1)
Market Price($)
Cash
Dividends
High Low Declared($)
1997 ------ ------ -----------
- ----
Quarter ending September 30(2). 15 11/16 10 9/16 0
Quarter ending December 31..... 21 1/2 12 1/2 0
1998
- ----
Quarter ending March 31........ 30 5/8 15 7/8 0
Quarter ending June 30......... 29 3/8 19 1/4 0
Quarter ending September 30.... 24 5/16 12 3/8 0
Quarter ending December 31..... 25 8 3/4 0
- ----------
(1) Because common stock was distributed on September 30, 1997 to holders of
record of the common stock of Commonwealth Telephone Enterprises, Inc. on
September 19, 1997, market price and dividend information have only been
set forth for the quarter ending September 30, 1997 and subsequent
periods. Common stock information has been restated to reflect the one
for one stock dividend declared on March 9, 1998 and paid on April 3,
1998.
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(2) The prices reflect the partial period between September 19, 1997 through
September 30, 1997. There was no market for the common stock prior to this
period.
The last reported sale price per share of common stock on
January 28, 1999, the last practicable date prior to the filing of this
prospectus, was $27.00.
On December 31, 1998, there were approximately 2,795 holders of
common stock. On December 31, 1998, 64,920,493 shares of common stock were
outstanding.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth selected historical consolidated
financial data for RCN. Prior to September 30, 1997, RCN operated as part of
C-TEC Corporation ("C-TEC"). The historical consolidated financial data
presented below reflect periods during which RCN did not operate as an
independent company and, accordingly, certain assumptions reflect the results
of operations or the financial condition which would have resulted if RCN had
operated as a separate, independent company during such periods, and are not
necessarily indicative of RCN's future results of operation or financial
condition.
The selected historical consolidated financial data for the
years ended December 31, 1994 and 1993 and as of December 31, 1994 and 1993
and September 30, 1997 are derived from RCN's unaudited historical consolidated
financial statements not included in this prospectus. The selected historical
consolidated financial data as of December 31, 1995 are derived from RCN's
audited historical consolidated financial statements not included in this
prospectus. The selected historical consolidated financial data of RCN for
the years ended December 31, 1997, 1996 and 1995 and as of December 31, 1997
and 1996 are derived from and should be read in conjunction with RCN's audited
historical consolidated financial statements (the "Financial Statements")
incorporated herein by reference to the RCN 10-K. The selected historical
consolidated financial data for the nine month periods ended September 30,
1997 and 1998 and as of September 30, 1998 are derived from and should be read
in conjunction with RCN's unaudited historical consolidated financial
statements incorporated herein by reference to the RCN September 10-Q. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the RCN 10-K and RCN September 10-Q.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $49,504 $59,500 $91,997 $104,910 $127,297 $91,854 $148,118
Costs and expenses, excluding
depreciation and amortization..... 30,821 49,747 75,003 79,107 134,967 91,183 182,632
Nonrecurring charges(1)............ -- -- -- -- 10,000 10,000 51,667
Depreciation and amortization...... 9,922 9,803 22,336 38,881 53,205 39,135 57,199
------ ------ ------ ------ ------ ------ -------
Operating (loss) income............ 8,761 (50) (5,342) (13,078) (70,875) (48,464) (143,380)
Interest income.................... 17,882 21,547 29,001 25,602 22,824 13,442 43,232
Interest expense................... (17,127) (16,669) (16,517) (16,046) (25,602) (10,460) (80,811)
Other (expense) income, net........ 1,195 1,343 (304) (546) 131 229 (1,947)
(Benefit) provision for income
taxes............................. 167 2,340 1,119 979 (20,849) (11,907) (9,923)
Equity in loss of unconsolidated
entities.......................... -- -- (3,461) (2,282) (3,804) (2,650) (8,169)
Minority interest in loss (income)
of consolidated entities.......... (85) (95) (144) 1,340 7,296 3,931 11,545
Extraordinary charge- debt
prepayment penalty, net of tax
of $1,728......................... -- -- -- -- (3,210) (3,210) --
Cumulative effect of changes in
accounting principles.............. 1,628 (83) -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Net (loss) income.................. $12,087 $3,653 $2,114 $(5,989) $(52,391) $(35,275) $(169,607)
====== ====== ====== ====== ====== ====== =======
Ratio of earnings to
fixed charges (2)............. 10.11 1.36 1.41 0.75 (1.87) NA (1.26)
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<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of
period):
Total assets....................... $291,634 $568,586 $649,610 $628,085 $1,150,992 $598,679 $1,890,447
Long-term debt..................... 181,500 154,000 135,250 131,250 686,103 110,000 1,248,681
Shareholders' equity............... 74,329 372,847 394,069 390,765 356,584 373,760 401,821
Other Data:
EBITDA before nonrecurring
charges(3)........................ 18,683 9,753 16,994 25,803 (7,670) 671 (34,514)
Cashed Provided by
(Used in):
Operating Activities............... N/A N/A 48,559 23,831 1,661 202 28,046
Investing Activities............... N/A N/A (146,203) (9,377) (475,860) (21,270) (478,013)
Financing Activities............... N/A N/A (31,203) 9,391 635,266 142,562 666,874
(1) Nonrecurring charges in 1997 represent costs of $10,000 incurred with
respect to the termination of a marketing services agreement related to
RCN's wireless video services, and in 1998 represent nonrecurring costs of
$51,667 of acquisition of in-process technology relating to the
acquisitions of UltraNet and Erols.
(2) 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. The
Company's earnings were insufficient to cover fixed charges by $73.5
million for the year ended December 31, 1997. The Company's earnings were
insufficient to cover fixed charges by $182.9 million for the nine months
ended September 30, 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. EBITDA is not intended to
represent cash flows for the period and should not be considered as an
alternative to cash flows from operating, investing or financing activities
as determined in accordance with U.S. GAAP. EBITDA is not a measurement
under U.S. GAAP and may not be comparable with other similarly titled
measures of other companies. Certain of the Company's debt agreements
contain certain covenants that, among other things, limit the ability of
the Company and its subsidiaries to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets
and engage in mergers and consolidations.
</TABLE>
20
<PAGE>
Supplemental Unaudited Financial Data
RCN conducts portions of its business through joint ventures,
including its joint venture with BECO (which is consolidated in RCN's
historical results of operations) and Starpower (which is accounted for under
the equity method in RCN's historical results of operations). The supplemental
unaudited financial information set forth below presents RCN's results of
operations as if all domestic joint ventures were fully consolidated
(hereinafter referred to as "Pro Forma Total RCN"), and shows the ownership
share of its domestic joint venture partners as minority interests. RCN
believes that this supplemental unaudited financial data provides useful
disclosure in analyzing its business.
<TABLE>
<CAPTION>
Pro Forma Total RCN (as defined above)
---------------------------------------------------------------------
Year Ended Nine Months Ended
December 31, September 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Sales:
Voice................................. $237 $830 $4,007 $1,869 $15,963
Video................................. 65,699 87,470 103,371 76,896 83,389
Data.................................. -- 4 41 25 47,520
Commercial and other.................. 26,061 16,606 19,878 13,064 24,258
------- ------- -------- -------- ---------
Total sales............................ 91,997 104,910 127,297 91,854 171,130
Costs and expenses, excluding
depreciation and amortization:
Direct expenses....................... 39,604 35,226 51,757 35,113 76,719
Operating, selling, general and
administrative...................... 35,399 43,881 83,422 56,070 127,176
------- ------- -------- -------- ---------
EBITDA before nonrecurring charges..... 16,994 25,803 (7,882) 671 (32,765)
Depreciation and amortization.......... 22,336 38,881 53,205 39,135 71,813
Nonrecurring charges................... -- -- 10,000 10,000 51,667
------- ------- -------- -------- ---------
Operating (loss)....................... (5,342) (13,078) (71,087) (48,464) (156,245)
Interest income........................ 29,001 25,602 22,824 13,442 43,808
Interest expense....................... (16,517) (16,046) (25,602) (10,460) (80,811)
Other income (expense), net............ (304) (546) 131 229 (1,978)
------- ------- -------- -------- ---------
(Loss) income before income taxes...... 6,838 (4,068) (73,734) (45,253) (195,226)
(Benefit) provision for income taxes... 1,119 979 (20,849) (11,907) (9,923)
------- ------- -------- -------- ---------
(Loss) income before equity in
unconsolidated entities, minority
interest and extraordinary item....... 5,719 (5,047) (52,885) (33,346) (185,303)
Equity in loss of unconsolidated
entities.............................. (3,461) (2,282) (3,698) (2,650) (2,008)
Minority interest in loss (income) of
consolidated entities................. (144) 1,340 7,402 3,931 17,704
------- ------- -------- -------- ---------
Loss (income) before extraordinary
item............................... 2,114 (5,989) (49,181) (32,065) (169,607)
Extraordinary charge-- debt
prepayment penalty.................... -- -- (3,210) (3,210) --
------- ------- -------- -------- ---------
Net (loss) income...................... $2,114 $(5,989) $(52,391) $(35,275) $(169,607)
======= ======= ======== ======== =========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Pro forma Total RCN (as previously defined)
------------------------------------------------------------------
Year Ended December 31, at September 30,
----------------------------------- ---------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash, temporary cash investments and
short-term investments................ $158,485 $108,674 $638,513 $183,337 $1,117,238
Property, plant and equipment.......... $173,373 $220,357 $307,759 $273,960 $533,250
Accumulated depreciation............... $71,293 $84,529 $107,419 $101,544 $152,293
Net property, plant and equipment...... $102,080 $135,828 $200,340 $172,416 $380,957
Long-term debt (including current
portion).............................. $161,000 $131,250 $686,103 $110,000 $1,248,681
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Prior to September 30, 1997, RCN was operated as part of C-TEC.
The following unaudited pro forma consolidated statements of operations set
forth the historical statements of operations of RCN for the year ended
December 31, 1997 and the nine months ended September 30, 1998 and as adjusted
for the following:
o the September 1997 spin-off transaction whereby C-TEC
distributed all of the shares of RCN to the holders of C-
TEC common equity;
o RCN's acquisition in March 1997 of the 19.9% minority
interest in Freedom New York LLC that it did not already
own;
o RCN's October 1997 issuance and sale of its 10% Senior Notes
and 11 1/8% Senior Discount Notes, both due 2007
(together, the "1997 Notes");
o RCN's acquisition of Erols in February 1998;
o RCN's 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 each
respective period.
Management believes that the assumptions used provide a
reasonable basis on which to present such unaudited pro forma statements of
operations. The unaudited pro forma statements of operations should be read in
conjunction with the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the RCN 10-K and
RCN September 10-Q.
The unaudited pro forma statements of operations are provided
for information purposes only and should not be construed to be indicative of
RCN's results of operations had the spin-off and the transactions and events
described above been consummated on the dates assumed, may not reflect the
results of operations or financial condition which would have resulted had RCN
been operated as a separate, independent company during such period, and are
not necessarily indicative of RCN's future results of operations or financial
condition.
23
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Liberty/ Adjustments
Adjustments Freedom for the 1997
RCN for Acquisition Notes and
Historical Spin-off Adjustments 9.8% Notes
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales.............................................. $127,297
Cost and expenses excluding depreciation and
amortization..................................... 134,967
Nonrecurring charges............................... 10,000
Depreciation and amortization ..................... 53,205 $1,250 (1)
-------- ------- ------ --------
Operating (loss) income............................ (70,875) -- (1,250)
Interest income.................................... 22,824 $(8,686) (2)
Interest expense................................... (25,602) (5,654) (3) $(85,179) (4)
10,460 (5)
Other (expense) income, net........................ 131
-------- ------- ------ --------
(Loss) income before income taxes.................. (73,522) (3,880) (1,250) (85,179)
(Benefit) for income taxes......................... (20,849) (1,358) (6) (437) (7) (29,812) (4)
-------- ------- ------ --------
(Loss) income before equity in unconsolidated
entities and minority interest................... (52,673) (2,522) (813) (55,367)
Equity in (loss) of unconsolidated entities........ (3,804)
Minority interest in loss of consolidated entities. 7,296
-------- ------- ------ --------
(Loss) income before extraordinary charge.......... $(49,181) $(2,522) $(813) $(55,367)
======== ======= ====== ========
Unaudited pro forma (loss) before extraordinary
charge per common share ......................... $(.89)
Weighted average number of common shares and
common stock equivalents outstanding............. 54,965,716
<CAPTION>
Adjustments
for the Stock
Acquisition Offering and
Erols Adjustments the 11%
Historical(8) For Erols Notes Pro Forma
------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Sales.............................................. $36,528 $(22,552) (9) $141,273
Cost and expenses excluding depreciation and
amortization..................................... 49,829 (30,764) (9) 154,032
Nonrecurring charges............................... 10,000
Depreciation and amortization ..................... 6,360 606 (10) 61,421
-------- ------- -------- ---------
Operating (loss) income............................ (19,661) 7,606 -- (84,180)
Interest income.................................... 14,138
Interest expense................................... (162) 100 $(18,719) (13) (124,756)
Other (expense) income, net........................ (49) 82
-------- ------- -------- ---------
(Loss) income before income taxes.................. (19,872) 7,706 (18,719) (13) (194,716)
(Benefit) for income taxes......................... (9,338) (11) (61,794)
(Loss) income before equity in unconsolidated
entities and minority interest................... (19,872) 17,044 (18,719) (132,922)
Equity in (loss) of unconsolidated entities........ (13,420) (9) (17,224)
Minority interest in loss of consolidated entities. 7,296
-------- ------- -------- ---------
(Loss) income before extraordinary charge.......... $(19,872) $3,624 $(18,719) $(142,850)
======== ======= ======== =========
Unaudited pro forma (loss) before extraordinary
charge per common share ......................... $(2.52)
Weighted average number of common shares and
common stock equivalents outstanding............. 1,730,648 (12) 56,696,364
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
24
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1998
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Adjustments for
the 1997 Notes Erols
RCN Offering and the Historical
Historical 9.8% Notes 1/1/98-2/28/98(8)
---------- ---------------- -----------------
<S> <C> <C> <C>
Sales....................................................... $148,118 $8,700
Cost and expenses, excluding depreciation and amortization.. 182,632 8,388
Nonrecurring acquisition costs: In-process technology....... 51,667 --
Depreciation and amortization............................... 57,199 1,478
------- ------- -------
Operating (loss) income..................................... (143,380) -- (1,166)
Interest income............................................. 43,232 --
Interest expense............................................ (80,811) $(3,492) (4) (164)
Other (expense), net........................................ (1,947) (5)
------- ------- -------
(Loss) income before income taxes........................... (182,906) (3,492) (1,335)
(Benefit) for income taxes.................................. (9,923) -- --
------- ------- -------
(Loss) income before equity in unconsolidated entities and
minority interest........................... (172,983) (3,492) (1,335)
Equity in (loss) of unconsolidated entities.................
(8,169) --
Minority interest in loss of consolidated entities.......... 11,545
------- ------- -------
Net loss.................................................... $(169,607) $(3,492) $ (1,335)
======== ======= =======
Unaudited pro forma net loss per average common shares...... $ (2.83)
Weighted average number of common shares and common
stock equivalents outstanding............... 59,905,854
<CAPTION>
Adjustments for
Acquisition the Stock
Adjustments Offering and the
for Erols 11% Notes Pro Forma
----------- ---------------- ---------
<S> <C> <C> <C>
Sales....................................................... $(5,371) (9) $151,447
Cost and expenses, excluding depreciation and amortization.. (5,179) (9) 185,841
Nonrecurring acquisition costs: In-process technology....... -- 51,667
Depreciation and amortization............................... (340) (10) 58,337
------- ------- -------
Operating (loss) income..................................... 148 -- (144,398)
Interest income............................................. 43,232
Interest expense............................................ 101 $(8,580) (13) (92,946)
Other (expense), net........................................ -- (1,952)
------- ------- -------
(Loss) income before income taxes........................... 249 (8,580) (13) (196,064)
(Benefit) for income taxes.................................. -- (11) (9,923)
------- ------- -------
(Loss) income before equity in unconsolidated entities and
minority interest........................... 249 (8,580) (13) (186,141)
Equity in (loss) of unconsolidated entities................. (1,702) (9) (9,871)
Minority interest in loss of consolidated entities.......... 11,545
------- ------- -------
Net loss.................................................... $ (1,453) $(8,580) $(184,467)
======= ======= =======
Unaudited pro forma net loss per average common shares...... $ (3.08)
Weighted average number of common shares and common
stock equivalents outstanding............... 59,905,854
See Notes to Unaudited Pro Forma Statement of Operations
</TABLE>
25
<PAGE>
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. All share and per share data of RCN common stock have
been restated to reflect the stock dividend paid in April 1998.
(1) Adjustment to reflect the additional depreciation and
amortization of $1,250 in 1997 resulting from the acquisition of the minority
interest of Freedom New York LLC ("Freedom") in March 1997 and to present the
information as if the acquisition of the minority interest of Freedom had
occurred at the beginning of 1997. See Note 4 to the Consolidated Financial
Statements in the RCN 10-K.
A summary of the transaction is as follows:
Cash paid $30,000
Reduction of
minority interest (3,812)
------
Fair value of
assets acquired $26,188
======
The fair value of assets acquired was allocated to goodwill with an
amortization period of six years.
(2) Adjustment to eliminate interest income of $8,686 for the
year ended December 31, 1997, and related income taxes of $(3,040) on
outstanding intercompany notes payable owed to RCN of which $110,000 was
repaid and the remaining balance was treated as capital contributions from
RCN to the borrower.
(3) Adjustment to reflect interest expense and amortization of
debt issuance costs of $5,654 for the year ended December 31, 1997, and
related income taxes of $(1,979) on new third party debt of $110,000 which was
incurred. The interest rate on the debt is based on either a LIBOR or Base
Rate Option, at the election of RCN. A 1/8% change in interest rates
would result in a change in annual interest expense of approximately $138.
(4) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 1997 Notes and 9.8% Notes
aggregating $3,492 and $85,179 for the nine months ended September 30, 1998
and for the year ended December 31, 1997, respectively, and related income
taxes of $29,812 for the year ended December 31, 1997. A pro forma adjustment
was not assumed for income tax benefits associated with the pro forma
adjustment for additional interest expense for the nine months ended September
30, 1998 because the realization of such benefit would be uncertain. Interest
expense on the 1997 Notes is already included in RCN's historical results for
the entire nine months ended September 30, 1998, therefore the pro forma
adjustment is correspondingly lower than the ratable portion of the adjustment
for the year ended December 31, 1997.
(5) Adjustment to eliminate interest expense and amortization
of debt issuance costs of $10,460 for the year ended December 31, 1997, and
related income taxes of $3,661 on existing outstanding third party debt that
was repaid and on outstanding intercompany notes payable owned by RCN which
were treated as capital contributions to RCN from the borrower.
(6) Income tax effects for the adjustments relating to the
spin-off are summarized as follows:
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
Benefit
(Provision)
<S> <C>
Elimination of interest expense and amortization of debt issuance costs on existing
outstanding third party debt (see Note 5)........................................................ $3,661
Incurrence of interest expense and amortization of debt issuance costs on new third party
debt (see Note 3)................................................................................ (1,979)
Elimination of interest income on outstanding intercompany notes (see Note 2)..................... (3,040)
-------
Total............................................................................................ $(1,358)
=======
</TABLE>
(7) Adjustments to income taxes of $(437) relating to
additional depreciation and amortization in 1997 due to the acquisition of
a 19.9% minority interest in Freedom in March 1997.
(8) On February 20, 1998, RCN completed the acquisition of
Erols, Washington, D.C.'s largest Internet service provider, for $29,200 in
cash, 1,730,648 newly issued shares of RCN common stock plus the assumption
and repayment of $5,100 of debt. Additionally, RCN converted approximately
999,000 stock options for Erols common stock into options to purchase 699,104
shares of RCN common stock at an average exercise price of $3.424 per share.
RCN accounted for this transaction under the purchase method of accounting and
accordingly, the financial statements of Erols are not consolidated with RCN's
historical financial statements as of and for the year ended December 31,
1997. In 1998, the financial results of Erols also are not consolidated with
RCN's historical financial statements for the period prior to February 20,
1998. The financial information relating to Erols was provided by Erols.
A summary of the transaction is as follows:
Cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt
of approximately 5,100)........................ $36,000
Fair value of RCN stock issued.................... 45,000
Liabilities assumed............................... 55,000
-------
Fair value of assets acquired..................... $136,000
=======
A fair value of assets acquired was preliminarily allocated as follows:
Contributing to joint venture..................... $77,000
In-process technology............................. 35,000
Property, plant & equipment....................... 4,000
Current Assets.................................... 2,000
Other Assets...................................... 1,000
Intangible Assets................................. 17,000
-------
$136,000
=======
Because the fair value study is still in progress,
allocation to specific intangible assets is not possible at this time.
However, because of the nature of the business acquired, the Company
believes that such intangible assets will primarily include customer lists,
goodwill and work force.
(9) Such adjustments include a pro forma allocation of
historical operating results of Erols to the joint venture with PEPCO (see
below) based upon the relationship of the number of subscribers expected to be
contributed to the joint venture to the total number of subscribers acquired
in the merger. RCN's share of such operating results, including the
depreciation and amortization effects of the allocation of a portion of the
total purchase price to the joint venture, representing the assumed value of
the subscribers to be contributed to the joint venture, are included in the
adjustment for "equity in (loss) of unconsolidated entities."
27
<PAGE>
A subsidiary of RCN is a party to a joint venture with a
subsidiary of PEPCO, to provide the greater Washington, D.C. area residents
and businesses local and long-distance telephone, cable television, and
Internet services as a package from a single source. As a result of this joint
venture, RCN expects to contribute to the joint venture the subscribers
acquired in the merger with Erols which are located in the relevant joint
venture market. The joint venture partners of Starpower are currently
negotiating the terms of such contribution. The value of such contribution
for accounting purposes is estimated to be approximately $51,937. The joint
venture is accounted for under the equity method of accounting. Additionally,
RCN expects that Starpower will assume the liability for the unearned revenue
related to the subscribers contributed to Starpower.
(10) Such adjustment reflects the change in depreciation and
amortization for the effect of the fair value adjustment of the net assets of
Erols acquired. Amortization of such excess over a five-year period has been
assumed, although a shorter life may result based on the study discussed
below. A one year change in the amortization period is expected to result in
corresponding changes in depreciation and amortization of approximately $5,000
and equity in unconsolidated entities (joint venture with PEPCO described in
Note 9) of approximately $15,000. Also, as discussed below, at least $35,478
is expected to be allocated to certain in-process technology projects which
has resulted in a ratable reduction of pro forma amortization expense. RCN
allocated the purchase price for Erols (see Note 8) on the basis of the fair
market value of the assets acquired and liabilities assumed. RCN has
undertaken a study to determine such fair market values, including in-process
technology. Such fair market values may differ from the allocations assumed in
the pro forma financial statements. The impact on deferred tax balances was
included in the above-referenced fair value adjustments. Erols' historical
property, plant and equipment has been adjusted to its estimated fair value
based upon its depreciated cost. The remaining excess of consideration over
the historical book value of Erols net assets acquired has been preliminarily
allocated to subscriber base, goodwill and other intangible assets. The
amounts preliminarily allocated to subscriber base, goodwill and other
intangible assets have been ratably reduced by the portion of the purchase
price preliminarily allocated to in-process technology of at least $35,478,
which was recognized as a charge for the six months ended June 30, 1998. The
final allocation to in-process technology may differ from the preliminary
estimate and an adjustment may occur.
(11) A pro forma adjustment was not assumed for income tax
benefits associated with the pro forma adjustments for the historical results
of operations of Erols because the realization of such benefit would be
uncertain.
(12) Represents adjustment for shares to be issued in
connection with the acquisition of Erols. (See Note 8.)
(13) Adjustment to reflect interest expense and amortization of
debt issuance costs related to the issuance of the 11% Notes aggregating
$8,580 and $18,719 for the nine months ended September 30, 1998 and for the
year ended December 31, 1997, respectively. Pro forma adjustments were not
assumed for income tax benefits associated with the pro forma adjustments for
additional interest expense because the realization of such benefits would be
uncertain.
28
<PAGE>
BUSINESS
Overview
We provide a wide range of telecommunications services through
high speed, high capacity advanced fiber optic networks. Our current services
include local and long distance telephone, video programming and data services
(including high speed Internet access), which we provide primarily to
residential customers in selected markets with high levels of population
density and favorable demographics. 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 intend to
leverage our customer base through strategic alliances and opportunistic
development of complementary products. In addition, we intend to leverage
excess capacity in our fiber optic networks by providing 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, Boston and its surrounding communities and in the Washington, D.C.
area. In the Boston market we operate our advanced fiber optic network
through a joint venture with BECO. The venture is managed and 51% owned by us
and 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, an indirect wholly owned subsidiary of
PEPCO. Starpower is owned 50% by us and 50% by Pepco Communications and is
accounted for under the equity method of accounting. We believe that these
joint ventures provide us with a number of important advantages including
access to rights of way and the use of existing fiber optic facilities, the
ability to enter our target markets quickly and efficiently and a reduction in
the up-front capital investment required to develop our networks. In
addition, our joint venture partners provide access to additional assets,
equity capital and established customer bases. We also benefit from our
relationship with our largest shareholder, Level 3, 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 multiple services, we report the total
number of our various service connections (for local telephone, video
programming and Internet access) rather than the number of customers. See
"--RCN Services--Connections." As of December 31, 1998, we had approximately
connections which were delivered through a variety of owned and
leased facilities including hybrid fiber/coaxial cable systems, a wireless
video system and advanced fiber optic networks. As of that date, we had
approximately total connections attributable to customers connected
to advanced fiber optic networks ("on-net" connections) and had approximately
connections attributable to customers served through other
facilities ("off-net" connections). See "--RCN Services." Approximately
of our Internet service connections were acquired during 1998.
See "--Recent Acquisition Transactions."
Our extensive operating experience in both the telephone and
video industries and in the design and development of telecommunications
facilities provides us with expertise in systems operation and development, an
established infrastructure for customer service and billing for both voice and
video services and established relationships with providers of equipment and
video programming. In addition, our management team and board of directors
benefit from experience gained in connection with the management of C-TEC,
which prior to September 30, 1997 owned and operated RCN Corporation. 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
29
<PAGE>
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 commenced developing 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, a market that benefits from high density, 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, have obtained an "open video system" ("OVS") certification from
the Federal Communications Commission (the "FCC") for the City of San
Francisco and surrounding counties and have commenced network development in
the San Francisco Bay Area. We also expect our expansion to include 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 commence 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.
Continued 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 leverage 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 Utilize 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 utilizing strategic alliances
with companies such as BECO, Pepco Communications, Level 3, Qwest and
MCI/WorldCom. By establishing relationships with these companies, we are able
30
<PAGE>
to leverage 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.
RCN Services
RCN provides a wide range of local and long distance telephone,
video programming and data services, both individually and in bundled service
options.
RCN provides these services through a range of facilities
including its advanced fiber optic networks in New York City, Boston and
Washington D.C., a wireless video system in New York City, its hybrid
fiber/coaxial cable systems in the states of New York (outside New York City),
New Jersey and Pennsylvania, and, on a limited basis, resale local and long
distance telephony services.
Connections. The following table summarizes the development of
RCN's 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(1):
Voice............................ 1,909 3,214 4,473 11,428 20,857
Video............................ 4,870 11,784 15,599 35,196 58,324
Data............................. 326 150 267 1,588 3,661
------- -------- ------- ------- -------
Subtotal On-Net................... 7,105 15,148 20,339 48,212 82,842
------- -------- ------- ------- -------
Off-Net(2):
Voice(3)......................... 10,953 24,900 40,447 49,052 58,093
Video(4)......................... 229,198 227,619 227,558 214,164 196,776
Data............................. -- -- 370,271 398,560 470,466
------- -------- ------- ------- -------
Subtotal Off-Net.................. 240,151 252,519 638,276 661,776 725,335
------- -------- ------- ------- -------
Total Service Connections(5)...... 247,256 267,667 658,615 709,988 808,177
======= ======== ======= ======= =======
Homes Passed...................... 26,083 44,045 63,386 122,977 213,983
Marketable Homes(6)............... -- -- -- 111,187 181,353
(1) Because RCN delivers multiple services, RCN accounts for its customer
activity by the number of individual local telephone, video programming or
Internet access services, or "connections," purchased. Consequently, a
single customer purchasing local telephone, video programming and Internet
access constitutes three connections.
(2) RCN classifies connections within the "Off-Net" category until the
relevant network is capable of providing voice, video and data services,
including local telephone service through an RCN switch. During 1998,
RCN's Allentown, Pennsylvania system was upgraded to provide a full range
of RCN services, and the customers on that system were migrated to "On-Net"
connections.
(3) Represents resold local phone service provided to customers not connected
to the advanced fiber optic networks.
(4) Includes approximately wireless connections and wireline video
connections serving the University of Delaware ( connections at
December 31, 1998).
(5) 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.
(6) As of September 30, 1998, RCN began to report marketable homes, which
represents that segment of homes passed which are being marketed the full
suite of advanced fiber optic network products. The distinction between
homes passed and marketable homes recognizes the transition from network
construction to service penetration.
</TABLE>
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<PAGE>
Set forth below is a brief description of RCN's services:
Voice. RCN offers full-featured local exchange telephone
service, including standard dial tone access, enhanced 911 access, operator
services and directory assistance in competition with the incumbent local
exchange providers and CLECs. In addition, RCN offers a wide range of
value-added services, including call forwarding, call waiting, conference
calling, speed dial, calling card, 800-numbers and voice mail. RCN also
provides Centrex service and associated features. RCN's local telephone rates
are generally competitive with the rates charged by the incumbent providers.
At December 31, 1998, RCN had approximately telephone service
connections on its advanced fiber optic networks and approximately
customers for resold telephone service. RCN also provides long distance
telephone services, including outbound, inbound, calling card and operator
services. These services are offered to residential and business customers.
Video Services. RCN offers a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system,
RCN offers from 61 to 147 channels. RCN's basic video programming package
provides extensive channel selection featuring all major cable and broadcast
networks. RCN's premium services include HBO, Cinemax, Showtime and The Movie
Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2.
RCN's StarCinema, available on RCN's advanced fiber optic networks, utilizes
the latest "impulse" technology allowing convenient impulse pay-per-view
ordering of the latest hit movies and special events instantly from the
customer's remote. RCN's "Music Choice" offers 30 different commercial-free
music channels delivered to the customer's stereo in digital CD quality sound.
As of December 31, 1998, RCN had approximately
subscribers for its video programming services provided over advanced fiber
optic networks. As of such date, RCN also had approximately connections
attributable to the wireless video system and approximately
connections attributable to the hybrid fiber/coaxial cable systems.
Internet Access and Data Transmission. RCN operates as an
Internet service provider, or ISP, under the RCN.com brand name. We focus on
serving individuals and businesses through a network of Company-owned points
of presence ("POPs") which are connected to RCN's advanced fiber optic
network. Our primary service offerings are 56K dial-up and high-speed cable
modem access. RCN also sells commercially oriented private line
point-to-point data transmission services such as DS-1 and OC-3 as well as a
range of web page and server hosting services. Our subscribers use their RCN
accounts to, among other things, communicate, retrieve information, and
publish information on the Internet. Following the recent acquisitions
described below under "--Recent Acquisition Transactions", RCN believes it is
the largest regional provider of Internet services in the Northeast. As of
December 31, 1998, RCN had approximately Internet subscribers.
Migration of Customers to Advanced Fiber Networks
RCN provides wireless video services to customers located near
its advanced fiber optic network in New York City, provides Internet services
to acquired subscribers and in the past has provided resold telephone service,
all with a view to extending the advanced fiber optic network to service many
of those customers. As RCN's advanced fiber optic network is extended into
these areas or buildings, customers receiving wireless video service in New
York City are switched to the advanced fiber optic network from the wireless
video network, and the wireless video equipment is used to provide service to
other customers in off-network premises. Similarly, as the advanced fiber
optic network is developed, voice customers are switched to the advanced fiber
optic network from resale accounts, thereby allowing RCN to gain additional
revenue (and higher margins) from originating and terminating access fees and
to control the related services and service quality.
32
<PAGE>
Strategic Relationships and Facilities Agreements
RCN has entered into a number of strategic alliances and
relationships in order to provide it with early entry and to reduce the cost
of entry into the market for telecommunications services. RCN expects to
continue to pursue opportunities that may be afforded by entering into
strategic alliances to facilitate network expansion and entry into new markets.
BECO Joint Venture
In 1996 RCN and BECO, through wholly owned subsidiaries, formed
a joint venture to utilize 126 fiber miles of BECO's fiber optic network to
deliver RCN's comprehensive communications package in Greater Boston. The
venture, in the form of an unregulated entity with a term expiring in the year
2060, was formed pursuant to a joint venture agreement providing for the
organization and operation of RCN-BECOCOM, LLC ("RCN-BECOCOM"). 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. RCN,
through RCN Telecom Services of Massachusetts, owns 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 RCN's financial
statements on a consolidated basis.
RCN and BECO are presently in discussions with BECO with
respect to the conversion of a portion of BECO's interest in the BECO joint
venture into RCN common stock.
RCN expects to benefit from the ability to utilize 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 its access to the
extensive BECO network, RCN's reliance on and utilization of MFS/WorldCom
facilities in Boston has been reduced significantly.
Starpower Joint Venture
In 1997, RCN Telecom Services, Inc., a subsidiary of RCN, and
Potomac Capital Investment Corporation ("PCI"), a wholly owned subsidiary of
PEPCO, 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 (the "Washington, D.C. Market"). 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. RCN, through RCN Washington, owns
50% of the equity interest in Starpower and PCI, through Pepco Communications,
owns the remaining 50% interest. Starpower is accounted for under the equity
method of accounting.
Miscellaneous Facilities Agreements
RCN has also entered into certain agreements which have helped
it accelerate network development, including Fiber Agreements (the "Fiber
Agreements") entered into with MFS/WorldCom, which owns or has the right to
use certain fiber optic network facilities in the Boston, Massachusetts and
New York City markets. Pursuant to the Fiber Agreements, MFS/WorldCom agreed
to construct and provide extensions connecting the fiber optic facilities to
buildings designated by RCN and to allow RCN to use certain dedicated fibers
in such facilities, except that RCN may not use the facilities to deliver
telephone services to commercial customers.
33
<PAGE>
In June 1998, RCN entered into an agreement with Qwest
Communications ("Qwest"), pursuant to which Qwest agreed to provide RCN with
capacity in its regional backbone of fiber lines to connect to RCN's local
networks from Boston to Washington, D.C. RCN also recently announced that it
had entered into a letter of intent with Level 3 pursuant to which Level 3
agreed to provide RCN with cross-country capacity to allow RCN customers to
connect to major Internet connection points in the United States. This gives
RCN 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, RCN entered into an Agreement and Plan of
Merger among RCN, Erols, Erol Onaran, Gold & Appel Transfer, S.A., a British
Virgin Islands corporation, and ENET Holding, Inc., a Delaware corporation and
a wholly owned subsidiary of RCN, to acquire all of the outstanding shares of
common stock of Erols, a leading regional ISP serving residential and business
subscribers in targeted markets, including New York City, Philadelphia,
Washington, D.C. and Boston. The approximate total consideration was $29.2
million in cash, 1,730,648 shares of RCN common stock plus the assumption and
repayment of approximately $5.1 million of debt. Additionally, RCN converted
certain Erols stock options to RCN stock options. The transaction was
completed in February 1998. After completion of the transaction, RCN
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
its Starpower joint venture partners in exchange for a $52 million credit to
RCN's capital account in the Starpower joint venture. In addition, RCN 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. Its 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
entered into an Agreement and Plan of Merger whereby RCN agreed to acquire
all of the outstanding shares of common stock of UltraNet, a leading ISP in
the Boston area serving residential and business customers in New England. The
total consideration for the acquisition was approximately $7 million in cash,
890,384 shares of RCN common stock, and $3 million in deferred compensation.
Additionally, RCN converted certain UltraNet stock options to RCN stock
options. The transaction was completed in February 1998. After completion of
the transaction, RCN contributed approximately 10,000 subscribers located in
the Boston area and certain assets and liabilities unique to the RCN-BECOCOM
service area to its 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, RCN entered into an Agreement and Plan of
Merger with Lancit Media Entertainment Ltd. ("Lancit") and LME Acquisition
Corporation whereby RCN agreed to acquire all of the outstanding shares of
common stock of Lancit, a producer of high quality children's programming. The
total consideration for the transaction was $1 in cash and 366,596 in shares
of RCN common stock. All options to purchase Lancit common stock were
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, RCN entered into the Interport Merger
Agreement with Interport and INET Holding, Inc. and the individual
shareholders of Interport whereby RCN agreed to acquire all of the outstanding
shares of common stock of Interport. The total consideration for the
transaction was $1.025 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 shares of RCN common stock were issued. The transaction was completed in
June 1998.
On June 30, 1998, RCN entered into the JavaNet Merger Agreement
with JavaNet, David Epstein, Zachary Julius, JNET Holding Inc. and (with
respect to certain provisions only) John Halpern whereby RCN agreed to acquire
all of the outstanding shares of common stock of JavaNet, an Internet service
provider with approximately 32,000 subscribers in Connecticut, Maine and
34
<PAGE>
Massachusetts (at the time of the acquisition). In connection with the
transaction, RCN 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 completion of the transaction, RCN contributed approximately 5,000
subscribers in Massachusetts and certain assets and liabilities unique to the
RCN-BECOCOM service area to its 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(1)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed ....... 118,216 119,761 282,836 283,940 290,612
Basic Subscribers .. 87,660 92,140 176,131 179,932 184,938
</TABLE>
(1) As of December 31, 1998, approximately homes (representing
approximately 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 RCN's New Jersey system. Certain of RCN's
Hybrid Fiber/Coaxial Cable systems have been upgraded to enable such networks to
provide voice, video and data services, including local telephone service,
through an RCN switch. Upon completion of such conversion, customers served by
such networks are included within the "on- net connections" category.
International
The Company owns a 48.9% 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 September 30, 1998, their wireline systems passed approximately
685,000 homes and served approximately 210,000 subscribers. Megacable had
revenues of $30.4 million and $23.2 million for the years ended December 31,
1997 and 1996, respectively and $27.9 million for the nine months ended
September 30, 1998.
Additionally, Megacable presently holds a 99% interest in
Megacable Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City, Monterrey and Guadalajara. MCM intends to use this network to
provide local voice and high-speed data service in these cities, principally
to commercial customers in Mexico City.
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<PAGE>
Competition
Overview
RCN competes with a wide range of service providers for each of
the services that it provides. Virtually all markets for voice and video
services are extremely competitive, and RCN expects that competition will
intensify in the future. In each of the markets in which it offers voice and
video programming services, RCN faces significant competition, often from
larger, better-financed incumbent local telephone carriers and cable companies,
and RCN often competes directly with incumbent providers which have
historically dominated their respective local telephone and cable television
markets. These incumbents presently have numerous advantages as a result of
their historic monopoly control of their respective markets, economies of
scale and scope, control of limited conduit and pole space, and
well-established customer and vendor relationships. However, RCN believes that
most existing and potential competitors will, at least initially, provide
narrower service offerings over limited delivery platforms as compared to the
wide range of voice, video and data services that will be provided over RCN's
fiber-based networks, thereby providing RCN with an opportunity to achieve
important market penetration.
With respect to local telephone services, RCN competes with the
incumbent LECs, and alternative service providers including CLECs. Cable
operators are also entering the local exchange market in some locations.
Commercial mobile radio services providers, including cellular carriers (such
as Bell Atlantic Mobile Services), personal communications services ("PCS")
carriers (such as Sprint Spectrum), and enhanced specialized mobile radio
services ("ESMRS") providers (such as NexTel), are also a source of
competitive local and long distance telephone service. However, RCN believes
these operators may primarily use competitive access services to transport
their calls among their radio transmitter/receiver sites through networks that
largely avoid the incumbent LECs with whom they compete.
With respect to long distance telephone services, RCN faces,
and expects to continue to face, significant competition from the
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 brought about by nationwide advertising. RCN, however,
regards its long-distance service as a complementary service rather than a
principal source of revenue. Certain IXCs, including AT&T, MCI 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 RCN's video services face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. Among the alternative video distribution
technologies are traditional cable networks, wireless local video distribution
technologies, and home satellite dish earth stations ("HSDs") which enable
individual households to receive many of the satellite-delivered program
services formerly available only to cable subscribers. 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. RCN faces
additional competition from private satellite master antenna television
("SMATV") systems that serve condominiums, apartment and office complexes and
private residential developments. The FCC and Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to RCN's various video distribution systems. These technologies
include, among others, Direct Broadcast Satellite ("DBS") service whereby
signals are transmitted by satellite to receiving facilities located on
customer premises. RCN expects that its video programming services will face
growing competition from current and new DBS service providers. The FCC has
recently determined that DBS is the fastest-growing competitor to franchised
cable operations. RCN also competes with wireless program distribution
services such as Multi-Channel Multi-Point Distribution Service ("MMDS") which
use low-power microwave frequencies to transmit video programming over-the-air
36
<PAGE>
to subscribers. RCN is unable to predict whether wireless video services will
have a material impact on its operations.
The Internet access market is extremely competitive and highly
fragmented. Competition in this market is expected to intensify. RCN's
current and prospective competitors include established online services; local,
regional and national ISPs; national and international telecommunications
companies including RBOCs (as defined below) 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
become competitive with services that RCN can offer. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. Thus, it is
not possible to predict the effect that ongoing or future developments might
have on the voice, video and data industries or on the operations of RCN.
RCN believes that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs provide the most direct
competition to RCN in the delivery of "last mile" connections for voice and
video services.
Incumbent LECs
In each of its target markets for advanced fiber optic
networks, RCN faces, and expects to continue to face, significant competition
from the incumbent LECs (including Bell Atlantic in the Northeast Corridor,
and Pacific Bell in California), which currently dominate their local
telephone markets. RCN competes with the incumbent LECs in its markets for
local exchange services on the basis of product offerings (including the
ability to offer bundled voice and video services), reliability,
state-of-the-art technology and superior customer service, as well as price.
RCN believes that its advanced fiber optic networks provide superior
technology for delivering high-speed, high-capacity voice, video and data
services as compared to the primarily copper wire based networks of the
incumbent LECs. However, the incumbent LECs (which have long-standing
relationships with their customers) have begun to expand the amount of fiber
facilities in their networks, 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 RCN 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 Regional Bell Operating
Companies ("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 that offered by RCN and proposed by the three largest IXCs
(AT&T, MCI WorldCom and Sprint). RCN expects that the increased competition
made possible by regulatory reform will result in certain pricing and margin
pressures in the telecommunications services business.
RCN has sought, and will continue to seek, to provide a full
range of local voice services in competition with incumbent LECs in its
service areas. RCN expects that competition for local telephone services will
be based primarily on quality, capacity and reliability of network facilities,
customer service, response to customer needs, service features and price, and
will not be based on any proprietary technology. As a result of the
comparatively recent installation of RCN's advanced fiber optic networks, its
dual backbone architecture and the state-of-the-art technology used in its
networks, RCN may have capital cost and service quality advantages over some
37
<PAGE>
currently available local networks relied upon by the incumbent LECs, as well
as the competitive advantage provided by the ability to deliver a bundled
voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a
wide variety of video services directly to subscribers in competition with
RCN. Various LECs currently are providing video services within and outside
their telephone service areas through a variety of distribution methods,
including both the deployment of broadband wire facilities and the use of
wireless transmission facilities. RCN cannot predict the likelihood of success
of video service ventures by LECs or the impact on RCN of such competitive
ventures. Some LECs, including Bell Atlantic, also offer Internet access
services that compete with RNC.com services.
Incumbent Cable Television Service Providers
Certain of RCN's video service businesses compete with
incumbent wireline cable companies in their respective service areas. In
particular, RCN's advanced fiber optic networks compete for cable subscribers
with the major wireline cable operators in its markets, such as Time-Warner
Cable in New York City and Cablevision in Boston and TCI in Washington, D.C.
RCN's wireless video service in New York City competes primarily with
Time-Warner Cable. RCN believes that the expanded capacity and fiber-to-node
architecture of its advanced fiber optic networks make it better equipped to
provide high-capacity communications services than traditional coaxial cable
based networks utilizing "tree and branch" architecture. RCN's Pennsylvania
hybrid fiber/coaxial cable television system competes with an alternate
service provider, Service Electric, which also holds a franchise for the
relevant service area.
Since cable television systems generally operate pursuant to
franchises granted on a non-exclusive basis, and the 1992 Act prohibits
franchising authorities from unreasonably denying requests for additional
franchises and permits franchising authorities to operate cable systems,
well-financed businesses from outside the cable industry (such as the public
utilities that own certain of the 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 RCN has 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
RCN also faces, and expects to continue to face, competition
from other potential competitors in certain of the geographic markets in which
RCN offers its services. Other CLECs, such as Teleport Communications Group,
compete for local telephone services, although they have to date focused
primarily on the market for commercial customers rather than residential
customers. In addition, potential competitors capable of offering private line
and special access services also include other smaller long distance carriers,
cable television companies, electric utilities, microwave carriers, wireless
telephone system operators and private networks built by large end-users,
including Winstar, Dualstar and New Vision. However, RCN believes that, at
least initially, it is relatively unique in its markets in offering bundled
voice, video and data services primarily to customers in residential areas
over its 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. RCN's current and
prospective competitors include many large companies with substantially
greater market presence and financial and other resources than RCN. RCN.com
competes directly or indirectly with established online services, such as
America Online, the Microsoft Network and Prodigy; with local, regional, and
national ISPs such as PSINet, EarthLink, Mindspring and Rocky Mountain
Internet; with the Internet services of national and international
telecommunications companies, such as AT&T, GTE, MCI WorldCom and Cable &
Wireless; with Internet access offered by RBOCs such as Bell Atlantic; and
with 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
38
<PAGE>
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. Diversified competitors may bundle other services and products
with Internet connectivity services, potentially placing RCN at a competitive
disadvantage. In addition, competitors may create downward pressure on the
pricing of and margins from Internet access services.
Other new technologies may become competitive with services
that RCN can offer. A provider of LMDS recently began offering wireless
Internet and video programming services in New York City and has announced
plans to offer telephone service in the future. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. In addition, a continuing
trend toward business combinations and alliances in the telecommunications
industry may also create significant new competitors to RCN. RCN cannot
predict whether competition from such developing and future technologies or
from such future competitors will have a material impact on its operations.
Regulation
The telephone and video programming transmission services
offered by RCN are subject to federal, state and local government regulation.
The 1996 Act, which became effective in February 1996, introduced widespread
changes in the regulation of the communications industry, including the local
telephone, long distance telephone, data services, and television
entertainment segments in which RCN operates. The 1996 Act was intended to
promote competition and decrease regulation of these segments of the industry.
The law delegates to both the FCC and the states broad regulatory and
administrative authority to implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses, preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations,
and sets basic standards for relationships between telecommunications
providers.
Among other things, the 1996 Act removes barriers to entry in
the local exchange telephone market by preempting state and local laws that
restrict competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
The 1996 Act will also, once certain thresholds are met, allow incumbent RBOCs
to enter the long distance market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require
LECs to open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as RCN are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations, and 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, and 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
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the interconnection and local competition provisions of the 1996 Act. While
the courts were reviewing the FCC rules, RCN had entered into interconnection
agreements with Bell Atlantic, covering all of its target market area, that
are generally consistent with the FCC guidelines, and those agreements remain
in effect. There can be no assurance, however, that RCN will be able to obtain
or enforce future interconnection agreements, or obtain renewal of existing
agreements, on terms acceptable to RCN.
The 1996 Act establishes certain conditions under which RBOCs
may be 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 such authorization in
1999 (including Bell Atlantic 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 are competitive with RCN's 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 the video programming transmission services offered by RCN, including
changes to the regulations applicable to video operators, the elimination of
restrictions on telephone company entry into the video business, and the
establishment of a new OVS regulatory structure for telephone companies and
others to offer such services. Under the 1996 Act 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 opt to provide their programming over non- franchised
open video systems subject to certain conditions, including, but not limited
to, making available a portion of their channel capacity for use by
unaffiliated program distributors and satisfying certain other requirements,
including providing capacity for public, educational and government channels,
and payment of a gross receipts fee equivalent to the franchise fee paid by
the incumbent cable television operator. RCN is one of the first CLECs to
provide television programming over an advanced fiber optic network pursuant
to the OVS regulations implemented by the FCC under the 1996 Act. As discussed
below, RCN is currently providing OVS service in the City of Boston, in the
City of New York and in a number of communities surrounding Boston, and is
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
RCN's voice business is subject to regulation by the FCC at the
federal level with respect to interstate telephone services (i.e., those that
originate in one state and terminate in a different state). State regulatory
commissions have jurisdiction over intrastate communications (i.e., those that
originate and terminate in the same state).
State Regulation of Intrastate Local and Long Distance
Telephone Services. RCN's intrastate telephone services are regulated by the
public service commissions or comparable agencies of the various states in
which these services are offered. RCN subsidiaries 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 and RCN has applied for authority to offer such services
in Arizona, Connecticut, Maine, and New Hampshire. Starpower has separately
obtained similar authority in Maryland, Virginia and the District of Columbia.
RCN's resale and inter-connection 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. Pursuant to such authorizations, RCN Long Distance Company
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is permitted to resell intrastate long distance services both to other
carriers, including RCN's local operating subsidiaries and Starpower for
resale to their end user subscribers, and to its own end user customers.
FCC Regulation of Interstate and International Telephone
Services. RCN, through several of its subsidiaries, including RCN Long
Distance Company, may also provide domestic interstate telephone services
nationwide pursuant to tariffs on file at the FCC, and has been authorized by
the FCC under Section 214 of the 1996 Act to offer worldwide international
services as well.
Local Regulation of Telephone Services. Municipalities also
regulate limited aspects of RCN's voice business by, for example, imposing
various zoning requirements and, in some instances, requiring
telecommunications licenses, franchise agreements and/or installation permits
for access to local streets and rights-of-way. In New York City, for example,
RCN will be required to obtain a telephone franchise in order to provide voice
services using its advanced fiber optic network facilities located in the
streets of New York City (although services may be provided over certain
leased or resold facilities pending receipt of a franchise).
Regulation of Video Services
Open Video Systems. At various times between February 1997 and
July 1998, RCN 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 upon 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 commenced. RCN executed an agreement with the City of
Boston on June 2, 1997, and initiated OVS service in the City on that day.
Pursuant to its agreement with the City of Boston, RCN will be required to pay
a fee to the City equal to 5% of video revenues. RCN has entered into similar
OVS agreements or is in the process of negotiating agreements with certain
other Boston-area municipalities, either to offer OVS services or franchised
cable television services. RCN executed an agreement with the City of New York
on December 29, 1997 and has initiated OVS service in the Borough of Manhattan
pursuant to that agreement. On July 10, 1998, RCN supplemented its agreement
with the City of New York to include all five boroughs of the City. On October
26, 1998, Starpower executed 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, to offer either
OVS services or franchised cable television services.
In areas where it offers video programming services as an OVS
operator, RCN is required to hold a 90-day open enrollment period every three
years, during which times RCN will be required to offer open capacity on its
network to other VPPs. Under the OVS regulations, RCN must offer at least
two-thirds of its capacity to unaffiliated parties, if demand for such
capacity exists during the open enrollment period. In certain areas, at the
request of local officials, RCN is in discussions to explore the feasibility
of obtaining a cable franchise in lieu of an OVS agreement, and will consider
providing RCN video service pursuant to franchise agreements rather than OVS
certification, if franchise agreements are preferred by the local authorities
and can be obtained on terms and conditions acceptable to RCN. RCN will
consider the relative benefits of OVS certification versus local franchise
agreements, including the possible imposition of universal service
requirements, before making any such decisions.
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 RCN's OVS
operations and planning. The most significant of the Court's decisions 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 with respect to rights-of-way
administration and in other minor respects. Because one of the principal
advantages of OVS as structured by Congress in the 1996 Act and by the FCC in
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its implementing regulations 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 the achievement of agreements with local
governments. RCN believes the Court's decision is erroneous as a matter of
law and plans 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 RCN, the company expects to continue to
expand its 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 such exception is that competing in-region cable
operators are not entitled to become video program providers on an OVS unless
the OVS except in certain limited circumstances. The incumbent cable operator
in Boston, Cablevision of Boston, Inc., sought an order from the FCC compelling
RCN to provide it with certain data on RCN's Boston OVS system and declaring
Cablevision an eligible video programming provider on the RCN system. The
FCC's Cable Services Bureau denied Cablevision's request and that denial has
become final. Time Warner Cable Co., which operates franchised cable systems
in many suburban Boston communities included within RCN's OVS certification,
also sought an order compelling RCN to release certain OVS system data and to
declare it eligible for carriage on the system. Unlike Cablevision, Time Warner
is not competing with any RCN-provided OVS service and restricted its request
to communities in which Time Warner is not the franchised cable operator.
Time Warner also sought the imposition of fines or the cancellation of RCN's
OVS authority. The Cable Services Bureau granted the data request in part and
denied it in part but found too little evidence to justify further exploration
of RCN's good faith in acquiring OVS authority. RCN has sought partial
reconsideration of the Bureau's Order, which is currently pending. Time
Warner filed a similar complaint against RCN in New York City in which Time
Warner and RCN compete 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
granted Time Warner's complaint in part, and denied it in part, relying on its
prior decision in the Time Warner complaint in the Boston area. RCN has 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, RCN's status
as an OVS operator was challenged and the relief requested included revocation
of RCN's OVS authority. These complaints were filed by Media General Cable of
Fairfax, Inc., and Media General Cable of Fredericksburg, Inc. The former
operates franchised cable service within the projected service area of
Starpower's OVS system; the latter, which is an affiliate of the former,
operates a cable system beyond the presently defined service area of
Starpower's system. 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 applicable 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 RCN's application
for OVS authority in the San Francisco area, the California Cable Television
Association filed an opposition, alleging that RCN was misusing the OVS rules
to compete unfairly against franchised cable operators. The Pennsylvania Cable
& Telecommunications Association filed comments on RCN's OVS application for
OVS authority in the Philadelphia region, making similar allegations but not
formally opposing the application. The Cable Services Bureau granted both
applications, indicating that RCN's applications were consistent with the
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rules and that the opposing parties had not provided sufficient evidence to
justify initiating any regulatory action against RCN. There is language in
each of these Cable Bureau determinations involving RCN's implementation of
the OVS concept which leave open the possibility for adverse parties to
challenge RCN's status as an OVS operator. RCN believes that it is operating
in strict conformity with all applicable provisions of the law and will
continue to defend its OVS roll-outs against what it believes are
anti-competitive requests for data or carriage by competing in-region cable
operators. However, there can be no assurance that the FCC will resolve the
pending OVS complaints in RCN's favor. To the extent the FCC were to grant any
such complaints and RCN were as a result obliged to share system data with its
local competitors, RCN 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. RCN does not believe that abandoning its
OVS certifications under such circumstances would materially adversely affect
its 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 sought to impose rights-of-way fees on RCN which it believes are in
violation of federal law. A number of FCC and judicial decisions have
addressed the issues posed by the imposition of such rights-of-way fees on
CLECs and on video distributors, but 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 RCN's
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 a preliminary injunction sought by
Cablevision and orally expressed some doubts about the underlying merits of
Cablevision's claims. There can be no assurances that Cablevision will not
further pursue the litigation nor that if it does so the outcome will be
favorable to RCN.
Prior to its certification as an OVS provider, RCN offered
limited video programming services using the VDT services offered by
MFS/WorldCom in Manhattan and the City of Boston. In February 1997, the FCC
held that MFS/WorldCom's facilities did not qualify as video dialtone
facilities entitled to an extension of time to comply with the newly adopted
OVS rules; nonetheless, the FCC did not direct MFS/WorldCom and RCN to cease
video programming distribution operations over the MFS/WorldCom platform. One
of the incumbent cable television companies in New York City has filed a
complaint with the New York Public Service Commission challenging the former
(pre-OVS) operations of RCN and WorldCom under the VDT framework, which
remains pending before that commission.
Wireless Video Services. RCN's 18 GHz wireless video services
in New York City are distributed using microwave facilities provided by
Bartholdi Cable pursuant to temporary authorizations issued to Bartholdi Cable
by the FCC. Bartholdi Cable has agreed to provide transmission services to RCN
until RCN has either converted the wireless video subscribers to its advanced
fiber optic network facilities or has obtained FCC authority to provide such
services pursuant to its own wireless radio licenses. In addition, Bartholdi
Cable has agreed to transfer to RCN the transmission equipment on demand.
Bartholdi Cable's obligation to provide transmission services is subject to
Bartholdi Cable having licenses from the FCC to provide such services. The
qualifications of Bartholdi Cable to hold certain of the licenses needed to
provide transmission services to RCN are at issue in an FCC proceeding in
which an Initial Decision was released on March 6, 1998. In the Initial
Decision, the Administrative Law Judge found Bartholdi Cable unqualified with
respect to 15 such licenses. The Administrative Law Judge declared that the
Initial Decision would become effective 50 days after its release unless
Bartholdi Cable filed exceptions to the Initial Decision within 30 days of its
release or the FCC elected to review the case on its own motion. Bartholdi
Cable filed exceptions to the Initial Decision on April 7, 1998. Because of
the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to RCN, RCN filed its own license applications at the
FCC for all of the microwave transmission paths which are currently being used
by Bartholdi Cable to provide transmission services to RCN and, in light of
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the increased uncertainties resulting from the Initial Decision in the FCC
proceeding involving certain of Bartholdi Cable's licenses, RCN expects now
actively to pursue its license applications. While RCN expects to receive
authorizations to transmit over these microwave paths, there can be no
assurance that RCN will be able to offer wireless video services pursuant to
its own FCC licenses or that the FCC's investigation will be resolved
favorably. The failure to obtain such licenses or resolve such proceedings
would materially adversely affect RCN's wireless video operations in New York
City.
There can be no assurance that RCN will be able to obtain or
retain all necessary authorizations needed to construct advanced fiber optic
network facilities, to convert its wireless video subscribers to an advanced
fiber optic network or to offer wireless video services pursuant to its own
FCC licenses.
Hybrid Fiber/Coaxial Cable. RCN's hybrid fiber/coaxial cable
systems are subject to regulation under the 1992 Act, which provides, among
other things, for rate regulation for cable services in communities that are
not subject to "effective competition," certain programming requirements, and
broadcast signal carriage requirements that allow local commercial television
broadcast stations to require a cable system to carry the station. Local
commercial television broadcast stations may elect once every three years to
require a cable system to carry the station ("must-carry"), subject to certain
exceptions, or to withhold consent and negotiate the terms of carriage
("retransmission consent"). A cable system generally is required to devote up
to one-third of its activated channel capacity for the carriage of local
commercial television stations whether pursuant to the mandatory carriage or
retransmission consent requirements of the 1992 Act. Local non-commercial
television stations are also given mandatory carriage rights. The FCC recently
issued rules establishing standards for digital television ("DTV"). Among
other provisions, the FCC's rules require television stations to simulcast
their 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
Notice of Proposed Rulemaking addresses the need for compatibility between
digital systems, 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, RCN was notified by the FCC that it had
ruled that certain of RCN's upper levels of service for its New Jersey systems
were regulated levels of service and that RCN's rates for such levels of
service exceeded the allowable rates under the FCC rate regulation rules.
Since that time, RCN and the FCC have negotiated a settlement under which the
FCC finds that RCN's upper levels of service for its New Jersey and certain
New York systems are "New Product Tiers", and that RCN's rates for 1997 and
prior years for those systems are approved, except that RCN will give a $5.00
per subscriber refund to all subscribers in RCN's New Jersey systems and a
refund of $3.30 per subscriber in certain of RCN's New York systems. The
settlement has been subject to public comment and is now awaiting final
approval by the FCC. RCN does not believe that the ultimate resolution of this
matter, whether the settlement is finally approved or not, will have a
material impact on its results of operations or financial condition.
Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and local
regulation, typically imposed through the franchising process. The terms and
conditions of state or local government franchises vary materially from
jurisdiction to jurisdiction and generally contain provisions governing cable
service rates, franchise fees, franchise term, system construction and
maintenance obligations, customer service standards, franchise renewal, sale
or transfer of the franchise, territory of the franchisee and use and
occupancy of public streets and types of cable services provided. Local
franchising authorities (state or local, depending on the practice in
individual states) may award one or more franchises within their jurisdictions
and prohibit non-grandfathered cable systems from operating without a
franchise in such jurisdictions. The Communications Act also provides that in
granting or renewing franchises, local authorities may establish requirements
for cable-related facilities and equipment, but not for video programming or
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information services other than in broad categories. The Communications Act
limits the payment of franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances.
RCN's ability to provide franchised cable television services
is dependent to a large extent on its ability to obtain and renew its
franchise agreements from local government authorities on generally acceptable
terms. RCN currently has 91 franchise agreements relating to the hybrid
fiber/coaxial cable systems in New York (outside New York City), New Jersey
and Pennsylvania. These franchises typically contain many conditions, such as
time limitations on commencement and completion of construction, conditions of
service, including the number of channels, the provision of free service to
schools and certain other public institutions, and the maintenance of
insurance and indemnity bonds. These franchises provide for the payment of
fees to the issuing authorities and generally range from 3% to 5% of revenues.
The duration of these outstanding franchises presently varies up to the year
2011. To date, all of RCN's cable franchises have been renewed or extended,
generally at or prior to their stated expirations and on acceptable terms.
Approximately 39 of RCN's hybrid fiber/coaxial cable systems' franchises are
due for renewal within the next three years. No assurance can be given that
RCN will be able to renew its franchises on acceptable terms. No one franchise
accounts for more than 7% of RCN's total revenue. RCN's five largest
franchises account for approximately 27% of RCN's total revenue.
The hybrid fiber/coaxial cable systems are also subject to
certain service quality standards and other obligations imposed by the FCC
and, where effective competition has not been demonstrated to exist, to rate
regulation by the FCC as well. RCN's cable television system in Pennsylvania
has been operating in a competitive cable environment for almost 30 years,
with approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, RCN's Pennsylvania cable
system is exempt from many FCC cable television regulations, including rate
regulation. Its other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. As required by the
1996 Act, however, all cable programming services will be deregulated as
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. There can be no assurance that such legislation will not be adopted.
RCN anticipates that the remaining provisions of the 1992 Act that do not
relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will remain in place and may serve to
reduce the future operating margins of RCN's hybrid fiber/coaxial cable
television businesses as video programming competition develops in its cable
television service markets.
The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of
service provided over the equipment attached to the utility's pole. The 1996
Act and the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain
providers of telecommunications services to rely upon the protections of the
current law and by requiring that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility. The FCC has recently adopted new
regulations to govern the charges for pole attachments used by companies
provided telecommunications services, including cable operators. These new
pole attachment rate regulations will become effective five years after
enactment of the 1996 Act, and any increase in attachment rates resulting from
the FCC's new regulations will be phased in equal annual increments over a
period of five years beginning on the effective date of the new FCC
regulations. The ultimate outcome of these rulemakings and the ultimate impact
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of any revised FCC rate formula or of any new pole attachment rate regulations
on RCN or its businesses cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to its subscribers, from favoring
an affiliated company over competitors and require such programmers to sell
their programming to other multichannel video distributors. These provisions
limit the ability of program suppliers affiliated with cable companies or with
common carriers providing satellite delivered video programming directly to
their subscribers to offer exclusive programming arrangements to their
affiliates. The Communications Act also includes provisions, among others,
concerning horizontal and vertical ownership of cable systems, customer
service, subscriber privacy, marketing practices, equal employment
opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
In addition to the FCC regulations noted above, there are other
FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration
of cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, sponsorship identification,
antenna structure notification, tower marking and lighting, carriage of local
sports broadcast programming, application of rules governing political
broadcasts, limitations on advertising contained in non-broadcast children's
programming, consumer protection and customer service, ownership of home
wiring, indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and closed captioning. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations. RCN has been experiencing
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
RCN to install its own distribution wiring and Cablevision has not been
willing to permit RCN to use the existing wiring on some equitable basis when
RCN wishes to initiate service to an individual unit previously served by
Cablevision. RCN has sought a ruling from the FCC's Cable Services Bureau that
existing FCC inside wiring rules require Cablevision to cooperate with RCN 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. It is probable that there
will be legislative proposals in the future by Congress and other governmental
bodies relating to the regulation of communications services.
Cable television systems are subject to federal compulsory
copyright licensing covering the retransmission of television and radio
broadcast signals. In exchange for filing certain reports and contributing a
percentage of their basic revenues to a federal copyright royalty pool, cable
operators can obtain blanket licenses to retransmit the copyrighted material
on broadcast signals.
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, there can be no assurance that this business will not become subject
to regulatory restraints. Some jurisdictions have sought to impose taxes and
other burdens on providers of data services, and to regulate content provided
via the Internet and other information services. RCN expects that proposals of
this nature will continue to be debated in Congress and state legislatures in
the future. In addition, although the FCC has on several occasions rejected
proposals to impose additional costs on providers of Internet access service
and other data services for the use of local exchange telephone network
facilities for access to their customers, similar proposals may well be
considered by the FCC or Congress in the future.
In order to develop its networks, RCN must obtain local
franchises and other permits, as well as building access agreements and rights
to utilize underground conduit and pole space, private easements and other
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rights-of-way and fiber capacity from entities such as incumbent local
exchange carriers and other utilities, railroads, long distance companies,
state highway authorities, local governments and transit authorities. There
can be no assurance that RCN will be able to maintain its existing franchises,
permits and rights or to obtain and maintain the other franchises, permits,
building access agreements and rights needed to implement its business plan on
acceptable terms. Although RCN does not believe that any of the existing
arrangements will be canceled or will not be renewed as needed in the near
future, cancellation or non-renewal of certain of such arrangements could
materially adversely affect RCN's business in the affected area. In addition,
the failure to enter into and maintain any such required arrangements for a
particular network, including a network which is already under development, may
affect RCN's ability to acquire or develop that network.
The foregoing does not purport to describe all present and
proposed federal, state, and local regulations and legislation affecting the
telephone, video programming and data service industries. Other existing
federal regulations, copyright licensing, and, in many jurisdictions, state
and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which communications companies
operate. The ultimate outcome of these proceedings, and the ultimate impact of
the 1996 Act or any final regulations adopted pursuant to the new law on RCN
or its businesses cannot be determined at this time.
Employees
As of December 31, 1998, RCN had approximately full-time
employees including general office and administrative personnel. In addition,
RCN's joint ventures had employees as of December 31, 1998. RCN
considers relations with its employees to be good.
Legal Proceedings
On September 30, 1997, the Yee Family Trusts, as holders of
C-TEC's Preferred Stock Series A and Preferred Stock Series B, filed an action
against RCN, Commonwealth Telephone and Cable Michigan in the Superior Court
of New Jersey, Chancery Division. The complaint alleges that Commonwealth
Telephone's distribution of the common stock of RCN and Cable Michigan in
connection with the spin-off, inter alia, (1) violated the terms of the
preferred stock instrument; (2) constituted a fraudulent conveyance; (3)
breached the covenant of good faith and fair dealing allegedly owed
plaintiffs; (4) breached fiduciary duties allegedly owed plaintiffs; and (5)
constitutes an unlawful distribution under Pennsylvania law. On December 1,
1997, the complaint was amended to allege that Commonwealth Telephone's
distribution of the common stock of RCN and Cable Michigan was an unlawful
distribution in violation of 15 Pa.C.S. 1551(b)(2). The plaintiffs are
seeking to set aside the alleged fraudulent conveyance and unspecified
monetary damages alleged to be in excess of $52 million. RCN believes this
lawsuit is without merit and intends to contest this action vigorously. On
January 9, 1998, the defendants, including RCN, filed a Motion to Dismiss, or
in the Alternative, for Summary Judgment. On September 15, 1998 the court
granted RCN's motion with respect to the breach of fiduciary duty and unlawful
distribution claims, but denied the motion with respect to the plaintiffs'
other claims. As a result, two counts of the complaint were dismissed. RCN's
answer was subsequently filed. Settlement discussions are currently in
process. RCN can not be certain that these discussions will be successful in
settling this complaint.
In the normal course of business, there are various legal
proceedings outstanding, including both commercial and regulatory litigation.
In the opinion of management, these proceedings will not have a material
adverse effect on the results of operations or financial condition of RCN.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of RCN is based
upon its certificate of incorporation ("Certificate of Incorporation"), its
bylaws ("Bylaws") and applicable provisions of law. The following description
is qualified in its entirety by reference to such Certificate of Incorporation
and Bylaws, which are filed as exhibits to the RCN 10-K.
Certain provisions of the Delaware General Corporation Law
("DGCL"), the Certificate of Incorporation and the Bylaws summarized in the
following paragraphs may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a shareholder
might consider in its best interests, including those attempts that might
result in a premium over the market price for shares held.
Authorized Capital Stock
The Certificate of Incorporation authorizes the issuance of 200
million shares of common stock ("Common Stock"), par value $1.00 per share,
400 million shares of Class B common stock ("Class B Stock"), par value $1.00
per share, and 25 million shares of preferred stock ("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 on the applicable record
date is entitled to receive such dividends as may declared by the Board of
Directors out of funds legally available therefor, and, in the event of
liquidation, to share pro rata in any distribution of RCN's assets after
payment or providing for the payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Each holder of Common Stock is
entitled to one vote for each share held of record on the applicable record
date on all matters presented to a vote of shareholders, including the
election of directors. Holders of Common Stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to such stock. On 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," no provision of the Certificate of
Incorporation or Bylaws and no provision of any agreement or plan involving
RCN is in effect that would discriminate against any existing or prospective
holder of such securities as a result of such security holder owning a
substantial amount of securities.
Class B Stock
The Class B Stock is in all material respects identical to the
Common Stock except that:
o the Class B Stock is generally non-voting,
o the Common Stock is convertible at the option of the holder
into Class B Stock and
o in certain mergers, distributions and other transactions in
which the holders of Company Stock are entitled to receive
equity interests of one or more corporations (including RCN),
the equity interests distributed in respect of the Common
Stock and the Class B Stock may have rights and privileges
that are substantially equivalent to the rights and privileges
of the Common Stock and the Class B Stock, respectively.
As of January 28, 1999, there are no outstanding shares of
Class B Stock and RCN does not have any current plan or intention to issue any
Class B Stock.
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Preferred Stock
Under the Certificate of Incorporation, the Board of Directors
has the authority to create one or more series of Preferred Stock, to issue
shares of Preferred Stock in such series up to the maximum number of shares of
Preferred Stock authorized, and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. The authorized shares of Preferred Stock, as well as authorized but
unissued shares of Company Stock, are available for issuance without further
action by RCN's shareholders, unless shareholder action is required by
applicable law or by the rules of a stock exchange or quotation system on
which any series of RCN's stock may then be listed or quoted.
The applicable 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, when issued, be
fully paid and non-assessable. Any shares of Preferred Stock that are issued
would have priority over the Common Stock with respect to dividend or
liquidation rights or both.
The transfer agent for each series of Preferred Stock will be
described in the applicable Prospectus Supplement.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. The
Certificate of Incorporation and the Bylaws provide for the Board of Directors
to be divided into three classes of directors. The term of office of the first
class expires at the 2001 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting held
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thereafter, a class of directors will be elected to replace the class whose
term has then expired. As a result, approximately one-third of the members of
the Board of Directors will be elected each year and, except as described
above, each of the directors serves a staggered three-year term. Moreover, as
is permitted under the DGCL only in the case of a corporation having a
classified board, the Certificate of Incorporation and the Bylaws provide that
directors may be removed only for cause.
These provisions could prevent a shareholder (or group of
shareholders) having majority voting power from obtaining control of the Board
of Directors until the second annual shareholders' meeting following the date
the acquirer obtains such voting power. Accordingly, these provisions could
have the effect of discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control of RCN.
Shareholder Action by Written Consent; Special Meetings. The
Certificate of Incorporation and the Bylaws provide that no action required or
permitted to be taken at an annual or special meeting of shareholders may be
taken without a meeting, and that no action may be taken by the written
consent of shareholders in lieu of a meeting. The Certificate of Incorporation
and the Bylaws also provide that special meetings of RCN's shareholders may be
called only by the Board of Directors, the Chairman of the Board of Directors
or the Chief Executive Officer of RCN. These provisions may make it more
difficult for shareholders to take action opposed by the Board of Directors.
Advance Notice Provisions. The Bylaws establish an advance
written notice procedure for shareholders seeking to nominate candidates for
election as directors at an annual meeting of shareholders or to bring
business before an annual meeting of shareholders of RCN. The Bylaws provide
that only persons who are nominated by or at the direction of the Board of
Directors, or by a shareholder who has given timely written notice to the
Secretary of RCN prior to the meeting at which directors are to be elected,
will be eligible for election as directors of RCN. The Bylaws also provide
that at any meeting of shareholders only such business may be conducted as has
been brought before the meeting by or at the direction of the Board of
Directors or, in the case of an annual meeting of shareholders, by a
shareholder who has given timely written notice to the Secretary of RCN of such
shareholder's intention to bring such business before such meeting. Under the
Bylaws, for any such shareholder notice to be timely, such notice must be
received at the principal executive offices of RCN in writing not less than
60 days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the
shareholder must be received not later than the close of business on the 10th
day following the day on which such notice or public disclosure was given or
made. Under the Bylaws, 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.
Preferred Stock. Under the Certificate of Incorporation, the
Board of Directors will have the authority, without further shareholder
approval, to create one or more series of preferred stock, to issue shares of
preferred stock in such series up to the maximum number of shares of preferred
stock authorized, and to determine the preferences, rights, privileges and
restrictions of any series, including the dividend rights, voting rights,
rights and terms of redemption, liquidation preferences, the number of shares
constituting any such series and the designation of such series. Pursuant to
this authority, the Board of Directors could create and issue a series of
preferred stock with rights, privileges or restrictions having the effect of
discriminating against an existing or prospective holder of such securities as
a result of such security holder beneficially owning or commencing a tender
offer for a substantial amount of Common Stock. One of the effects of
authorized but unissued and unreserved shares of capital stock may be to
render more difficult or discourage an attempt by a potential acquirer to
obtain control of RCN by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of RCN's management. The
issuance of such shares of capital stock may have the effect of delaying,
deferring or preventing a change in control of RCN without any further action
by the shareholders of RCN.
Amendment of Certain Charter and Bylaw Provisions. The
Certificate of Incorporation provides that the Board of Directors may adopt,
amend or repeal any provision of the Bylaws. The Common Stock and the Bylaws
also provide that Bylaw provisions may be adopted, amended or repealed by the
affirmative vote of shareholders holding not less than 66 2/3% of the total
number of votes entitled to be cast in the election of directors.
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Any amendment, modification or repeal of the provisions of the
Certificate of Incorporation relating to the election and removal of
directors, the right to call special meetings, the prohibition on action by
written consent, amendment of the Bylaws and the limitation of liability and
indemnification of officers and directors will require approval by the
affirmative vote of shareholders holding at least 66 2/3% of the total number
of votes entitled to vote generally in the election of directors.
Delaware Takeover Statute
RCN is 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 such shareholder became an
interested shareholder, unless (i) prior to such date either the business
combination or the transaction which resulted in the shareholder becoming an
interested shareholder is approved by the board of directors of the
corporation, (ii) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the interested shareholder
owns at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding for purposes of determining the
number of shares outstanding, shares owned by (A) persons who are both
directors and officers and (B) employee stock plans in certain circumstances),
or (iii) on or after such date the business combination is approved by the
board and authorized at an annual or special meeting of shareholders, and not
by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested shareholder. A
"business combination" includes a merger, consolidation, asset sale, or other
transaction resulting in a financial benefit to the interested shareholder. An
"interested shareholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The restrictions imposed by Section 203 will not
apply to a corporation if, among other things, (i) the corporation's original
certificate of incorporation contains a provision expressly electing not to be
governed by Section 203 or (ii) 12 months have passed after the corporation,
by action of its shareholders holding a majority of the outstanding stock,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203. RCN has not opted out of Section
203 and, therefore, the restrictions imposed by Section 203 will apply to RCN.
Prior to the Distribution, the Board of Directors approved of Level 3 Telecom
becoming an interested shareholder and, consequently, Section 203 would not
apply to any business combination with Level 3 Telecom.
Liability and Indemnification of Directors and Officers
Certain provisions of the DGCL and the Certificate of
Incorporation and the Bylaws relate to the limitation of liability and
indemnification of directors and officers of RCN. These various provisions are
described below.
The Certificate of Incorporation provides that RCN's directors
are not personally liable to RCN or its shareholders for monetary damages for
breach of their fiduciary duties as a director to the fullest extent permitted
by the DGCL. Under the DGCL, directors would not be personally liable to RCN
or its shareholders for monetary damages for breach of their fiduciary duties
as a director, except for (i) any breach of the director's duty of loyalty to
RCN or its shareholders, (ii) acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, (iii) any transaction
from which the director derived improper personal benefit or (iv) the unlawful
payment of dividends or unlawful stock repurchases or redemptions. This
exculpation provision may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
shareholders or RCN from bringing a lawsuit against directors of RCN for
breach of their fiduciary duties as directors. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission.
The Certificate of Incorporation also provides that each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a director or officer of RCN or is or was serving at the request of RCN as
a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the DGCL. This right to
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indemnification shall also include the right to be paid by RCN the expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by the DGCL. This right to
indemnification shall be a contract right. RCN may, by action of the Board of
Directors, provide indemnification to such of the employees and agents of RCN
to such extent and to such effect as the Board of Directors determines to be
appropriate and authorized by the DGCL.
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
Certificate of Incorporation.
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DESCRIPTION OF DEBT SECURITIES
This section describes the general terms and provisions of the
debt securities (the "Debt Securities"). The prospectus supplement will
describe the specific terms of the Debt Securities offered through that
prospectus supplement. The Debt Securities will be issued under an indenture
(the "Indenture") between RCN and The Chase Manhattan Bank, as trustee (the
"Trustee").
We have summarized certain terms and provisions of the
Indenture. The summary is not complete. If we refer to particular provisions
of the Indenture, the provisions, including definitions of certain terms, are
incorporated by reference as a part of this summary. The Indenture is filed
as an exhibit to the registration statement of which this prospectus is a
part, and is incorporated by reference. You should refer to the Indenture for
the provisions which may be important to you. The Indenture is subject to and
governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act").
General
The Indenture will not limit the amount of Debt Securities
which we may issue. We may issued Debt Securities up to an aggregate
principal amount as we may authorize from time to time. The applicable
prospectus supplement will describe the terms of any Debt Securities being
offered, including:
o the designation, aggregate principal amount and authorized
denominations;
o the maturity date;
o the interest rate, if any, and the method for calculating the
interest rate;
o the interest payment dates and the record dates for the
interest payments;
o any mandatory or optional redemption terms or prepayment,
conversion, sinking fund or exchangeability or convertability
provisions;
o the place where the principal of and interest will be payable;
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o if other than denominations of $1,000 or multiples of $1,000,
the denominations the Debt Securities will be issued in;
o whether the Debt Securities will be issued in the form of
Global Securities (as defined below) or certificates;
o additional provisions, if any, relating to the defeasance of
the Debt Securities;
o the currency or currencies, if other than the currency of the
United States, in which principal of and interest will be
payable;
o whether the Debt Securities will be issuable in registered
form or bearer form ("Bearer Securities") or both and, if
Bearer Securities are issuable, any restrictions applicable to
the exchange of one form for another and the offer, sale and
delivery of Bearer Securities;
o any applicable United States federal income tax consequences;
o the dates on which premium, if any, will be payable;
o the right of RCN, if any, to defer payment of interest and
the maximum length of such deferral period;
o any listing on a securities exchange;
o the initial public offering price; and
o other specific terms, including any additional events of
default or covenants provided for with respect to the Debt
Securities.
As described in each prospectus supplement relating to any
particular series of Debt Securities being offered, the Indenture may contain
covenants limiting:
o the incurrence of additional debt by RCN and certain of its
subsidiaries and affiliates;
o the making of certain payments by RCN and certain of its
subsidiaries and affiliates;
o business activities of RCN and certain of its subsidiaries
and affiliates;
o the issuance of preferred stock of certain of its subsidiaries
and affiliates;
o certain asset dispositions;
o certain transactions with affiliates;
o restrictions on dividend payments by certain subsidiaries and
affiliates;
o a change of control of RCN
o issuance of certain guarantees;
o liens; and
o mergers and consolidations involving RCN.
Book-Entry System
Unless otherwise specified in a prospectus supplement, Debt
Securities of any series may be issued under a book-entry system in the form
of one or more global securities (each, a "Global Security"). Each Global
Security will be deposited with, or on behalf of, a depositary, which will be
The Depository Trust Company, New York, New York (the "Depositary"). The
Global Securities will be registered in the name of the Depositary or its
nominee.
The Depositary has advised RCN that the Depositary is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of the New York banking law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations, some of which (and/or their representatives) own the
Depositary. Access to the Depositary's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
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or maintain a custodial relationship with a participant, either directly or
indirectly.
When a Global Security in issued in registered form, the
Depositary will credit, on its book-entry registration and transfer system,
the respective principal amounts of the Debt Securities represented by each
Global Security to the accounts of participants. The underwriters, dealers,
or agents, if any, will designate the accounts to be credited, or RCN, if Debt
Securities are offered and sold directly by RCN. Ownership of beneficial
interests in the Global Security will be limited to participants or persons
that may hold interests through participants. Ownership of beneficial
interests by participants in the Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by such participants. The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such
securities in definitive form, which may impair the ability to transfer
beneficial interests in a Global Security.
So long as the Depositary or its nominee is the owner of record
of a Global Security, the Depositary or its nominee will be considered the
sole owner or holder of the Debt Securities represented by such Global Security
for all purposes under the Indenture. Except as set forth below, owners of
beneficial interests in a Global Security will not be entitled to have the
Debt Security represented by a Global Security registered in their names, and
will not receive or be entitled to receive physical delivery of Debt
Securities in definitive form and will not be considered the owners or holders
of the Debt Securities. Accordingly, each person owning a beneficial interest
in a Global Security must rely on the procedures of the Depositary. Persons
who are not participants in the Depositary must rely on the procedures of the
participant through which it owns its interest, in order to exercise any
rights of a holder of record of the Debt Securities. RCN understands that
under existing industry practices, if RCN requests any action of holders or if
any owner of a beneficial interest in a Global Security desires to give or
take any action which a holder is entitled to give or take under the
Indenture, the Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and the
participants would in turn authorize beneficial owners owning through them to
give or take such action or would otherwise act upon the instruction of
beneficial owners holding through them.
Payments of principal of, premium, if any, and interest on Debt
Securities represented by a Global Security registered in the name of the
Depositary or its nominee will be made to the Depositary or nominee as the
registered owner of such Global Security. None of RCN, the Trustee or any
other agent of RCN or agent of the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in such Global Security or for
maintaining, supervising, or reviewing any records relating to such beneficial
ownership interests.
RCN has been advised by the Depositary that the Depositary will
credit participants' accounts with payments of principal, premium, if any, or
interest on the payment date thereof in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Security
as shown on the records of the Depositary. RCN expects that payments by
participants to owners of beneficial interests in the Global Security held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers registered in "street name," and will be the responsibility of
such participants.
A Global Security may not be transferred except as a whole by
the Depositary to a nominee or successor of the Depositary or by a nominee of
the Depositary to another nominee of the Depositary. A Global Security
representing all but not part of an offering of Debt Securities is
exchangeable for Debt Securities in definitive form of like tenor and terms if:
o the Depositary notifies RCN that it is unwilling or unable to
continue as depositary for the Global Security or if at any
time the Depositary is no longer eligible to be or in good
standing as a clearing agency registered under the Exchange
Act, and a successor depositary is not appointed by RCN within
90 days after RCN receives notice or
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o RCN in its sole discretion at any time determines not to have
all of the Debt Securities represented in an by a Global
Security and notifies the Trustee.
If a Global Security is exchangeable, then it is exchangeable
for Debt Securities registered in the names and in authorized denominations
as the Depositary directs.
Payments of Principal and Interest
The payment of principal of, premium, if any, and interest on
the Senior Debt Securities will rank equally with all unsecured and
unsubordinated debt of RCN.
Events of Default
An Event of Default, as defined in the Indenture and applicable
to Debt Securities issued under such Indenture, will occur with respect to the
Debt Securities of any series under the Indenture if:
(1) default in the payment of interest on the Debt Securities when it
becomes due and payable and continuance of such default for a period
of 30 days or more;
(2) default in the payment of the principal of, or premium, if any, on
the Debt Securities when due;
(3) default in the performance, or breach, of certain covenants;
(4) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (1), (2) or (3) above)
and continuance of such default or breach for a period of 30 days or more
after written notice to RCN by the Trustee or to RCN and the Trustee by
the holders of at least 25% in aggregate principal amount of the
outstanding Debt Securities of (when such notice is deemed received in
accordance with the Indenture) all series issued under the Indenture;
(5) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $10 million or more under which RCN or a Material Restricted
Subsidiary is obligated, and either (a) such Indebtedness is already due
and payable in full or (b) such failure results in the acceleration of the
maturity of such Indebtedness;
(6) any holder of at least $10 million in aggregate principal amount
of Indebtedness of RCN or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of, assets of RCN or any Material Restricted Subsidiary having
an aggregate Fair Market Value, individually or in the aggregate, of $10
million or more or shall have exercised any right under applicable law or
applicable security documents to take ownership of any such assets in
lieu of foreclosure; provided that, in any such case, RCN or any Material
Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect;
(7) one or more final non-appealable judgments, orders or decrees for
the payment of money of $10 million or more, either individually or in
the aggregate, shall be entered against RCN or any Material Restricted
Subsidiary or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days or more during
which a stay of enforcement of such judgment or order, by reason of
pending appeal or otherwise, shall not be in effect;
(8) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to RCN or any Material
Restricted Subsidiary shall have occurred; or
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(9) any other Events of Default set forth in the applicable
prospectus supplement.
If an Event of Default (other than an Event of Default
specified in clause (8) with respect to RCN) under the Indenture occurs with
respect to the Debt Securities of any series and is continuing, then the
Trustee thereunder or the holders of at least 25% in principal amount of the
outstanding Debt Securities of such series may by written notice, and the
Trustee upon request of the holders of not less than 25% in principal amount
of the outstanding Debt Securities of such series shall, declare the Default
Amount of the outstanding Debt Securities of such series issued thereunder to
be due and payable immediately, together with all accrued and unpaid interest
and premium, if any, thereon. Upon any such declaration, the Default Amount
shall become due and payable immediately.
If an Event of Default under the Indenture specified in clause
(8) with respect to RCN occurs and is continuing, then the Default Amount will
ipso facto become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any holder.
After a declaration of acceleration or any ipso facto
acceleration pursuant to clause (8) under the Indenture, the holders of a
majority in principal amount of outstanding Debt Securities of any series may,
by notice to the applicable Trustee, rescind such declaration of acceleration
and its consequences if all existing Events of Default, other than nonpayment
of the principal of, and accrued and unpaid interest on, the Debt Securities
of such series that has become due solely as a result of such acceleration,
have been cured or waived and if the rescission of acceleration would not
conflict with any judgment or decree. The holders of a majority in principal
amount of the outstanding Debt Securities of any series also have the right to
waive past defaults, except a default in the payment of the principal of, or
any interest on, any outstanding Debt Security, or in respect of a covenant or
a provision that cannot be modified or amended without the consent of all
holders of the Debt Securities of such series.
No holder of any of the Debt Securities issued of any series
under the Indenture has any right to institute any proceeding with respect to
the Indenture or any remedy thereunder, unless the holders of at least 25% in
principal amount of the outstanding Debt Securities of such series have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee, the Trustee has failed to institute such proceeding
within 60 days after receipt of such notice and the Trustee has not within
such 60-day period received directions inconsistent with such written request
by holders of a majority in principal amount of the outstanding Debt
Securities of such series. Such limitations do not apply, however, to a suit
instituted by a holder of a Debt Security for the enforcement of the payment
of the principal of, premium, if any, or any accrued and unpaid interest on,
the Debt Security on or after the respective due dates expressed in the Debt
Security.
During the existence of an Event of Default under the
Indenture, the Trustee is required to exercise such rights and powers vested
in it under the Indenture and use the same degree of care and skill in its
exercise thereof as a prudent person would exercise under the circumstances in
the conduct of such person's own affairs. Subject to the provisions of the
Indenture relating to the duties of the Trustee, if an Event of Default shall
occur and be continuing, the Trustee is not under any obligation to exercise
any of its rights or powers under the Indenture at the request or direction of
any of the holders unless such holders shall have offered to the Trustee
reasonable security or indemnity. Subject to certain provisions concerning
the rights of the Trustee, the holders of a majority in principal amount of
the outstanding Debt Securities of any series have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust, or power conferred on the Trustee.
The Indenture provides that the Trustee will, within 45 days
after the occurrence of any Default, give to the holders of the Debt
Securities of such series notice of such Default known to it, unless such
Default shall have been cured or waived; provided that, except in the case of
a Default in payment of principal of or premium, if any, on any Debt Security
of such series when due or in the case of any Default in the payment of any
interest on the Debt Securities of such series or in the case of any Default
arising from the occurrence of any Change of Control, the Trustee shall be
protected in withholding such notice if it determines in good faith that the
withholding of such notice is in the interest of such holders.
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RCN is required to furnish to the Trustee annually a statement
as to compliance with all conditions and covenants under the Indenture.
"Fair Market Value" means, with respect to any asset or
property, the price that could be negotiated in an arms-length free market
transaction, for cash, between a willing seller and a willing buyer, neither
of whom is under pressure or compulsion to complete the transaction. Any
Asset Sale pursuant to the terms of the deadlock event "buy-sell" arrangements
in Section 7.8 of the Amended and Restated Operating Agreement of RCN-BECOCOM,
LLC, as in effect on the Issue Date, or Section 7.15 of the Amended and
Restated Operating Agreement of Starpower Communications, LLC, as in effect on
the Issue Date, shall be deemed to have been made for Fair Market Value.
Unless otherwise specified in the Indenture, Fair Market Value shall be
determined by the Board acting in good faith and shall be evidenced by a Board
Resolution.
"Material Restricted Subsidiary" means any Restricted
Subsidiary of RCN, which, at any date of determination, is a "Significant
Subsidiary" (as that term is defined in Regulation S-X issued under the
Securities Act), but shall, in any event, include (x) any Guarantor or (y) any
Restricted Subsidiary of RCN which, at any date of determination, is an
obligor under any Indebtedness in an aggregate principal amount equal to or
exceeding $10 million.
Modification and Waiver
From time to time, RCN, when authorized by resolutions of the
Board, and the Trustee, without the consent of the holders of Debt Securities
of any series, may amend, waive or supplement the Indenture and the Debt
Securities of such series for certain specified purposes, including, among
other things:
o curing ambiguities, defects or inconsistencies,
o to provide for the assumption of RCN's obligations to holders
of the Debt Securities of such series in the case of a merger
or consolidation,
o to make any change that would provide any additional rights or
benefits to the holders of the Debt Securities of such series,
o to add Guarantors with respect to the Debt Securities of such
series,
o to secure the Debt Securities of such series,
o to maintain the qualification of the Indenture under the Trust
Indenture Act or
o to make any change that does not adversely affect the rights
of any holder.
Other amendments and modifications of the Indenture or the Debt
Securities issued thereunder may be made by RCN and the Trustee with the
consent of the holders of not less than a majority of the aggregate principal
amount of the outstanding Debt Securities of each series affected thereby
(each series voting as a separate class); provided that no such modification
or amendment may, without the consent of the holder of each outstanding Debt
Security affected thereby:
(1) reduce the principal amount of, or extend the fixed maturity of
the Debt Securities, or alter or waive the redemption provisions of the
Debt Securities (other than, subject to clause (7) below, provisions
relating to repurchase of Debt Securities upon the occurrence of an Asset
Sale or a Change of Control);
(2) change the currency in which any Debt Securities or any premium
or the accrued interest thereon is payable;
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(3) reduce the percentage in principal amount outstanding of Debt
Securities of any series which must consent to an amendment, supplement
or waiver or consent to take any action under the Indenture or the Debt
Securities of such series;
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to the Debt Securities;
(5) waive a default in payment with respect to the Debt Securities or
any Guarantee;
(6) reduce the rate or extend the time for payment of interest on the
Debt Securities;
(7) following the occurrence of an Asset Sale or a Change of Control,
alter the obligation to purchase the Debt Securities of any series as a
result thereof in accordance with the Indenture or waive any default in
the performance thereof;
(8) adversely affect the ranking of the Debt Securities of any
series;
(9) release any Guarantor from any of its obligations under its
Guarantee or the Indenture, except in compliance with the terms of the
Indenture.
"Asset Sale" means any direct or indirect sale, conveyance,
transfer or lease (that has the effect of a disposition and is not for
security purposes) or other disposition (that is not for security purposes) to
any person other than RCN or a Restricted Subsidiary, in one transaction or a
series of related transactions, of:
(1) any Capital Stock of any Restricted Subsidiary (other than
customary stock option programs) or any Restricted Affiliate;
(2) any assets of RCN or any Restricted Subsidiary or any Restricted
Affiliate which constitute substantially all of an operating unit or line
of business of RCN and the Restricted Subsidiaries and the Restricted
Affiliates; or
(3) any other property or asset of RCN or any Restricted Subsidiary
or any Restricted Affiliates outside of the ordinary course of business.
For the purposes of this definition, the term "Asset Sale"
shall not include:
(1) any disposition of properties and assets of RCN and/or the
Restricted Subsidiaries that is governed under "--Consolidation, Merger,
Sale of Assets, Etc.";
(2) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with
the business of RCN or any Restricted Subsidiary or Restricted Affiliate,
as the case may be; and
(3) for purposes of a covenant "Disposition of Proceeds of Asset
Sales," any sale, conveyance, transfer, lease or other disposition of any
property or asset, whether in one transaction or a series of related
transactions occurring within one year, either (x) involving assets with
a Fair Market Value not in excess of $500,000 or (y) which constitutes
the incurrence of a Capitalized Lease Obligation.
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Consolidation, Merger, Sale of Assets, Etc.
The Indenture provides that RCN will not (1) consolidate or
combine with or merge with or into or, directly or indirectly, sell, assign,
convey, lease, transfer or otherwise dispose of all or substantially all of
its properties and assets to any person or persons in a single transaction or
through a series of transactions, or (2) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if
it would result in the disposition of all or substantially all of the
properties or assets of RCN and the Restricted Subsidiaries on a consolidated
basis, unless, in the case of either (1) or (2):
(a) RCN shall be the continuing person or, if RCN is not the
continuing person, the resulting, surviving or transferee person (the
"surviving entity") shall be a company organized and existing under the
laws of the United States or any State or territory thereof;
(b) the surviving entity shall expressly assume all of the
obligations of RCN under the Debt Securities and the Indenture, and
shall, if required by law to effectuate such assumption, execute a
supplemental indenture to effect such assumption which supplemental
indenture shall be delivered to the Trustee and shall be in form and
substance reasonably satisfactory to the Trustee;
(c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), RCN or the
surviving entity (assuming such surviving entity's assumption of RCN
obligations under the Debt Securities and Indenture), as the case may be,
would be able to incur $1.00 of Indebtedness under clause (1)(a) of the
proviso of the covenant "Limitation on Additional Indebtedness";
(d) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default
shall have occurred and be continuing; and
(e) RCN or the surviving entity, as the case may be, shall have
delivered to the Trustee an Officers' Certificate stating that such
transaction or series of transactions, and, if a supplemental indenture,
is required in connection with such transaction or series of transactions
to effectuate such assumption, such supplemental indenture complies with
this covenant and that all conditions precedent in the Indenture relating
to the transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all
of the assets of RCN in accordance with the foregoing in which RCN or the
Restricted Subsidiary, as the case may be, is not the continuing corporation,
the successor corporation formed by such a consolidation or into which RCN or
such Restricted Subsidiary is merged or to which such transfer is made will
succeed to, and be substituted for, and may exercise every right and power of,
RCN or such Restricted Subsidiary, as the case may be, under the Indenture
with the same effect as if such successor corporation had been named as RCN or
such Restricted Subsidiary therein; and thereafter, except in the case of (1)
any lease or (2) any sale, assignment, conveyance, transfer, lease or other
disposition to a Restricted Subsidiary of RCN, RCN shall be discharged from
all obligations and covenants under the Indenture and the Debt Securities
issued thereunder.
The Indenture provides that for all purposes of the Indenture
and the Debt Securities (including the provision of this covenant and the
covenants "Limitation on Additional Indebtedness," "Limitation on Restricted
Payments" and "Limitation on Liens"), Subsidiaries of any surviving entity
will, upon such transaction or series of related transactions, become
Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to
the covenant "Limitation on Designations of Unrestricted Subsidiaries" and all
Indebtedness, and all Liens on property or assets, of RCN and the Restricted
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Subsidiaries in existence immediately prior to such transaction or series of
related transactions will be deemed to have been incurred upon such
transaction or series of related transactions.
Satisfaction and Discharge of the Indenture; Defeasance
RCN may terminate its obligations under the Indenture, when
(1) either:
(A) all Debt Securities of any series issued thereunder that have
been theretofore authenticated and delivered have been delivered to the
Trustee for cancellation, or
(B) all the Debt Securities of any series issued thereunder that
have not theretofore delivered to the Trustee for cancellation will
become due and payable (a "Discharge") under irrevocable arrangements
satisfactory to the Trustee for the giving of notice of redemption by
such Trustee in the name, and at the expense, of RCN, and RCN has
irrevocably deposited or caused to be deposited with such Trustee funds
in an amount sufficient to pay and discharge the entire indebtedness on
such series of Debt Securities, not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, on and
interest to the date of deposit or maturity or date of redemption;
(2) RCN has paid or caused to be paid all other sums then due and
payable under the Indenture by RCN; and
(3) RCN has delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
RCN may elect, at its option, to have its obligations under the
Indenture discharged with respect to the outstanding Debt Securities of any
series ("legal defeasance"). Such defeasance means that RCN will be deemed
to have paid and discharged the entire indebtedness represented by the
outstanding Debt Securities of such series under the Indenture, except for:
(1) the rights of holders of the Debt Securities to receive payments
in respect of the principal of and any premium and interest on the Debt
Securities when payments are due;
(2) RCN's obligations with respect to the Debt Securities concerning
issuing temporary Debt Securities, registration of transfer of Debt
Securities, mutilated, destroyed, lost or stolen Debt Securities and the
maintenance of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee;
and
(4) the defeasance provisions of the Indenture.
In addition, RCN may elect, at its option, to have its
obligations released with respect to certain covenants in the Indenture,
including covenants relating to Asset Sales and Changes of Control ("covenant
defeasance"), and any omission to comply with such obligation shall not
constitute a Default or an Event of Default with respect to the Debt
Securities of any series under the Indenture. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Debt Securities of such
series.
In order to exercise either legal defeasance or covenant
defeasance with respect to outstanding Debt Securities of any series:
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(1) RCN must irrevocably have deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated
solely to the benefits of the holders of the Debt Securities of such
series:
(A) money in an amount; or
(B) U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their
terms will provide, not later than the due date of any payment, money
in an amount; or
(C) a combination thereof, in each case sufficient without
reinvestment, in the opinion of an internationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee to pay and discharge, and which shall
be applied by the Trustee to pay and discharge, the entire Indebtedness
in respect of the principal of and premium, if any, and interest on the
Debt Securities on the maturity thereof or (if RCN has made irrevocable
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name and at the expense of RCN) the
redemption date thereof, as the case may be, in accordance with the
terms of the Indenture and Debt Securities;
(2) in the case of legal defeasance under the Indenture, RCN shall
have delivered to the Trustee an opinion of counsel stating that, under
then applicable Federal income tax law, the holders of the Debt
Securities of such series will not recognize gain or loss for federal
income tax purposes as a result of the deposit, defeasance and discharge
to be effected with respect to the Debt Securities of such series and
will be subject to federal income tax on the same amount, in the same
manner and at the same times as would be the case if such deposit,
defeasance and discharge were not to occur;
(3) in the case of covenant defeasance under the Indenture, RCN shall
have delivered to the Trustee an opinion of counsel to the effect that
the holders of such outstanding Debt Securities of such series will not
recognize gain or loss for U.S. federal income tax purposes as a result
of the deposit and covenant defeasance to be effected with respect to the
Debt Securities of such series and will be subject to U.S. federal income
tax on the same amount, in the same manner and at the same times as would
be the case if such deposit and covenant defeasance were not to occur;
(4) no Default with respect to the outstanding Debt Securities of
such series shall have occurred and be continuing at the time of such
deposit after giving effect thereto or, in the case of legal defeasance,
no Default relating to bankruptcy or insolvency shall have occurred and
be continuing at any time on or prior to the 91st day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day);
(5) such legal defeasance or covenant defeasance shall not cause the
applicable Trustee to have a conflicting interest within the meaning of
the Trust Indenture Act (assuming all Debt Securities of such series were
in default within the meaning of such Act);
(6) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any other
agreement or instrument to which RCN is a party or by which it is bound;
(7) such legal defeasance or covenant defeasance shall not result in
the trust arising from such deposit constituting an investment company
within the meaning of the Investment Company Act of 1940, as amended,
unless such trust shall be registered under such Act or exempt from
registration thereunder; and
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(8) RCN shall have delivered to the Trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent with
respect to such defeasance or covenant defeasance have been complied
with.
PLAN OF DISTRIBUTION
RCN may sell the securities in any of three ways (or in any
combination thereof): (i) through underwriters or dealers; (ii) directly to a
limited number of purchasers or to a single purchaser; or (iii) through
agents. The prospectus supplement with respect to any securities will set
forth the terms of the offering of such securities, including (a) the name or
names of any underwriters, dealers or agents and the respective amounts of such
securities underwritten or purchased by each of them (b) the initial public
offering price of such securities and the proceeds to RCN and any discounts,
commissions or concessions allowed or reallowed or paid to dealers and (c) any
securities exchanges on which such securities may be listed. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, such
securities will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Such securities may be either offered to the public
through underwriting syndicates represented by managing underwriters, or
directly by underwriters. Unless otherwise set forth in the applicable
prospectus supplement, the obligations of the underwriters to purchase such
securities will be subject to certain conditions precedent and the underwriters
will be obligated to purchase all of such securities if any are purchased.
The securities may be sold directly by RCN or through agents
designated by RCN from time to time. Any agent involved in the offer or sale
of the securities in respect of which a prospectus supplement is delivered will
be named, and any commissions payable by RCN to such agent will be set forth,
in the prospectus supplement. Unless otherwise indicated in the prospectus
supplement, any such agent will be acting on a best efforts basis for the
period of its appointment.
If so indicated in the applicable prospectus supplement, RCN
will authorize underwriters, dealers or agents to solicit offers by certain
purchasers to purchase the securities from RCN at the public offering price
set forth in the prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the prospectus
supplement, and the prospectus supplement will set forth the commission
payable for solicitation of such contracts.
Agents and underwriters may be entitled under agreements
entered into with RCN to indemnification by RCN against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents and underwriters may be customers
of, engage in transactions with, or perform services for RCN in the ordinary
course of business.
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LEGAL MATTERS
The validity of the securities in respect of which this
prospectus is being delivered will be passed on for RCN Corporation 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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable
by the Registrant in connection with the sale of the securities being
registered hereby. All amounts are estimates except the registration fee.
Amount to be Paid
-----------------
Registration fee........................... $ 278,000.00
Printing................................... *
Legal fees and expenses.................... *
Accounting fees and expenses............... *
Miscellaneous.............................. *
----------------
TOTAL................................ *
================
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* To be filed supplementally
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
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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>
1.1 Form of Underwriting Agreement*
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)
- ----------
* To be filed supplementally.
II-2
<PAGE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
4.7 Indenture dated June 24, 1998 between the Company, as Issuer, and The
Chase Manhattan Bank, as Trustee, with respect to the 11% Senior Discount
Notes due 2008 (incorporated by Reference to Exhibit 4.8 to RCN's
Registration Statement on Form S-1 (Commission File No. 333-55673))
4.8 Form of 11% Senior Discount Note due 2008 (included in Exhibit 4.8)
(incorporated by reference to Exhibit 4.8 to RCN's Registration Statement
on Form S-1 (Commission File No. 333-55673))
4.9 Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as Trustee
under the Indenture (as defined therein), and the Company (incorporated by
reference to Exhibit 4.6 to RCN's Form S-4)
4.10 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems,
Inc., ComVideo Systems, Inc., C-TEC Cable Systems of New York, Inc. and
First Union National Bank, as agent (incorporated by reference to Exhibit
4.1 to RCN's Form 10)**
4.11 Registration Rights Agreement dated as of June 12, 1998 among certain
shareholders of Interport Communications Corp. and RCN Corporation
(incorporated by reference to Exhibit 4.12 to the 1998 Form S-1)
4.12 Form of Indenture relating to Debt Securities issued hereunder*
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)
12.1 Statement re computation of ratios*
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)
25.1 Statement of Eligibility of Trustee*
</TABLE>
- ----------
(*) To be filed supplementally.
(**) 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-3
<PAGE>
(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. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b)
under the Securities Act of 1933 if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective 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
termination of the offering.
(b) The undersigned registrant hereby understands that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to
the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrants pursuant to the
foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
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
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Princeton, State of New Jersey, on
February 1, 1999
RCN CORPORATION
By: /s/ Bruce C. Godfrey
-------------------------------------
Bruce C. Godfrey
Executive Vice President and Chief
Financial Officer
The Registrant and each person whose signature appears below
constitutes and appoints Michael J. Mahoney and Bruce C. Godfrey, and any
agent for service named in this Registration statement and each of them, his,
her or its true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him, her or it and in his her, or its
name, place and stead, in any and all capacities, to sign and file (i) any and
all amendments (including post-effective amendments) to this Registration
statement, with all exhibits thereto, and other documents in connection
therewith, and (ii) a registration statement, and any and all amendments
thereto, relating to the offering covered hereby filed pursuant to Rule 462(b)
under the Securities Act of 1933, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and things requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he, she, or it might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this 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>
/s/ David C. McCourt
- --------------------------
David C. McCourt Director, Chairman and Chief February 1, 1999
Executive Officer
/s/ Michael J. Mahoney
- --------------------------
Michael J. Mahoney Director, President and Chief February 1, 1999
Operating Officer
/s/ Bruce Godfrey
- --------------------------
Bruce C. Godfrey Director, Executive Vice President February 1, 1999
and Chief Financial Officer
/s/ James Q. Crowe
- --------------------------
James Q. Crowe Director February 1, 1999
II-5
<PAGE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alfred Fasola
- --------------------------
Alfred Fasola Director February 1, 1999
/s/ Stuart E. Graham
- --------------------------
Stuart E. Graham Director February 1, 1999
/s/ Richard R. Jaros
- --------------------------
Richard R. Jaros Director February 1, 1999
/s/ Thomas May
- --------------------------
Thomas May Director February 1, 1999
/s/ Thomas P. O'Neill, III
- --------------------------
Thomas P. O'Neill, III Director February 1, 1999
/s/ Eugene Roth
- --------------------------
Eugene Roth Director February 1, 1999
/s/ Walter Scott, Jr.
- --------------------------
Walter Scott, Jr. Director February 1, 1999
/s/ Michael B. Yanney
- --------------------------
Michael B. Yanney Director February 1, 1999
/s/ Ralph S. Hromisin
- --------------------------
Ralph S. Hromisin Senior Vice President and Chief February 1, 1999
Accounting Officer
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Document
- ------- --------
<S> <C>
1.1 Form of Underwriting Agreement*
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))
- ----------
* To be filed supplementally.
II-7
<PAGE>
<CAPTION>
Exhibit
No. Document
- ------- --------
<S> <C>
4.9 Escrow Agreement dated as of October 17, 1997 among The Chase
Manhattan Bank, as escrow agent, The Chase Manhattan Bank, as Trustee
under the Indenture (as defined therein), and the Company (incorporated by
reference to Exhibit 4.6 to RCN's Form S-4)
4.10 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems,
Inc., ComVideo Systems, Inc., C-TEC Cable Systems of New York, Inc. and
First Union National Bank, as agent (incorporated by reference to Exhibit
4.1 to RCN's Form 10)**
4.11 Registration Rights Agreement dated as of June 12, 1998 among certain
shareholders of Interport Communications Corp. and RCN Corporation
(incorporated by reference to Exhibit 4.12 to the 1998 Form S-1)
4.12 Form of Indenture relating to Debt Securities issued hereunder*
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)
12.1 Statement re computation of ratios*
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)
25.1 Statement of Eligibility of Trustee*
</TABLE>
- ----------
(*) To be filed supplementally.
(**) Exhibits and schedules which have not been filed with Exhibit 4.10 will be
provided to the Commission by the registrant upon request.
II-8
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
January 28, 1999
Exhibit 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption
"Experts" in the Registration Statement (Form S-3 No. 333- ) to be
filed on or about February 1, 1999 and related Prospectus of RCN Corporation
and to the incorporation by reference therein of our report dated January 15,
1998, except for Note 10, as to which the date is February 20, 1998, on the
financial statements of Erols Internet, Inc. included in the RCN Corporation
Current Report on Form 8-K dated May 8, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young, LLP
Vienna, Virginia
January 29, 1999
