As filed with the Securities and Exchange Commission on May 25, 1999
Registration No. 333-48797
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM S-3
AMENDMENT NO. 2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3498533
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address,including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
John Jones
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copy to:
Julia Cowles
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
-----------------------
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
PROSPECTUS
May 25, 1999
[GRAPHIC OMITTED]
890,384 Shares
RCN Corporation
Common Stock
-----------------------
This prospectus relates to the sale of up to 890,384 shares of common
stock, par value $1.00 per share, of RCN Corporation by certain shareholders
of RCN Corporation. All of the shares were originally issued by RCN
Corporation in connection with its acquisition of Ultranet Communications,
Inc.
-----------------------
The common stock is included for quotation in The Nasdaq National Market
under the symbol "RCNC." On May 24, 1999, the last sale price of the common
stock was $41 7/8 per share.
-----------------------
Investing in common stock involves certain risks. See "Risk
Factors" beginning on Page 5.
-----------------------
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.
<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.
We are building high-speed, high-capacity advanced fiber optic networks
in selected markets with high levels of population density. Our strategy is to
become the leading single source provider of voice, video and data services to
residential customers in each of our markets by offering individual or bundled
service options, superior customer service and competitive prices. We are also
constructing our networks with significant excess capacity in order to
accommodate expanded services in the future.
Our initial advanced fiber optic networks have been established in
selected markets in the Boston to Washington, D.C. corridors, which includes
New York City, and also in the San Francisco Bay area. In Boston and
Washington, we operate through joint ventures with Boston Edison Company and
PEPCO Communications, L.L.C., respectively. We are typically building the
first true local network to compete with the aging infrastructure of the
incumbent service providers in our markets.
Because our network development plan involves relatively low fixed
costs, we are able to schedule capital expenditures to meet expected
subscriber growth in each major market. Our principal fixed costs in each such
market are incurred in connection with the establishment of a video
transmission and telephone switching facility. To make each market
economically viable, it is then necessary to construct infrastructure to
connect a minimum number of subscribers to the transmission and switching
facility. We phase our market entry projects to ensure that we have sufficient
cash on hand to fund this construction.
We have extensive operating experience in the telephone, video and
Internet industries and in the design, development and construction of
telecommunications facilities. As of December 31, 1998, we had approximately
855,000 total service connections, including approximately 123,000 connections
provided to customers on our advanced fiber optic network.
Business Strategy
Our goal is to become the leading provider of communication services to
residential customers in our target markets by pursuing the following key
strategies:
o Exploit the "Last Mile" Bottleneck in Existing Local Networks.
Existing local networks are typically low capacity, single service
facilities without the bandwidth for multiple or new services and
revenue streams. We seek to be the first operator of an advanced
fiber optic network offering advanced communications services to
residential customers in our target markets.
o Continue Construction of Advanced Fiber Optic Networks. Our advanced
fiber optic networks are designed with sufficient capacity to meet
the growing demand for high speed, high capacity, voice, video and
data services. Our networks also have a significant amount of excess
capacity which will be available for the introduction of new
products.
o Leverage our Network and Customer Base. We are able to leverage our
network by delivering a broad range of communications products and
by focusing on high density residential markets. This bandwidth
capacity and home density allows us to maximize the revenue
potential per mile of constructed network. We believe we can further
exploit our network capacity and customer base by exploring
opportunities to deliver new products and services in the future,
including complementary commercial and wholesale products and
services.
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<PAGE>
o Offer Bundled Voice, Video and Data Services with Quality Customer
Service. By connecting customers to our own network, we improve our
operating economics and have complete control over our customers'
experience with us.
o Continue to Use Strategic Alliances. We have been able to enter
markets quickly and efficiently and to reduce the up-front capital
investment required to deploy our networks by entering into
strategic alliances.
Connections
Because we deliver a variety of services to our customers, we report the
total number of our various revenue generating service connections for local
telephone, video programming and Internet access. For example, a single
customer who purchases local telephone, video programming and Internet access
counts as three connections. The table below shows our growth in total
connections and growth in customers connected to advanced fiber optic
networks, which we refer to as "On-Net Connections".
<TABLE>
<CAPTION>
As of
-----------------------------------------------------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Total Connections:
Voice............. 28,114 44,950 60,480 78,950 95,890
Video............. 239,403 243,157 249,360 255,100 261,662
Data.............. 150 370,538 400,148 474,127 497,809
Total........... 267,667 658,645 709,988 808,177 855,361
On-Net Connections. 15,148 20,339 48,212 82,842 123,393
Homes Passed....... 44,045 63,386 122,977 213,983 304,505
Marketable Homes... -- -- 111,187 181,353 270,406
</TABLE>
Our off-net connections are delivered through a variety of facilities
including hybrid fiber/coaxial cable systems and a wireless video system.
-----------------------
Our principal executive offices are located at 105 Carnegie Center,
Princeton, New Jersey, and our telephone number is (609) 734-3700. We maintain
a web site at http://www.rcn.com where general information about us is
available. Reference to the website shall not be deemed to incorporate the
contents of the website into this prospectus.
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<PAGE>
The Offering
Common stock offered by selling shareholders..... 890,384
Common stock outstanding as of March 31, 1999.... 66,523,546
NASDAQ symbol.................................... RCNC
Use of proceeds.................................. We will not receive any
proceeds from the sale of
the shares being offered
hereby.
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<PAGE>
Risk Factors
Prospective investors should carefully consider all of the information in
this prospectus and, in particular, should evaluate the specific risk factors
set forth under "Risk Factors," beginning on page 5.
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in
our securities. Some of the following risks relate principally to our business
in general and the industry in which we operate. Other risks relate
principally to the securities markets and ownership of our securities. The
risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual
events, our business, financial condition or results of operations could be
materially adversely affected. In such case, the trading price of our
securities could decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below and elsewhere in this
prospectus.
We have a limited operating history and have incurred negative cash flow and
operating losses
We have only recently begun operating a voice, video and data services
business. Accordingly, you will need to evaluate our performance based on a
limited operating history. In connection with entering this business, we have
incurred operating and net losses and negative cash flows and expect to
continue to do so for the next five to seven years as we expand our network
and customer base. Whether we continue to have negative cash flow in the
future will be affected by a variety of factors including:
o our pace of entry into new markets;
o the time and expense required for constructing our fiber optic
network as we planned;
o our success in marketing services;
o the intensity of competition; and
o the availability of additional capital to pursue our business
plans.
We had operating losses after depreciation and amortization and
nonrecurring charges of $158,793,000, $70,875,000 and $13,078,000 for the
years ended December 31, 1998, 1997 and 1996. We can not assure you that we
will achieve or sustain profitability or positive cash flows from operating
activities in the future.
Additional growth will require additional capital, and our total capital needs
may be substantial
We expect that we will require substantial additional capital to expand
the development of our network and operations into new areas. We will need
capital to fund the construction of our advanced fiber optic networks, upgrade
our hybrid fiber/coaxial plant and fund operating losses and pay our debts.
Based on our current growth plan, we currently estimate that our capital
requirements for the period from January 1, 1999 through 2000 will be
approximately $1.8 billion, which include capital expenditures of
approximately $700 million in 1999 and approximately $1 billion in 2000. These
capital expenditures do not include amounts our joint venture partners
contribute to the Boston and Washington, D.C. joint ventures. We are obligated
to pay our portion of any capital contributions required by the joint
ventures' annual budget or capital contribution schedule. If our joint venture
partner(s) fail to make anticipated capital contributions, it could have a
material adverse effect on our business. See "Business--Network Development
and Financing Plan."
We may seek additional sources of funding from vendor financing, public
offerings or private placements of equity and/or debt securities, and bank
loans. We cannot assure you that additional financing will be available to us
or, if available, that it can be obtained on a timely basis and on acceptable
terms. If we fail to obtain such
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<PAGE>
financing, it could result in the delay or curtailment of our development and
expansion plans and expenditures and could have a material adverse effect on
our business.
Our estimates of capital requirements are forward-looking statements that
are subject to change. The actual timing and amount of capital required to
develop our network and to fund operating losses may vary materially from our
estimates if there are significant departures from the current business plan,
unforeseen delays, cost overruns, engineering design changes or other
unanticipated expenses or occurrences.
Our substantial indebtedness limits our business flexibility
We have indebtedness that is substantial in relation to our shareholders'
equity and cash flow. As of December 31, 1998, we had an aggregate of
approximately $1,267 million of indebtedness outstanding. As a result of our
substantial indebtedness, fixed charges are expected to exceed earnings for
the foreseeable future, and our operating cash flow may not be sufficient to
pay principal and interest on our various debt securities. The extent of our
leverage may also have the following consequences:
o limit our ability to obtain necessary financing in the future
for working capital, capital expenditures, debt service
requirements or other purposes;
o require that a substantial portion of our cash flows from
operations be dedicated to paying principal and interest on our
indebtedness and therefore not be available for other purposes;
o limit our flexibility in planning for, or reacting to, changes in
our business; o place us at a competitive disadvantage as
compared with our competitors who do not have as much debt; and
o render us more vulnerable in the event of a downturn in our
business.
Our outstanding debt securities contain customary covenants limiting our
flexibility, including covenants limiting our ability to incur additional
debt, make liens, make investments, consolidate, merge or acquire other
businesses and sell assets, pay dividends and other distributions, make
capital expenditures and enter into transactions with affiliates.
We may not be able to manage our growth or integrate our acquisitions
The expansion and development of our operations, including the
construction and development of additional networks, will depend on several
factors, including our ability to:
o access markets,
o design fiber optic network backbone routes,
o install or lease fiber optic cable and other facilities,
including switches, and o obtain rights-of-way, building access
rights and any government authorizations, franchises and
permits,
all in a timely manner, at reasonable costs and on satisfactory terms and
conditions.
In addition to the markets we are presently developing, we continually
evaluate other potential markets. These markets may be within the Boston to
Washington, D.C. corridor or in non-contiguous areas. As is the case in our
present markets, we intend to evaluate potential markets in terms of
population density and favorable demographics, and to apply a strategy of
building network facilities to meet the needs of targeted subscribers in new
markets. We cannot assure you that we will be able to expand our existing
network or to identify and develop new markets. Furthermore, our ability to
manage our expansion effectively will also require us to continue to implement
and improve our operating and administrative systems and attract and retain
qualified management and professional and technical personnel. If we are not
able to manage our planned expansion effectively, it could have a material
adverse effect on our business.
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<PAGE>
We recently announced our intention to begin developing advanced fiber
optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor, initially in the San Francisco Bay Area. Our
proposed expansion into non-contiguous markets could place additional strain
on management resources. Furthermore, although we believe that our experience
in the Northeast will provide us with strategic advantages in developing new
markets, we cannot assure you that our experience in our current markets will
be replicated in the western United States.
We have experienced significant growth through acquisitions and will
continue to consider acquisition opportunities that arise from time to time.
Acquisitions may place a significant strain on our resources, and we may incur
additional expenses during the integration of the acquired company with our
business. For instance, the process of integrating the Internet service
provider businesses we acquired in 1998 may take a significant period of time
and require significant expenditure, including costs to upgrade the systems
and internal controls of these businesses. As a result, we cannot assure you
that we will be able to integrate these businesses successfully or in a timely
manner.
Our business is dependent upon acceptance of fiber optic technology as the
platform of choice
The telecommunications industry has been and will continue to be subject
to rapid and significant changes in technology. The effect of technological
changes on our business cannot be predicted, and we cannot assure you that the
fiber optic technology that we use will not be supplanted by new or different
technologies. See "Business--Competition."
We are dependent on our strategic relationships and joint ventures
We have entered into a number of strategic alliances and relationships
which allowed us to enter into the market for telecommunications services
earlier than if we had made the attempt independently. As our network is
further developed, we will be dependent on some of these arrangements to
provide a full range of telecommunications service offerings. Our key
strategic relationships include:
o our arrangements with MFS Communications Company, Inc. (a
subsidiary of WorldCom, Inc.) to lease portions of MFS/
WorldCom's fiber optic network in New York City and Boston;
o our joint venture with Boston Edison Company under which we
have access to its extensive fiber optic network in Greater
Boston;
o our joint venture with Pepco Communications to develop and
operate an advanced fiber optic network in the Washington, D.C.
market; and
o our agreement with Level 3 to provide us with access to its
cross-country fiber network.
Our joint venture agreements with Boston Edison Company and Pepco
Communications contain provisions for the management, governance and ownership
of the RCN-BECOCOM and Starpower joint ventures, respectively. Certain matters
require the approval of our joint venture partner, including some matters
beyond our control, such as a change of control. In addition, although certain
covenants contained in our indentures apply to the joint venture companies,
neither the joint venture companies nor our joint venture partners are parties
to these indentures and are not bound to comply with the indentures. A
disagreement with our joint venture partners over certain business actions,
including actions related to compliance with these indentures, could impede
our ability to conduct our business. It may also trigger deadlock provisions
in the joint venture agreements which could force us to sell our interest in
the relevant joint venture or buy out the interest of the other joint
venturer. See "Business -- Strategic Relationships and Facilities Agreements."
(
7
<PAGE>
In addition, any disruption of our relationships or arrangements with
incumbent local exchange carriers, such as Bell Atlantic, could have a
material adverse effect on our company. We cannot assure you that we will
successfully negotiate agreements with the incumbent local exchange carrier in
new markets or renew existing agreements. Our failure to negotiate or renew
required interconnection and resale agreements could have a material adverse
effect on our business.
We may encounter difficulties in competing in the highly competitive
telecommunications industry
In each of the markets where we offer our services, we face significant
competition from larger, better-financed telephone carriers and cable
companies. Virtually all markets for voice, video and data services are
extremely competitive, and we expect that competition will intensify in the
future. Our principal competitors include:
o traditional and competitive telephone companies, including Bell
Atlantic, AT&T, Sprint, and MCI WorldCom, some of which are
constructing extensive fiber optic networks and expanding into data
services;
o cable television service operators such as Time Warner, some of
which are beginning to offer telephone and data services through
cable networks using fiber optic networks and high-speed modems;
o established online services, such as America Online and Internet
services of other telecommunications companies;
o alliances and combinations of telephone companies, cable service
providers and Internet companies, including the recently announced
alliance that will combine services of AT&T, TCI and At Home; and
o developing technologies such as Internet-based telephony and
satellite communications services.
It may be difficult to gain customers from the incumbent providers which have
historically dominated their markets.
Other new technologies may become competitive with services that we
offer. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors. We cannot predict the extent to which competition from such
developing and future technologies or from such future competitors will impact
our operations. See "Business -- Competition".
Our business plan depends upon continued application of regulations that have
been challenged in the past
Our ability to provide telephone and video programming transmission
services was made possible by important changes in government regulations
which have been subsequently challenged and may be subject to change in the
future. These regulations often have a direct or indirect impact on the costs
of operating our networks, and therefore the profitability of our services. In
addition, we will continue to be subject to other regulations at the federal,
state and local levels, all of which may change in the future. We cannot
assure you that we will be able to obtain all of the authorizations we need to
construct advanced fiber optic network facilities or to retain the
authorizations we have already acquired. It is possible that changes in
existing regulations could have an adverse impact on our ability to obtain or
retain authorizations and on our business. See "Business--Regulation."
8
<PAGE>
We may not be able to procure programming services from the third parties we
depend on
Our video programming services are dependent upon our management's
ability to procure programming that is attractive to our customers at
reasonable commercial rates. We are dependent upon third parties for the
development and delivery of programming services. These programming suppliers
charge us for the right to distribute the channels to our customers. The costs
to us for programming services is determined through negotiations with these
programming suppliers. Management believes that the availability of sufficient
programming on a timely basis will be important to our future success. We
cannot assure you that we will have access to programming services or that
management can secure rights to such programming on commercially acceptable
terms.
The expansion of our Internet services business has subjected us to additional
risks
The expansion of our Internet services business has subjected us to
additional risks. These risks will affect our ability to develop a profitable
Internet services business. These special factors include:
o evolving industry standards which have the potential to make our
services obsolete by replacing or providing lower-cost alternatives
to our services;
o constraints on server capacity or supply of equipment (such as
modems and servers) which could result in a strain on incoming
access lines, causing busy signals and/or delays for our
subscribers;
o network infrastructure and risk of system failure, such as viruses,
which could lead to interruptions, delays, or cessation of our
services, as well as corruption of our or our subscribers' computer
systems;
o possible claims of liability against us as a result of computer
viruses or security breaches; and
o the evolving competitive and regulatory environment concerning
Internet services.
Our management may have conflicts of interest with other companies
Level 3 Telecom beneficially owns approximately 46% of our common stock.
Level 3 Telecom effectively has the power to elect a majority of our directors
and to decide the outcome of substantially all matters voted on by
shareholders. This may tend to deter non-negotiated tender offers or other
efforts to obtain control of our company and thereby deprive shareholders of
opportunities to sell shares at prices higher than the prevailing market
price. Moreover, a disposition by Level 3 Telecom of a significant portion of
our common stock, or the perception that such a disposition may occur, could
affect the trading price of our common stock and the control of our company.
The common stock of Level 3 Telecom is owned 90% by Level 3 and 10% by David
C. McCourt, our Chairman and Chief Executive Officer. Mr. McCourt has been a
member of the Board of Directors and President of Level 3 Telecom since
September 1992. Based upon a review of documents filed with the SEC, we
believe that as of December 31, 1998, 16.1% of the common stock of Level 3 was
owned by directors and executive officers of Level 3, five of whom (Walter
Scott, Jr., Richard R. Jaros, David C. McCourt, James Q. Crowe and Michael B.
Yanney) are executive officers or directors of RCN. The remaining shares of
Level 3 common stock are owned by other persons, none of whom own more than 5%
of outstanding shares.
As a result of the September 30, 1997 spin-off of our shares to holders
of common equity of Commonwealth Telephone Enterprises, Inc., relationships
exist that may lead to conflicts of interest. Level 3 Telecom effectively
controls both us and Commonwealth Telephone. In addition, the majority of our
named executive officers are also directors and/or executive officers of
Commonwealth Telephone. Our success may be affected by the degree which our
officers and directors are involved in our business and the abilities of
officers, directors and employees in managing both our company and
Commonwealth Telephone. We will deal with potential conflicts of interest on a
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case-by-case basis taking into consideration relevant factors including the
requirements of The Nasdaq National Market and prevailing corporate practices.
In February 1999, we announced that we have entered into joint
construction agreements with Level 3. We also recently announced that we have
entered into a letter of intent with Level 3 for Level 3 to provide us with
cross-country capacity to allow our customers to connect to major internet
connection points in the United States. Although these arrangements are
designed to reflect similar arrangements entered into by parties negotiating
at arm's length, we cannot assure you that we would not be able to obtain
better terms from an unrelated third party.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at
the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C.
20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. You may also inspect our filings at
the regional offices of the SEC located at Citicorp, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New
York 10048 or over the Internet at the SEC's WEB site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings
made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until we sell all of the securities:
(a) [Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
(b) Current Report on Form 8-K dated March 19, 1999; and
(c) Annual Report on Form 10-K for the year ended December 31, 1998.
You may request a copy of these filings at no cost, by writing or
telephoning the office of Valerie Haertel, RCN Corporation, 105 Carnegie
Center, Princeton, N.J. 08540-6215, telephone number (609) 734-3700.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties, and assumptions about our business, including, among other
things:
o plans to develop networks and upgrade facilities;
o opportunities presented by target markets;
o plans to connect certain wireless video, resale telephone and
Internet service customers to advanced fiber optic networks;
o development of existing businesses;
o current and future markets for services and products;
o anticipated capital expenditures;
o impact of the Year 2000 issue;
o anticipated sources of capital; and
o effects of regulatory reform and competitive and technological
developments.
We have no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or risks.
New information, future events or risks may cause the forward-looking events
we discuss in this prospectus not to occur.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares being
offered hereby.
DIVIDENDS
We anticipate that future revenues will be used principally to support
operations and finance business growth. Accordingly, we do not intend to
declare or pay cash dividends in the foreseeable future. Our Board of
Directors has the discretion to declare or pay any cash dividends in the
future. Their decision to declare any dividends and the amount of any
dividends will depend on a number of factors, including our financial
condition, capital requirements, funds from operations, future business
prospects and any other factor that they may deem relevant. We are a holding
company and our ability to pay cash dividends is dependent on our ability to
receive cash dividends, advances and other payments from our subsidiaries. Our
credit agreement contains restrictions on our subsidiaries' ability to pay
dividends. In addition, we have entered into indentures in connection with our
debt securities which also restrict our and certain of our subsidiaries'
ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 10-K for the year ended
December 31, 1998.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth our selected historical consolidated financial
data. Prior to September 30, 1997, we operated as part of C-TEC Corporation.
The historical consolidated financial data presented below reflect periods
during which we did not operate as an independent company. Accordingly, we had
to make certain assumptions to reflect the results of operations or the
financial condition which would have resulted if we had operated as a
separate, independent company during the periods listed below. You should not
rely on the historical consolidated financial data as an indication of our
results of operation and financial condition that would have been achieved if
we had operated as a separate, independent company during the periods listed
below. The historical consolidated financial data also do not necessarily
indicate our future results of operation or financial condition.
The selected historical consolidated financial data for the year ended
December 31, 1994 and as of December 31, 1994 are derived from our unaudited
historical consolidated financial statements not included in this prospectus.
The selected historical consolidated financial data as of December 31, 1995
are derived from our audited historical consolidated financial statements not
included in this prospectus. The selected historical consolidated financial
data for the year ended December 31, 1995 and as of December 31, 1996 are
derived from and should be read in conjunction with our audited historical
consolidated financial statements incorporated by reference to our 10-K for
the year ended December 31, 1997. The selected historical consolidated
financial data for the years ended December 31, 1998, 1997 and 1996 and as of
December 31, 1998 and 1997 are derived from and should be read in conjunction
with our audited historical consolidated financial statements incorporated by
reference to our 10-K for the year ended December 31, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
our 10-K for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 59,500 $ 91,997 $ 104,910 $ 127,297 $ 210,940
Costs and expenses, excluding depreciation
and amortization............................ 49,747 75,003 79,107 134,967 262,352
Nonrecurring charges......................... -- -- -- 10,000 --
Acquired research and development............ -- -- -- -- 18,293
Depreciation and amortization................ 9,803 22,336 38,881 53,205 89,088
-------- -------- --------- ---------- ----------
Operating (loss)............................. (50) (5,342) (13,078) (70,875) (158,793)
Interest income.............................. 21,547 29,001 25,602 22,824 58,679
Interest expense............................. (16,669) (16,517) (16,046) (25,602) (112,239)
Other (expense) income, net.................. 1,343 (304) (546) 131 (1,889)
(Benefit) provision for income taxes......... 2,340 1,119 979 (20,849) (4,998)
Equity in loss of unconsolidated entities.... -- (3,461) (2,282) (3,804) (12,719)
Minority interest in loss (income) of
consolidated entities....................... (95) (144) 1,340 7,296 17,162
Extraordinary charge- debt prepayment
penalty, net of tax of $1,728............... -- -- -- (3,210) --
Cumulative effect of changes in accounting
principles.................................. (83) -- -- -- (641)
-------- -------- --------- ---------- ----------
Net (loss) income............................ $ 3,653 $ 2,114 $ (5,989) $ (52,391) $ (205,442)
-------- -------- --------- ---------- ----------
Ratio of earnings to fixed charges........... 1.36 1.41 0.75 (1.87) (0.91)
Deficiency of earnings to fixed charges...... N/A N/A N/A $ (73,522) $ (214,242)
Balance Sheet Data (at end of period):
Total assets................................. $568,586 $649,610 $628,085 $1,150,992 $1,907,615
Long-term debt (excluding current portion)... 154,000 135,250 131,250 686,103 1,263,036
Shareholders' equity......................... 372,847 394,069 390,765 356,584 371,446
Other Data:
EBITDA before nonrecurring charges........... 9,753 16,994 25,803 (7,670) (51,412)
</TABLE>
13
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash Provided by (Used in):
Operating Activities......................... 6,193 48,559 23,831 2,069 35,110
Investing Activities......................... (140,152) (146,203) (9,377) (475,860) (828,176)
Financing Activities......................... 280,014 (31,203) 9,391 634,858 690,282
</TABLE>
In the table above:
(1) Nonrecurring charges represent costs of $10,000 incurred in 1997 the
termination of a marketing services agreement related to our wireless video
services, and costs of $18,293 incurred in 1998 relating to acquisition of
in-process technology in connection with the acquisitions.
(2) The deficiency of earnings to fixed charges is based on income from
continuing operations and has been computed on a total enterprise basis.
Earnings represent income before income taxes, and fixed charges. Fixed
charges consist of interest expense and debt amortization costs.
(3) EBITDA before nonrecurring charges represents earnings before
interest, depreciation and amortization, and income taxes. Because of the
capital intensive nature of the business and resulting large non-cash charges
for depreciation, EBITDA is commonly used in the communications industry by
management, investors, and analysts to analyze companies on the basis of
operating performance, leverage and liquidity. RCN intends to judge the
success of its initial rollout of fiber optic networks before deciding whether
to undertake additional capital expenditures to expand its network in new
areas. RCN believes that EBITDA is a critical measure of success. Because RCN
is in a growth-oriented and capital intensive phase of development, it incurs
depreciation and amortization charges in new markets which may obscure its
earnings growth in more mature markets. In addition, EBITDA provides a measure
of the availability of funds for various uses including repayment of debt,
expansion into new markets and acquisitions. EBITDA is not intended to
represent cash flows for the period and should not be considered as an
alternative to cash flows from operating, investing or financing activities as
determined in accordance with U.S. GAAP. EBITDA is not a measurement under
U.S. GAAP and may not be comparable with other similarly titled measures of
other companies. Certain of our debt agreements contain certain covenants
that, among other things, limit our and our subsidiaries' ability to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.
14
<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,
1998 and as adjusted for the following:
o RCN's acquisition of Erols in February 1998;
o RCN's February 1998 issuance and sale of its 9.80% Senior Discount
Notes due 2008 (the "9.80% Notes"); and
o RCN's June 1998 issuance and sale of 6,098,355 shares of Common
Stock (the "Stock Offering") and its 11% Senior Discount Notes due
2008 (the "11% Notes").
and the related transactions and events described in the notes thereto, as if
such transactions and events had been consummated on the first day of 1998.
Management believes that the assumptions used provide a reasonable basis
on which to present such unaudited pro forma statements of operations. The
unaudited pro forma statements of operations should be read in conjunction
with the financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 10-K for the year ended
December 31, 1998.
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.
15
<PAGE>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
($ in thousands, except per share amounts and number of shares)
<TABLE>
<CAPTION>
Erols Adjustments
Historical for the Stock
Adjustments 1/1/98 - Acquisition Offering and
RCN for the 9.8% 2/28/98 Adjustments the 11%
Historical Notes (2) For Erols Notes Pro Forma
---------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales................................. $ 210,940 $ 8,700 $ (5,371)(3) $ 214,269
Cost and expenses excluding
depreciation and amortization.... 262,352 8,388 (5,179)(3) 265,561
Nonrecurring acquisition costs:
In-process technology............ 18,293 18,293
Depreciation and amortization ........ 89,088 1,478 352 (4) 90,918
---------- ---------- ---------- ---------- ---------- ----------
Operating (loss)...................... (158,793) (1,166) (544) -- (160,503)
Interest income....................... 58,679 58,679
Interest expense...................... (112,239) $ (3,492)(1) (164) 101 $ (8,580)(6) (124,374)
Other (expense), net.................. (1,889) (5) (1,894)
---------- ---------- ---------- ---------- ---------- ----------
(Loss) before income taxes............ (214,242) (3,492) (1,335) (443) (8,580) (228,092)
(Benefit) for income taxes............ (4,998) (1) -- -- (5) (4,998)
---------- ---------- ---------- ---------- ---------- ----------
(Loss) before equity in
unconsolidated entities and
minority interest................ (209,244) (3,492) (1,335) (443) (8,580) (223,094)
Equity in (loss) of unconsolidated
entities......................... (12,719) (2,687)(3) (15,406)
Minority interest in loss of
consolidated entities............ 17,162 17,162
---------- ---------- ---------- ---------- ---------- ----------
Loss before cumulative effect of
change in accounting principle... $ (204,801) $ (3,492) $ (1,335) $ (3,130) $ (8,580) $ (221,338)
========== ========== ========== ========== ========== ==========
Unaudited pro forma loss per average
common share before cumulative
effect of change in accounting
principle........................ $ (3.35) $ $ (3.62)
Weighted average number of common
shares and common stock
equivalents outstanding.......... 61,187,354 61,187,354
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations
16
<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.
(1) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the 9.8% Notes aggregating $3,492
for the year ended December 31, 1998. A pro forma adjustment was not assumed
for income tax benefits associated with the pro forma adjustment for
additional interest expense for the year ended December 31, 1998 because the
realization of such benefit would be uncertain.
(2) On February 20, 1998, RCN completed the acquisition of Erols,
Washington, D.C.'s largest Internet service provider. RCN accounted for this
transaction under the purchase method of accounting and accordingly, the
financial statements of Erols are not consolidated with RCN's historical
financial statements as of and for the year ended December 31, 1997. In 1998,
the financial results of Erols also are not consolidated with RCN's historical
financial statements for the period prior to February 20, 1998. The financial
information relating to Erols was provided by Erols.
A summary of the transaction is as follows:
Cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt of
approximately $5,100).................................$ 36,000
Fair value of RCN stock issued............................. 45,000
Fair value of stock options exchanged...................... 11,000
Liabilities assumed........................................ 55,000
----------
Fair value of assets acquired..............................$ 147,000
==========
The fair value of assets acquired was allocated as follows:
<TABLE>
<S> <C> <C>
In-process technology......................................$ 13,228
Property, plant & equipment................................ 19,100
Current assets............................................. 2,280
Other assets............................................... 3,800
Intangible assets:
Estimated Useful
Life (months)
----------------
Customer base......................................... 15,000 48
Acquired current products/technologies................ 49,224 48
Goodwill.............................................. 41,115 48
Tradename............................................. 3,253 13
----------
$ 147,000
==========
</TABLE>
(3) Such adjustments include a pro forma allocation of historical
operating results of Erols to the joint venture with Pepco Communications (see
below) based upon the relationship of the number of subscribers contributed to
the joint venture to the total number of subscribers acquired in the merger.
RCN's share of such operating results, including the depreciation and
amortization effects of the allocation of a portion of the total purchase
price to the joint venture, representing the agreed upon value of the
subscribers to be contributed to the joint venture, are included in the
adjustment for "equity in (loss) of unconsolidated entities."
17
<PAGE>
A subsidiary of RCN is a party to a joint venture with a subsidiary of
Pepco Communications, to provide the greater Washington, D.C. area residents
and businesses local and long-distance telephone, cable television, and
Internet services as a package from a single source. As a result of this joint
venture, RCN contributed to the joint venture the subscribers acquired in the
merger with Erols which are located in the relevant joint venture market. This
represents approximately 62% of the customer base acquired from Erols. The
value of such contribution as agreed to by the joint venture partners was
$51,937. Additionally, Starpower assumed the liability for the unearned
revenue related to the subscribers contributed to the joint venture of
$26,663. A summary of related amounts transferred to the joint venture is as
follows:
Property, plant and equipment..................... $ 11,900
Customer base..................................... 9,300
Trade name........................................ 2,060
Goodwill.......................................... 55,340
Unearned revenue.................................. (26,663)
----------
Net investment in joint venture................... $ 51,937
==========
(4) Such adjustment reflects the change in depreciation and amortization
for the effect of the fair value adjustment of the net assets of Erols
acquired. RCN allocated the purchase price for Erols (see Note 2) on the basis
of the fair market value of the assets acquired and liabilities assumed.
(5) A pro forma adjustment was not assumed for income tax benefits
associated with the pro forma adjustments for the historical results of
operations of Erols because the realization of such benefit would be
uncertain.
(6) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the 11% Notes aggregating $8,580 for
the year ended December 31, 1998. Pro forma adjustments were not assumed for
income tax benefits associated with the pro forma adjustments for additional
interest expense because the realization of such benefits would be uncertain.
18
<PAGE>
BUSINESS
Overview
We are building high-speed, high-capacity advanced fiber optic networks
in selected markets with high levels of population density. Our current
services include local and long distance telephone, video programming and data
services, including high speed Internet access. Our strategy is to become the
leading single-source provider of voice, video and data services to
residential customers in each of our markets by offering individual or bundled
service options, superior customer service and competitive prices. We are also
constructing our networks with significant excess capacity in order to
accommodate expanded services in the future. We intend to expand the services
provided to our customers through strategic alliances and opportunistic
development of complementary products. In addition, we will use the excess
capacity in our fiber optic networks to provide services to commercial
customers located on or near our networks. As a result of recent acquisitions
and internal growth, we are a leading regional Internet service provider in
the Boston to Washington, D.C. corridor. Our Internet businesses have recently
been integrated under the brand name "RCN.com."
Our initial advanced fiber optic networks have been established in
selected markets in the Boston to Washington, D.C. corridor, including New
York City, and the San Francisco Bay area. We are typically building the first
true local network to compete with the aging infrastructure of the incumbent
service providers in our markets. In the Boston market we operate our advanced
fiber optic network through a joint venture with Boston Edison Company. We own
and manage 51% owned of the venture and it is accounted for on a consolidated
basis. In the Washington, D.C. market, we are developing an advanced fiber
optic network through a joint venture named Starpower with Pepco
Communications, L.L.C., an indirect wholly owned subsidiary of Potomac
Electric Power Company. We own 50% of Starpower and Pepco Communications owns
50% and it is accounted for under the equity method of accounting. We believe
that these joint ventures provide us with a number of important advantages.
For example, we are able to access rights of way of our joint venture partners
and use their existing fiber optic facilities. This allows us to enter our
target markets quickly and efficiently and to reduce our up-front costs of
developing our networks. In addition, our joint venture partners provide us
with additional assets, equity capital and established customer bases. We also
benefit from our relationship with our largest shareholder, Level 3
Communications, Inc., and from the experience gained by certain of our key
employees who participated in the operation and development of other
telephone, cable television and business ventures, including MFS
Communications Company, Inc.
Because we deliver a variety of services, we report the total number of
our various service connections purchased for local telephone, video
programming and Internet access rather than the number of customers. For
example, a single customer who purchases local telephone, video programming
and Internet access counts as three connections. Because we view long distance
as a complementary product, we do not currently include customers of our long
distance service as connections. See "--RCN Services--Connections." As of
December 31, 1998, we had approximately 855,000 connections which were
delivered through a variety of our owned and leased facilities including
hybrid fiber/coaxial cable systems, a wireless video system and advanced fiber
optic networks. As of that date, we had approximately 123,000 total
connections attributable to customers connected to advanced fiber optic
networks ("on-net" connections) and had approximately 732,000 connections
attributable to customers served through other facilities ("off-net"
connections). See "--RCN Services." We obtained approximately 370,000 of our
497,000 Internet service connections through acquisitions of subscriber bases
during 1998. See "--Recent Acquisition Transactions."
We have extensive operating experience in both the telephone and video
industries and in the design and development of telecommunications facilities.
Our experience provides us with expertise in systems operation and
development, and gives us an established infrastructure for customer service
and billing for both voice and video services and established relationships
with suppliers of equipment and video programming. In addition, our management
team and board of directors benefit from experience gained when they managed
C-TEC, which prior to September 30, 1997 owned and operated our company. C-TEC
has over 100 years of experience in the
19
<PAGE>
telephone business and nearly 25 years of experience in the cable television
business. Both C-TEC and certain members of management also have extensive
experience in the design and development of advanced telecommunications
facilities.
We seek to exploit competitive opportunities in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a
particularly attractive opportunity to develop advanced fiber optic networks.
We continue to construct network facilities within the Boston to Washington,
D.C. corridor. We believe that our experience in the Northeast will provide us
with a key strategic advantage as we enter markets in the San Francisco to San
Diego corridor.
West Coast Expansion
We recently began to develop advanced fiber optic networks in selected
high density markets outside of the Boston to Washington, D.C. corridor. Our
initial west coast network is being developed in the San Francisco Bay Area,
which is densely populated and has high per capita income and the highest per
capita Internet usage in the United States. We have received competitive local
exchange carrier ("CLEC") status in California. We have also obtained an "open
video system" ("OVS") certification from the Federal Communications Commission
for the City of San Francisco and surrounding counties and have begun to
develop our network in the San Francisco Bay Area. We expect to expand into
selected markets in or near Southern California. As is the case in our
existing markets, we intend to focus on high density markets with favorable
demographics, and to apply a subscriber-driven investment strategy. We expect
to begin offering services in the San Francisco Bay Area in late 1999.
Business Strategy
Our goal is to become the leading provider of communications services to
residential customers in our target markets by pursuing the following key
strategies:
Exploit the "Last Mile" Bottleneck in Existing Local Networks: Existing
local networks are typically low capacity, single service facilities without
the bandwidth for multiple or new services and revenue streams. Investment in
the local network or "last mile" has not generally kept pace with other
industry and technological advances. In our target markets, we seek to be the
first operator of an advanced fiber optic network offering advanced
communications services to residential customers.
Continue Construction of Advanced Fiber Optic Networks: Our advanced
fiber optic networks are designed with sufficient capacity to meet the growing
demand for high speed, high capacity, voice, video and data services. Our
networks also have a significant amount of excess capacity at relatively low
incremental cost 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 recover the cost of our network through
multiple revenue streams. In addition, our networks generally provide superior
signal quality and network reliability relative to the typical networks of the
incumbent service providers.
Leverage our Network and Customer Base: We are able to leverage our
network by delivering a broad range of communications products and by focusing
on high density residential markets. This bandwidth capacity and home density
allows us to maximize the revenue potential per mile of constructed network.
We believe we can further exploit our network capacity and customer base by
exploring opportunities to deliver new products and services in the future,
including complementary commercial and wholesale products and services.
Offer Bundled Voice, Video and Data Services with Quality Customer
Service: We offer our customers a single-source package of competitively
priced voice, video and data services, individually or on a bundled basis,
with quality customer service. By connecting customers to our own network, we
improve our operating economics and have complete control over our customers'
experience with us. We believe that the combination of bundled
20
<PAGE>
communications services and quality customer care that we provide is superior
to services that are typically available from most incumbent telephone, cable
or other service providers.
Continue to Use Strategic Alliances: We have been able to enter markets
quickly and efficiently and to reduce the up-front capital investment required
to deploy our networks by entering into strategic alliances with companies
such as BECO, Pepco Communications, Level 3, Qwest and MCI/WorldCom. By
establishing relationships with these companies, we are able to take advantage
of their existing extensive fiber optic networks and other assets, and our own
existing cable television infrastructure, to expedite and reduce the cost of
market entry and business development. We will continue to evaluate other
strategic alliances in our existing markets and our developing markets.
Network Development and Financing Plan
Because our network development plan involves relatively low fixed costs,
we are able to schedule capital expenditures to meet expected subscriber
growth in each major market. Our principal fixed costs in each such market are
incurred in connection with the establishment of a video transmission and
telephone switching facility. To make each market economically viable, it is
then necessary to construct infrastructure to connect a minimum number of
subscribers to the transmission and switching facility. We phase our market
entry projects to ensure that we have sufficient cash on hand to fund this
construction.
Based on our current growth plan, we expect that we will require
substantial additional capital to expand the development of our network and
operations into new areas within our larger target markets. We will need
capital to fund the construction of our advanced fiber optic networks, upgrade
our hybrid fiber/coaxial plant and fund operating losses and repay our debts.
We currently estimate that our capital requirements for the period from
January 1, 1999 through 2000 will be approximately $1.8 billion, which include
capital expenditures of approximately $700 million in 1999 and approximately
$1 billion in 2000. These capital expenditures will be used principally to
fund additional construction of our fiber optic network in high density areas
in the Boston, New York City, Washington, D.C. and San Francisco Bay area
markets as well as to expand into new markets (including selected markets in
the western United States) and to develop our information technology systems.
These estimates are forward-looking statements that may change if
circumstances related to construction, timing of receipt of regulatory
approvals and opportunities to accelerate the deployment of our networks do
not occur as we expect. In addition to our own capital requirements, our joint
venture partners are each expected to contribute approximately $275 million
(of which $120 million has been contributed) to the joint ventures through
2000 in connection with development of the Boston and Washington, D.C.
markets.
In order to facilitate growth beyond 2000, we expect to supplement our
existing available credit facilities and operating cash flow by seeking
additional capital to increase our network coverage and pay for other capital
expenditures, working capital, debt service requirements and anticipated
further operating losses. We may seek additional sources of funding from
vendor financing, public offerings or private placements of equity and/or debt
securities, and bank loans.
In March 1999, we secured a $1 billion bank facility from The Chase
Manhattan Bank and sold $250 million of convertible preferred stock to a
private investment fund.
RCN Services
We provide a wide range of local and long distance telephone, video
programming and data services, both individually and in bundled service
options.
We provide these services through a range of facilities including our
advanced fiber optic networks in New York City, Boston and Washington D.C., a
wireless video system in New York City, our hybrid fiber/coaxial cable
21
<PAGE>
systems in the states of New York (outside New York City), New Jersey and
Pennsylvania. We also provide, on a limited basis, resale local and long
distance telephony services.
Connections. The following table summarizes the development of our
subscriber base:
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
On-Net Service Connections:
Voice.......................... 1,909 3,214 4,473 11,428 20,857 30,868
Video.......................... 4,870 11,784 15,599 35,196 58,324 86,349
Data........................... 326 150 267 1,588 3,661 6,176
------- ------- ------- ------- ------- -------
Subtotal On-Net................. 7,105 15,148 20,339 48,212 82,842 123,393
Off-Net Service Connections:
Voice.......................... 10,953 24,900 40,447 49,052 58,093 65,022
Video.......................... 229,198 227,619 227,558 214,164 196,776 175,313
Data........................... -- -- 370,271 398,560 470,466 491,633
------- ------- ------- ------- ------- -------
Subtotal Off-Net................ 240,151 252,519 638,276 661,776 725,335 731,968
------- ------- ------- ------- ------- -------
Total Service Connections....... 247,256 267,667 658,615 709,988 808,177 855,361
======= ======= ======= ======= ======= =======
Homes Passed.................... 26,083 44,045 63,386 122,977 213,983 304,505
Marketable Homes................ -- -- -- 111,187 181,353 270,406
</TABLE>
Because we deliver a variety of services to our customers, we account for
our customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections," purchased.
Consequently, a single customer purchasing local telephone, video programming
and Internet access counts as three connections.
We classify connections in the "Off-Net" category until the relevant
facilities are capable of providing voice, video and data services, including
local telephone service, through an RCN switch. During 1998, our Allentown,
Pennsylvania system was upgraded to provide a full range of services, and the
customers on that system were moved to the "On-Net" connections category.
"Off-Net--Voice" figures in the table above represent resold local phone
service provided to customers not connected to the advanced fiber optic
networks.
Our "Off-Net--Video" figures in the table above include approximately
31,000 wireless connections and wireline video connections serving the
University of Delaware (4,000 connections at December 31, 1998).
As of December 31, 1998 we had approximately 186,000 homes passed and
approximately 140,000 basic subscribers connected to our hybrid fiber/coaxial
cable system in New York, New Jersey and Lehigh Valley service areas.
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 and are included in the connections set forth in the table above.
As of September 30, 1998, we began to report marketable homes, which
represents that segment of homes passed which are being marketed our entire
line of advanced fiber optic network products. The distinction between homes
passed and marketable homes recognizes our transition from constructing our
network in initial markets to providing services to customers that have
ordered our services.
Set forth below is a brief description of our services:
22
<PAGE>
Voice. We offer full-featured local exchange telephone service, including
standard dial tone access, enhanced 911 access, operator services and
directory assistance. We compete with the incumbent local exchange providers
and CLECs. In addition, we offer a wide range of value-added services,
including call forwarding, call waiting, conference calling, speed dial,
calling card, 800-numbers and voice mail. We also provide Centrex service and
associated features. Our local telephone rates are generally competitive with
the rates charged by the incumbent providers. At December 31, 1998, we had
approximately 30,900 telephone service connections on our advanced fiber optic
networks and approximately 65,000 customers for resold telephone service. We
also provide long distance telephone services, including outbound, inbound,
calling card and operator services. These services are offered to residential
and business customers.
Video Services. We offer a diverse line-up of high quality basic, premium
and pay-per-view video programming. Depending on the system, we offer from 61
to 147 channels. Our basic video programming package provides extensive
channel selection featuring all major cable and broadcast networks. Our
premium services include HBO, Cinemax, Showtime and The Movie Channel, as well
as supplementary channels such as HBO 2, HBO 3 and Cinemax 2. StarCinema,
available on our advanced fiber optic networks, uses the latest "impulse"
technology allowing convenient impulse pay-per-view ordering of the latest hit
movies and special events instantly from the customer's remote. "Music Choice"
offers 30 different commercial-free music channels delivered to the customer's
stereo in digital CD quality sound.
As of December 31, 1998, we had approximately 86,350 subscribers for our
video programming services provided over advanced fiber optic networks. As of
such date, we also had approximately 34,900 connections attributable to the
wireless video system and approximately 140,400 connections attributable to
the hybrid fiber/coaxial cable systems.
Internet Access and Data Transmission. We operate as an Internet service
provider under the RCN.com brand name. We focus on serving individuals and
businesses through a network of our-owned points of presence ("POPs") which
are connected to our advanced fiber optic network. Our primary service
offerings are 56K dial-up and high-speed cable modem access. We also sell
commercially oriented private line point-to-point data transmission services
such as DS-1 and OC-3 and a range of web page and server hosting services. Our
subscribers use their RCN accounts to communicate, retrieve information, and
publish information on the Internet. Following the recent acquisitions
described below under "--Recent Acquisition Transactions", we believe that we
are the largest regional provider of Internet services in the Northeast United
States. As of December 31, 1998, we had approximately 497,800 Internet
subscribers.
Migration of Customers to Advanced Fiber Networks
We provide wireless video services to customers located near our advanced
fiber optic network in New York City and Internet services to acquired
subscribers. We have also actively marketed resold telephone service in the
past. Our goal is to extend our advanced fiber optic network to service many
of those customers. As our advanced fiber optic network is extended into these
areas or buildings, customers receiving wireless video service in New York
City are switched to the advanced fiber optic network from the wireless video
network. The wireless video equipment is then used to provide service to other
customers in off-network premises. Similarly, as the advanced fiber optic
network is developed, voice and data customers are switched to the advanced
fiber optic network from resale accounts. The switch to our network allows us
to gain additional revenue and higher margins from originating and terminating
access fees and to control the related services and service quality.
Strategic Relationships and Facilities Agreements
We have entered into a number of strategic alliances and relationships
which allow us to enter into the telecommunications services market early,
reduce the cost of entry into our markets and tap management expertise. We
expect to continue to pursue potential opportunities from entering into
strategic alliances to facilitate network expansion and entry into new
markets.
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BECO Joint Venture
In 1996 RCN and the Boston Edison Company ("BECO"), through wholly owned
subsidiaries, formed a joint venture to use 126 fiber miles of BECO's fiber
optic network to deliver our comprehensive communications package in Greater
Boston. A joint venture agreement provided for the organization and operation
of RCN- BECOCOM, LLC, an unregulated entity with a term expiring in the year
2060. RCN-BECOCOM is a Massachusetts limited liability company organized to
own and operate an advanced fiber optic telecommunications network and to
provide, in the market in and around Boston, Massachusetts, voice, video and
data services. Through RCN Telecom Services of Massachusetts, we own 51% of
the equity interest in RCN-BECOCOM and BECO, through a subsidiary, owns the
remaining 49% interest. This joint venture with BECO is reflected on our
financial statements on a consolidated basis.
Pursuant to an exchange agreement between BECO and RCN, BECO has the
right, from time to time, to convert portions of its ownership interest in
RCN-BECOCOM into shares of our common stock. In February 1999, BECO exercised
this right and converted a portion of its interest into 1,107,539 shares of
our common stock. This conversion reduced BECO's current ownership interest in
RCN-BECOCOM to 45.74% and increased our current ownership interest to 54.26%.
Future capital contributions to the joint venture will continue to be made 49%
by BECO and 51% by RCN until BECO disposes of the shares it received on the
conversion. The capital contribution percentages will change in proportion to
BECO's future disposal of the shares.
We expect to benefit from our ability to use BECO's large fiber optic
network, its focus on innovative technology, its sales and marketing expertise
and its reach into the market. In the future, the venture may expand into
energy management and property monitoring services. Starting in Boston, the
joint venture partners have expanded into surrounding markets, including
Arlington, Somerville and Newton. As a result of our access to the extensive
BECO network, our reliance on and use of MFS/WorldCom facilities in Boston has
been reduced significantly.
Starpower Joint Venture
In 1997, RCN Telecom Services, Inc., one of our subsidiaries, and Potomac
Capital Investment Corporation ("PCI"), a wholly owned subsidiary of Potomac
Electric Power Company, formed a joint venture to own and operate a
communications network to provide voice, video, data and other communications
services to residential and commercial customers in the greater Washington,
D.C., Virginia and Maryland area. Starpower is an unregulated limited
liability company with a perpetual term. Starpower was formed to construct,
own, lease, operate and market a network for the selling of voice, video, data
and other telecommunications services to all potential commercial and
residential customers in the Washington, D.C. market covered by the joint
venture contract. We own 50% of the equity interest in Starpower and Pepco
Communications owns the remaining 50% interest. Starpower is reflected on our
financial statements under the equity method of accounting.
Other Strategic Relationships
On April 7, 1999, Hicks, Muse, Tate & Furst Incorporated, through HM4 RCN
Partners, purchased $250 million of a new issue of convertible preferred stock
of RCN in a private placement transaction. In connection with this
transaction, we agreed to provide the purchaser with the right to appoint one
director to RCN's Board of Directors for so long as it owns at least 50% of
its initial investment. Michael J. Levitt, a partner of Hicks, Muse, has been
appointed to RCN's Board of Directors in connection with this agreement.
Miscellaneous Facilities Agreements
We have also entered into agreements which have helped us accelerate
network development, including Fiber Agreements entered into with
MFS/WorldCom. MFS/WorldCom owns or has the right to use certain fiber optic
network facilities in the Boston, Massachusetts and New York City markets.
Under the Fiber Agreements,
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MFS/WorldCom agreed to construct and provide extensions connecting the fiber
optic facilities to buildings we designated. We are also able to use certain
dedicated fibers in those facilities, except that we may not use the
facilities to deliver telephone services to commercial customers.
In February 1999, we announced that we have entered into joint
construction agreements with Level 3. The agreements will allow us to deploy
additional network in Boston and New York faster and at a lower cost. We also
recently announced that we have entered into a letter of intent with Level 3
for Level 3 to provide us with cross- country capacity to allow our customers
to connect to major Internet connection points in the United States. This
gives us the ability to negotiate peering agreements that will allow the
exchange of traffic as a Tier I operator.
In June 1998, we entered into an agreement with Qwest Communications for
Qwest to provide us with capacity in its regional backbone of fiber lines to
connect to our local networks from Boston to Washington, D.C.
Recent Acquisition Transactions
In February 1998, we acquired Erols. The total approximate consideration
was $36.0 million in cash, including out of pocket costs of approximately $1.4
million and the assumption and repayment of debt of approximately $5.1
million, and RCN common stock with a fair value at the time of issuance of
approximately $45.0 million. The purchase price also included approximately
$11.0 million representing the fair value of Erols stock options which were
converted to RCN stock options in connection with the acquisition.
RCN contributed approximately 60% of the subscribers and related unearned
revenue acquired in the acquisition of Erols to Starpower and approximately 1%
to RCN-BECOCOM.
In February 1998, we acquired Ultranet Communications, Inc. The total
approximate consideration was $7.7 million in cash, including cash payments
aggregating approximately $.5 million to certain holders of Ultranet stock
options, and RCN common stock with a fair value at the time of issuance of
approximately $26.2 million. The purchase price also included approximately
$1.9 million representing the fair value of Ultranet stock options which were
converted to RCN stock options in connection with the acquisition.
RCN contributed to RCN-BECOCOM approximately 30% of the subscribers
acquired in the acquisition of Ultranet.
In the allocation of purchase price associated with the acquisition of
Erols and Ultranet, $13.2 million and $5.1 million, respectively, was
determined to represent acquired in-process research & development ("IPR&D").
In particular, four projects which qualified as IPR&D were identified as not
having achieved technological feasibility and representing technology which,
at the time of acquisition, offered no alternative use than the defined
project. For both the Erols and the Ultranet acquisitions, we identified the
research and development projects to include--
o Cable Modem Internet access for subscribers, consisting of projects
to develop the hardware, systems and software to permit subscribers
to be offered high-speed Internet access through direct cable
connection. The remaining development effort is concerned with
technical standards for this service and with the design and
integration of this product into our cable and fiber optic network.
o Internet Telephony, representing projects to develop the potential
for dial-up telephone service through the Internet. This service
area required that significant technical challenges as well as
political, commercial and market challenges be faced before service
could be offered to subscribers. At the date of acquisition, neither
hardware nor systems had been acquired or developed in support of
this new product and, as a result, a high degree of development
activity remains.
o E-Commerce Systems, consisting of efforts to develop a suitable
system that would permit subscribers to conduct commercial
activities over the Internet. Following evaluation of
commercially-available
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packages, none were capable of meeting subscriber needs and
development of the suitable system was undertaken.
o High-speed shared office Internet access, representing a blending of
fiber optic and Internet networking technologies, was under
development as a package to be offered to commercial clients. While
the technical challenges were still being addressed at the date of
acquisition, there was no certainty that this system would result in
a competitive product offering in the market.
In June 1998, we acquired Interport Communications Corp. The total
approximate consideration for the transaction was $1.3 million in cash and RCN
common stock with a fair value at the time of issuance of approximately $8.5
million.
In June 1998, we also acquired Lancit Media Entertainment, Ltd., a
producer of high quality children's programming. The total approximate
consideration for the transaction was $.4 million in cash and RCN common stock
with a fair value at the time of issuance of approximately $7.4 million.
In July 1998, we acquired Javanet, Inc. The total approximate
consideration for the transaction was $3.7 million in cash and RCN common
stock with a fair value at the time of issuance of approximately $13.4
million.
RCN contributed to RCN-BECOCOM approximately 6% of the subscribers
acquired in the acquisition of Javanet.
International
We own a 40.0% interest in Megacable, the second largest cable television
provider in Mexico. Megacable owns 22 wireline cable systems in Mexico,
principally on the Pacific and Gulf coasts and including Guadalajara, the
second largest city in Mexico, Hermosillo, the largest city in the state of
Sonora and Veracruz, the largest city in the state of Veracruz. At December
31, 1998, their wireline systems passed approximately 733,500 homes and served
approximately 222,300 subscribers. Megacable had revenues of $37.5 million and
$30.4 million for the years ended December 31, 1998 and 1997, respectively.
Additionally, Megacable presently holds a 99% interest in Megacable
Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license from the
Mexican government to allow it to build a fiber optic network in Mexico City,
Monterrey and Guadalajara. MCM intends to use this network to provide local
voice and high-speed data service in these cities, principally to commercial
customers in Mexico City.
Competition
Overview
We compete with a wide range of service providers for each of our
services. Virtually all markets for voice and video services are extremely
competitive, and we expect that competition will intensify in the future. We
face significant competition in each of the markets in which we offer voice
and video programming services. Our competitors are often larger,
better-financed incumbent local telephone carriers and cable companies with
better access to capital resources, and many have historically dominated their
local telephone and cable television markets. These incumbents presently have
numerous advantages as a result of their historic monopolistic control of
their respective markets, economies of scale and scope and control of limited
conduit and pole space. They also have well-established customer and vendor
relationships. However, we believe that most existing and potential
competitors will, at least initially, offer narrower services over limited
delivery platforms compared to the wide range of voice, video and data
services that we provide over our fiber-based networks. This gives us an
opportunity to achieve important market penetration.
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We compete with the incumbent Local Exchange Carriers ("LECs") for the
provision of local telephone services, as well as with alternative service
providers including CLECs. Cable operators are also entering the local
exchange market in some locations. Other sources of competitive local and long
distance telephone services include: Commercial mobile radio services
providers, including cellular carriers (such as Bell Atlantic Mobile
Services); personal communications services carriers such as Sprint PCS; and
enhanced specialized mobile radio services providers (such as NexTel).
We face, and expect to continue to face, significant competition for long
distance telephone services from the inter-exchange carriers ("IXCs"),
including AT&T, Sprint and MCI WorldCom, which account for the majority of all
U.S. long distance revenue. The major long distance service providers benefit
from established market share and from established trade names through
nationwide advertising. However, we regard our long-distance service as a
complementary service rather than a principal source of revenue. Certain IXCs,
including AT&T, MCI WorldCom and Sprint, have also announced their intention
to offer local services in major U.S. markets using their existing
infrastructure in combination with resale of incumbent LEC service, lease of
unbundled local loops or other providers' services. Internet-based telephony,
a potential competitor for low cost telephone service, is also developing and
we are also pursuing this technology.
All of our video services face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment. Other sources include off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. Alternative video distribution technologies
include traditional cable networks, wireless local video distribution
technologies, and home satellite dish ("HSD") earth stations. Home satellite
systems enable individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. The Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Act") contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to HSD owners certain satellite-delivered cable programming at
competitive costs. We face additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The FCC and
Congress have adopted policies providing a more favorable operating
environment for new and existing technologies that compete, or may compete,
with our various video distribution systems. These technologies include, among
others, Direct Broadcast Satellite ("DBS") service whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
We expect that our video programming services will face growing competition
from current and new DBS service providers. The FCC has recently determined
that DBS is the fastest-growing competitor to franchised cable operations. We
also compete with wireless program distribution services such as Multi-Channel
Multi-Point Distribution Service which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers.
The Internet access market is extremely competitive and highly
fragmented. Competition in this market is expected to intensify. Our current
and prospective competitors include established online services; local,
regional and national ISPs; national and international telecommunications
companies including Regional Bell Operating Companies ("RBOCs") such as Bell
Atlantic; and affiliates of incumbent cable providers. Increased competition
may create downward pressure on the pricing of and margins from Internet
access services.
Other new technologies, including Internet-based services, may compete
with services that we can offer. Advances in communications technology as well
as changes in the marketplace and the regulatory and legislative environment
are constantly occurring. Thus, we cannot predict the effect that ongoing or
future developments might have on the voice, video and data industries or on
our operations or financial condition.
We believe that among the existing competitors, the incumbent LECs,
incumbent cable providers and the CLECs are most of our competitors in the
delivery of "last mile" connections for voice and video services.
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Incumbent LECs
In each of our target markets for advanced fiber optic networks, we face,
and expect to continue to face, significant competition from the incumbent
LECs. The incumbent LECs include Bell Atlantic in the Northeast Corridor, and
Pacific Bell in California, both of which currently dominate their local
telephone markets. We compete with the incumbent LECs in our markets for local
exchange services on the basis of product offerings, including the ability to
offer bundled voice and video service, reliability, state-of-the-art
technology and superior customer service, as well as price. We believe that
our advanced fiber optic networks provide superior technology for delivering
high-speed, high-capacity voice, video and data services compared to the
incumbent LECs' primarily copper wire based networks. However, the incumbent
LECs have long-standing relationships with their customers. They have also
begun to expand the amount of fiber facilities in their networks, to offer
broadband digital transmission services and retail Internet access, and to
prepare to re-enter the long distance telephone service market. The pending
merger between Bell Atlantic and GTE Corporation may enhance the combined
entity's ability to compete with us in the Northeast corridor markets. The
pending merger between SBC and Ameritech may also increase competitive
pressures in the Northeast corridor if SBC, which already owns a Connecticut
incumbent LEC and several wireless franchises in this region, continues to
pursue a nationwide strategy.
Under the Telecommunications Act of 1996 (the "1996 Act"), and ensuing
federal and state regulatory initiatives, barriers to local exchange
competition are being slowly removed. The introduction of such competition,
however, also establishes the predicate for the RBOCs, such as Bell Atlantic,
to provide in-region interexchange long distance services. The RBOCs are
currently allowed to offer "incidental" long distance service in-region and to
offer out-of-region long distance service. Once the RBOCs are allowed to offer
in-region long distance services, they will also be in a position to offer
single source local and long distance service similar to what we offer and
proposed by the three largest IXCs: AT&T, MCI/WorldCom and Sprint. We expect
that the increased competition made possible by regulatory reform will result
in certain pricing and margin pressures in the telecommunications services
business.
We have sought, and will continue to seek, to provide a full range of
local voice services which compete with incumbent LECs in our service areas.
We expect that competition for local telephone services will be based
primarily on quality, capacity and reliability of network facilities, customer
service, response to customer needs, service features and price, and will not
be based on any proprietary technology. Our new advanced fiber optic networks
employ dual backbone architecture and state-of-the-art technology and, as a
result, we may have capital cost and service quality advantages over some of
the networks of the incumbent LECs. We may also have a competitive advantage
because we are able to deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others, with which we
compete, to provide a wide variety of video services directly to subscribers.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. We cannot predict the likelihood of success of video
service ventures by LECs or the impact such competitive ventures may have on
us. Some LECs, including Bell Atlantic, also offer Internet access services
that compete with our services.
Incumbent Cable Television Service Providers
Certain of our video service businesses compete with incumbent wireline
cable companies in their respective service areas. In particular, our advanced
fiber optic networks compete for cable subscribers with the major wireline
cable operators in our markets, such as Time-Warner Cable in New York City,
Cablevision in Boston and TCI in Washington, D.C. Our wireless video service
in New York City competes primarily with Time-Warner Cable. We believe that
the expanded capacity and fiber-to-node architecture of our advanced fiber
optic networks make us better equipped to provide high-capacity communications
services than traditional coaxial cable based networks using "tree and branch"
architecture. Our Lehigh Valley, Pennsylvania hybrid fiber/coaxial cable
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television system competes with an alternate service provider, Service
Electric, which also holds a franchise for the relevant service area.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis, and the 1992 Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable systems. Therefore, well-financed
businesses from outside the cable industry, such as the public utilities that
own certain of the conduits or poles which carry cable, may become competitors
for franchises or providers of competing services. Telephone companies or
others may also enter the video distribution market by becoming open video
service operators as we have done in several markets, pursuant to Section 653
of the Communications Act. No local franchise is required for the provision of
such service. See "Regulation of Video Services" below.
CLECs and Other Competitors
We also face, and expect to continue to face, competition from other
potential competitors in certain of our geographic markets. Other CLECs, such
as subsidiaries of AT&T and MCI/WorldCom, compete for local telephone
services, although they have to date focused primarily on the market for
commercial customers rather than residential customers. In addition, potential
competitors capable of offering private line and special access services also
include other smaller long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators
and private networks built by large end-users, including Winstar, Dualstar and
New Vision. However, we believe that, at least initially, we are relatively
unique in our markets in offering bundled voice, video and data services
primarily to customers in residential areas over our own advanced fiber optic
network.
Internet Services
The Internet access market is extremely competitive and highly
fragmented. No significant barriers to entry exist, and accordingly
competition in this market is expected to intensify. Our current and
prospective competitors include many large companies with substantially
greater market presence and financial and other resources. We compete directly
or indirectly with:
o established online services, such as America Online, the Microsoft
Network and Prodigy;
o local, regional, and national ISPs such as PSINet, EarthLink,
Mindspring and Rocky Mountain Internet;
o the Internet services of national and international
telecommunications companies, such as AT&T, GTE, MCI/WorldCom and
Cable & Wireless;
o Internet access offered by RBOCs such as Bell Atlantic; and
o online services offered by incumbent cable providers, such as At
Home and Roadrunner.
Bell Atlantic has recently asked the FCC to authorize it to build a
regional high-speed network, which would serve as an Internet backbone, and to
exempt this network from pricing and other regulatory restrictions. The
network would span the states from Maine to Virginia. The acquisition of
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 has completed the
acquisition of TCI's cable television networks, which gives it a significant
ownership interest in At Home, an ISP. Diversified competitors may bundle
other services and products with Internet connectivity services, potentially
placing us at a competitive disadvantage. In addition, competitors may create
downward pressure on the pricing of and margins from Internet access services.
Competition could also impact our ability to participate in transit agreements
and peering arrangements, which could in turn adversely effect the speed of
service that we can provide to our customers.
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Other new technologies may become competitive with our services. A
provider of Limited Multi Distribution Systems ("LMDS") recently began
offering wireless Internet and video programming services in New York City and
has announced plans to offer telephone service in the future. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. In addition,
a continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors. We
cannot predict whether competition from developing and future technologies or
from future competitors will have a material impact on our operations or
financial condition.
Regulation
Our telephone and video programming transmission services are subject to
federal, state and local government regulation. The 1996 Act introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments. The 1996 Act was intended to promote competition and
decrease regulation of these segments of the industry. The law delegates to
both the FCC and the states broad regulatory and administrative authority to
implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telephone and video programming communications businesses.
The Act also preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations
and sets basic standards for relationships between telecommunications
providers.
The 1996 Act removes barriers to entry in the local exchange telephone
market by preempting state and local laws that restrict competition and by
requiring LECs to provide nondiscriminatory access and interconnection to
potential competitors, such as cable operators, wireless telecommunications
providers, and long distance companies. In addition, the 1996 Act provides
relief from the earnings restrictions and price controls that have governed
the local telephone business for many years. The 1996 Act will also, once
certain thresholds are met, allow incumbent RBOCs to enter the long distance
market within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require LECs to
open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as ours are now
able to interconnect with the incumbent LECs in order to provide local
exchange services. Numerous parties appealed certain aspects of these
regulations, and implementation of several provisions of the rules was delayed
while the courts considered these appeals. On January 25, 1999, the Supreme
Court issued an opinion confirming the FCC's authority to issue regulations
implementing the pricing and other provisions of the 1996 Act and reinstating
most of the challenged rules. However, the Supreme Court vacated a key FCC
rule identifying the network elements that incumbent LECs are required to
unbundle. This decision will likely require the FCC to conduct additional
proceedings to determine new unbundling standards. The outcome of such
proceedings cannot be predicted. Also, while the Supreme Court confirmed that
the FCC has authority to issue rules implementing the 1996 Act, particular
rules still may be challenged in future court proceedings. Future regulatory
proceedings and court appeals may create delay and uncertainty in effectuating
the interconnection and local competition provisions of the 1996 Act. While
the courts were reviewing the FCC rules, we had entered into interconnection
agreements with Bell Atlantic covering all of our target market area that are
generally consistent with the FCC guidelines. Those agreements remain in
effect, although some are subject to termination on or after July 1, 1999. We
cannot assure you, however, that we will be able to obtain or enforce future
interconnection agreements, or obtain renewal of existing agreements, on
acceptable terms.
The 1996 Act establishes certain conditions before RBOCs are allowed to
offer interLATA long distance service to customers within their local service
regions. These conditions include 14 "checklist" requirements designed to open
the RBOC networks to competitors. To date, no RBOC has received FCC
authorization to
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provide in-region long distance service, but it is likely that several RBOCs
will seek authorization in 1999. Bell Atlantic is likely to seek authorization
for New York and possibly other states in its region. If an RBOC is authorized
to provide in-region long distance service in one or more states, the RBOC may
be able to offer "one-stop shopping" services that compete with our service
offerings. See "Business-Competition". In addition, the RBOC will lose the
incentive it now has to rapidly implement the interconnection provisions of
the 1996 Act in order to obtain in-region authority, although the RBOC will
still be subject to a legal obligation to comply with those provisions.
The 1996 Act also makes far-reaching changes in the regulation of video
programming transmission services. These include changes to the regulations
applicable to video operators, the elimination of restrictions on telephone
company entry into the video business, and the establishment of a new OVS
regulatory structure for telephone companies and others. Under the 1996 Act
and implementing rules adopted by the FCC, local telephone companies,
including both incumbent LECs such as Bell Atlantic, and CLECs such as RCN,
may provide service as traditional cable television operators subject to
municipal cable television franchises, or they may choose to provide their
programming over non-franchised open video systems subject to certain
conditions. The ability to provide OVS service without having obtained a local
franchise, however, has been called into question by a recent decision. See
"Regulation of Video Services" below. The conditions include making available
a portion of their channel capacity for use by unaffiliated program
distributors and satisfying certain other requirements, including providing
capacity for public, educational and government channels, and paying a gross
receipts fee equal to the franchise fee paid by the incumbent cable television
operator. We are one of the first CLECs to provide television programming over
an advanced fiber optic network under the OVS regulations implemented by the
FCC under the 1996 Act. As discussed below, we are currently providing OVS
service in the City of Boston, in the City of New York and in a number of
communities surrounding Boston. We are also negotiating, in the District of
Columbia, similar agreements in Northern New Jersey, Philadelphia and
surrounding communities, and San Francisco and surrounding communities.
Starpower is negotiating similar OVS agreements and local franchises in
communities surrounding Washington D.C.
Regulation of Voice Services
Our voice business is subject to regulation by the FCC at the federal
level for interstate telephone services (i.e., those that originate in one
state and terminate in a different state). State regulatory commissions have
jurisdiction over intrastate communications (i.e., those that originate and
terminate in the same state).
State Regulation of Intrastate Local and Long Distance Telephone
Services. Our intrastate telephone services are regulated by the public
service commissions or comparable agencies of the various states in which we
offer these services. Our subsidiaries or affiliates have received authority
to offer intrastate telephone services, including local exchange service, in
California, Delaware, the District of Columbia, Maryland, Massachusetts,
Nevada, New Jersey, New York, Pennsylvania, Rhode Island, Vermont and
Virginia. We have applied for authority to offer these services in Arizona,
Connecticut, Maine and New Hampshire. Starpower has separately obtained
similar authority in Maryland, Virginia and the District of Columbia. Our
resale and interconnection agreements have been approved, pursuant to Section
252 of the Communications Act, by state regulatory commissions in Arizona,
Delaware, the District of Columbia, Maine, Maryland, Massachusetts, New York,
New Jersey, New Hampshire, Pennsylvania, Rhode Island, Vermont and Virginia.
RCN Long Distance Company is authorized to offer intrastate long distance
services in 48 states nationwide. RCN Long Distance Company is permitted to
resell intrastate long distance services both to other carriers, including our
local operating subsidiaries and Starpower for resale to their end user
subscribers, and to our own end user customers.
FCC Regulation of Interstate and International Telephone Services.
Through several of our subsidiaries, including RCN Long Distance Company, we
may provide domestic interstate telephone services nationwide under
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tariffs on file at the FCC. We have been authorized by the FCC under Section
214 of the 1996 Act to offer worldwide international services as well.
Local Regulation of Telephone Services. Municipalities also regulate
limited aspects of our voice business by, for example, imposing various zoning
requirements. In some instances, they require telecommunications licenses,
franchise agreements and/or installation permits for access to local streets
and rights-of-way. In New York City, for example, we will be required to
obtain a telephone franchise in order to provide voice services using our
advanced fiber optic network facilities located in the streets of New York
City, although services may be provided over certain leased or resold
facilities while we wait to receive a franchise.
Regulation of Video Services
Open Video Systems. At various times between February 1997 and July 1998,
our subsidiaries and affiliates have been certified by the FCC to operate OVS
networks in New York City, Boston, Washington, Philadelphia and San Francisco,
and communities surrounding each of these cities, and in the Northern New
Jersey area. Initiation of OVS services is subject to completion of an open
enrollment period for non-affiliated video programmers to seek capacity on the
systems and after negotiation of certain agreements with local governments.
The initial open enrollment period for each of these systems has expired,
except for the Northern New Jersey system, where the open enrollment period
has not yet begun. We executed an agreement with the City of Boston on June 2,
1997, and initiated OVS service in the City on that day. Under our agreement
with the City of Boston, we will be required to pay a fee to the City equal to
5% of video revenues. We have entered into similar OVS agreements or are in
the process of negotiating agreements with certain other Boston-area
municipalities, either to offer OVS services or franchised cable television
services. We entered into an agreement with the City of New York on December
29, 1997 and have initiated OVS service in the Borough of Manhattan. RCN also
provides video distribution service in Manhattan and a portion of the Bronx
using microwave facilities and antennas located at multiple dwelling units. On
July 10, 1998, we supplemented our agreement with the City of New York to
include all five boroughs. On October 26, 1998, Starpower entered into an
agreement with the District of Columbia and initiated OVS service in the
District in the last quarter of 1998. Starpower has entered into similar
agreements or is in the process of negotiating agreements with numerous
suburban communities near Washington, D.C., to offer either OVS services or
franchised cable television services.
In areas where we offer video programming services as an OVS operator, we
are required to make any "open capacity" on the system available to
unaffiliated video program providers ("VPPs"). The commission's rules permit
us to retain up to one-third of system capacity for our own (or our
affiliates') use. Under the OVS regulations, during initial open enrollment
period we must offer at least two-thirds of our capacity to unaffiliated
parties, if demand for such capacity exists during the open enrollment period.
In certain areas, at the request of local officials, we are in discussions to
explore the feasibility of obtaining a cable franchise instead of an OVS
agreement. We will consider providing RCN video service under franchise
agreements rather than OVS certification, if franchise agreements are
preferred by the local authorities and can be obtained on acceptable terms and
conditions. We will consider the relative benefits of OVS certification versus
local franchise agreements, including the possible imposition build-out
requirements, before making any decisions.
The U.S. Court of Appeals for the Fifth Circuit has recently released a
decision approving some portions of the FCC's OVS rules but striking down
other portions. Although a number of the Court's rulings are favorable to OVS
operators, others could have an adverse impact on our OVS operations and
planning. The Court's most significant decision was to strike down the FCC's
rule preempting local authority to franchise OVS operators. The FCC's rules
had set forth a relatively simple procedure at the FCC for rapid certification
of each OVS system on a regional basis and permitted local authorities to
regulate OVS only as to rights-of-way administration and in other minor
respects. One of the principal advantages of OVS as structured by Congress and
by the FCC was to eliminate the time, expense, and uncertainty generally
required to secure a local franchise. The Court's action allowing local
governments to require area-by-area franchising may significantly reduce the
advantage of OVS operation as compared with traditional franchising and delay
achieving agreements with local governments. We believe the
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Court's decision is erroneous in its application of law and have sought
reconsideration by the full court. The FCC, which is the respondent before the
Fifth Circuit, has also sought reconsideration. In the event the court denies
reconsideration, it is not clear how the FCC will modify its OVS policy and
rules to take account of the Court's specific rulings. The U.S. Courts of
Appeal do not routinely grant requests to reconsider their rulings and when
they do a significant period of time is generally required for the
consideration of such requests. However, in many instances RCN, at the
insistence of local authorities, has been negotiating franchise agreements and
agreeing to provisions in OVS right-of-way agreements which to some extent
erode the differences between the two modes of operation. Accordingly, while
the ruling is disadvantageous to us, we expect to continue to expand our video
service offerings.
The FCC's rules require OVS operators to make their facilities available
to video program providers on a non-discriminatory basis, with certain
exceptions. One exception is that competing in-region cable operators are not
entitled to become video program providers on an OVS except in certain limited
circumstances. The incumbent cable operator in Boston, Cablevision of Boston,
Inc., sought an order from the FCC compelling us to provide it with certain
data on our Boston OVS system and declaring Cablevision an eligible video
programming provider on our system. The FCC's Cable Services Bureau denied its
request and that denial has become final. Time Warner Cable Co., which
operates franchised cable systems in many suburban Boston communities included
within our OVS certification, also sought an order compelling us to release
certain OVS system data and to declare it eligible for carriage on our system.
Unlike Cablevision, Time Warner is not competing with any RCN-provided OVS
service and restricted its request to communities where it is not the
franchised cable operator. Time Warner also petitioned the FCC to impose fines
or cancel our OVS authority. The Cable Services Bureau partially granted the
data request and partially denied it but found too little evidence to justify
further exploration of our good faith in acquiring OVS authority. We have
sought partial reconsideration of the Bureau's order, which is currently
pending. Time Warner filed a similar complaint against us in New York City
where we compete with it for video distribution business in Manhattan. Time
Warner asked for system data concerning parts of New York City in which it
does not hold a franchise for cable service. The FCC's Cable Services Bureau
partially granted Time Warner's complaint, and partially denied it, relying on
its prior decision in the Time Warner complaint in the Boston area. We have
sought partial reconsideration of that decision and Time Warner has asked the
full commission to review that portion of the Cable Bureau's decision which
denied certain of Time Warner's data requests.
Two additional cable company complaints have been filed against
Starpower, seeking data and a determination of eligibility for carriage on the
metropolitan Washington OVS system. As in the prior complaints, they challenge
our status as an OVS operator and seek to revoke our OVS authority. These
complaints were filed by Media General Cable of Fairfax, Inc., which operates
franchised cable service within the projected service area of Starpower's OVS
system, and Media General Cable of Fredericksburg, Inc. which is an affiliate
of Media General Cable of Fairfax, Inc. and operates a cable system beyond
Starpower's service area. Both claimed to be seeking system data for areas in
which they do not provide franchised service. Starpower declined to provide
system data to Media General of Fairfax on the ground that, as an in-region
competitive cable company, it was not entitled to the data or to be carried on
the system. The request of Media General of Fredericksburg was denied on the
ground that, as an affiliate of Media General of Fairfax, it was not entitled
under FCC rules to the requested data or to be carried on the system.
Starpower responded to both Media General Complaints on December 14, 1998.
Media General has also sought to initiate discovery against Starpower. The
Cable Services Bureau has not yet acted on the Media General complaints.
Cable industry representatives have opposed or commented adversely on two
other RCN OVS initiatives. In respect to our application for OVS authority in
the San Francisco area, the California Cable Television Association filed an
opposition, alleging that we were misusing the OVS rules to compete unfairly
against franchised cable operators. The Pennsylvania Cable &
Telecommunications Association filed comments on our OVS application for OVS
authority in the Philadelphia region, making similar allegations but not
formally opposing the application. The Cable Services Bureau granted both of
our applications, indicating that our applications were consistent with the
rules and that the opposing parties had not provided sufficient evidence to
justify initiating any regulatory
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action against us. There is language in each of these Cable Bureau
determinations involving our implementation of the OVS concept which leave
open the possibility for adverse parties to challenge our status as an OVS
operator. We believe that we are operating in strict conformity with all
applicable provisions of the law and will continue to defend our OVS roll-outs
against what we believe are anti-competitive requests for data or carriage by
competing in-region cable operators. However, we cannot assure you that the
FCC will resolve the pending OVS complaints in our favor. If the FCC were to
grant any such complaints and as a result we were obliged to share system data
with our local competitors, we would be forced to reassess the desirability of
continuing to operate in certain markets as an OVS operator as compared with
seeking traditional cable franchises. We do not believe that abandoning our
OVS certifications under such circumstances would materially adversely affect
our video distribution activities.
As in the case of traditional franchised cable systems, OVS operators
must in virtually all locations have access to public rights-of-way for their
distribution plant. In a number of jurisdictions local authorities have
attempted to impose rights-of-way fees on us which we believe are in violation
of federal law. A number of FCC and judicial decisions have addressed the
issues posed by the imposition of rights-of-way fees on CLECs and on video
distributors. To date the state of the law is uncertain and may remain so for
some time. The obligation to pay local rights-of-way fees which are excessive
or discriminatory could have adverse effects on our business activities. The
incumbent cable operator in Boston, MA, Cablevision of Boston, Inc., recently
filed suit in U.S. District Court in Boston against the City of Boston,
RCN-BECOCOM, RCN, BECOCOM and others, alleging that the City had followed a
discriminatory policy in administering access to public rights-of-way for the
installation and use of underground conduit and that the private defendants
had participated in an effort to unlawfully construct and use underground
conduit. Cablevision claimed that the defendants were in violation of the 1996
Act and Massachusetts state law, and sought a preliminary injunction. RCN and
the other defendants denied participating in any unlawful activity. The Court
has denied the preliminary injunction and issued a written memorandum of
decision expressing some doubts about the underlying merits of Cablevision's
claims. Cablevision filed an appeal of the District Court's ruling with the
First Circuit Court of Appeals on February 26, 1999. On March 15, 1999 the
district judge stayed the litigation pending the outcome of Cablevision's
appeal. We cannot assure you that Cablevision will not further pursue the
litigation nor that if it does so the outcome will be favorable to RCN. Oral
argument on the appeal will be scheduled for June 1999. Cablevision has filed
an amended complaint in the District Court, but the District Court has stayed
that proceeding until the First Circuit Court rules on the appeal. We cannot
assure you that Cablevision will not further pursue the litigation nor that if
it does so the outcome will be favorable to us.
Access issues have also arisen in a proceeding before the Massachusetts
Department of Telecommunications and Energy (the "MDTE"). In 1997, the MDTE
opened an investigation into Boston Edison Company's compliance with a MDTE
order in 1993 that permitted Boston Edison to invest up to $45 million in its
unregulated subsidiary Boston Edison Technology Group for three limited
purposes. RCN-BECOCOM intervened in the current proceeding, as did Cablevision
Systems Corporation and the New England Cable Television Association, Inc.,
along with others. Hearings began in December 1998 and are still proceeding.
The intervenors, Cablevision in particular, have advocated that if the MDTE
finds that Boston Edison's investment in RCN-BECOCOM violated the 1993 Order,
then Boston Edison should be forced to divest itself of its interest in
RCN-BECOCOM, that RCN- BECOCOM should be subject to the same terms and
conditions as other cable television providers who seek to attach their
facilities to Boston Edison facilities, and that installed RCN-BECOCOM cables
and fiber-optic facilities should be relocated. Boston Edison is vigorously
defending the propriety of its compliance with the MDTE's 1993 Order, and its
investment in RCN-BECOCOM. We cannot assure you that the MDTE will not
determine that Boston Edison violated the MDTE's 1993 Order nor can we assure
you as to the nature of any remedy that the MDTE may determine to be
appropriate including those proposed remedies which are equitable in nature.
We are participating in the proceeding and plan to take such action as we deem
appropriate to protect our rights.
Prior to our certification as an OVS provider, we offered limited video
programming services using the Video DialTone Transport ("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
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an extension of time to comply with the newly adopted OVS rules. Nonetheless,
the FCC did not direct MFS/WorldCom and RCN to cease video programming
distribution operations over the MFS/WorldCom platform. One of the incumbent
cable television companies in New York City has filed a complaint with the New
York Public Service Commission challenging the former, pre-OVS, operations of
RCN and WorldCom under the VDT framework, which remains pending before that
commission.
Wireless Video Services. Our 18 GHz wireless video services in New York
City are distributed using microwave facilities provided by Bartholdi Cable
under temporary authorizations issued to Bartholdi Cable by the FCC. Bartholdi
Cable has agreed to provide us with transmission services until we have either
converted the wireless video subscribers to our advanced fiber optic network
facilities or have obtained FCC authority to provide services under our own
wireless radio licenses. In addition, Bartholdi Cable has agreed to transfer
to us the transmission equipment on demand. Bartholdi Cable's obligation to
provide transmission services is subject to Bartholdi Cable having licenses
from the FCC to provide these services. The qualifications of Bartholdi Cable
to hold certain of the licenses needed to provide transmission services to us
are at issue in an FCC proceeding in which an initial decision was released on
March 6, 1998. In the initial decision, the Administrative Law Judge found
Bartholdi Cable unqualified with respect to 15 such licenses. The
Administrative Law Judge declared that the initial decision would become
effective 50 days after its release unless Bartholdi Cable filed exceptions to
the initial decision within 30 days of its release or the FCC elected to
review the case on its own motion. Bartholdi Cable filed exceptions to the
initial decision on April 7, 1998. Because of the uncertainty as to Bartholdi
Cable's right in the future to offer transmission services to us, we filed our
own license applications at the FCC for all of the microwave transmission
paths which are currently being used by Bartholdi Cable to provide us with
transmission services. In light of the increased uncertainties resulting from
the initial decision in the FCC proceeding, we expect now actively to pursue
our license applications. While we expect to receive authorizations to
transmit over these microwave paths, we cannot assure you that we will be able
to offer wireless video services under our own FCC licenses or that the FCC's
investigation will be resolved favorably. Our failure to obtain these licenses
or resolve these proceedings would materially adversely affect our wireless
video operations in New York City.
We cannot assure you that we will be able to obtain or retain all
necessary authorizations needed to construct advanced fiber optic network
facilities, to convert our wireless video subscribers to an advanced fiber
optic network or to offer wireless video services under our own FCC licenses.
Hybrid Fiber/Coaxial Cable. Our hybrid fiber/coaxial cable systems are
subject to regulation under the 1992 Act. The 1992 Act regulate rates for
cable services in communities that are not subject to "effective competition,"
certain programming requirements, and broadcast signal carriage requirements
that allow local commercial television broadcast stations to require a cable
system to carry the station. Local commercial television broadcast stations
may elect once every three years to require a cable system to carry the
station ("must-carry"), subject to certain exceptions, or to withhold consent
and negotiate the terms of carriage ("retransmission consent"). A cable system
generally is required to devote up to one-third of its activated channel
capacity for the carriage of local commercial television stations whether
under the mandatory carriage or retransmission consent requirements of the
1992 Act. Local non-commercial television stations are also given mandatory
carriage rights. The FCC recently issued rules establishing standards for
digital television ("DTV"). The FCC's rules require television stations to
simulcast their existing television signals ("NTSC") and DTV signals for a
period of years. During this simulcast period, it is unclear whether
must-carry rules will apply to DTV signals. The FCC has initiated a rule
making proceeding seeking comment on the carriage of broadcast DTV signals by
cable and OVS operators during the transitional period to full digital
broadcasting. The FCC's proceeding addresses the need for the digital systems
to be compatible, seeks comment on possible changes to the mandatory carriage
rules, and explores the impact carriage of DTV signals may have on other FCC
rules. The cable industry has generally opposed many of the FCC's proposals,
on the grounds that they constitute excessively burdensome obligations on the
industry. The Communications Act permits franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. Cable systems with 36 or more channels must
designate a portion of their channel capacity for commercial leased access by
third parties to provide programming that may compete with services offered by
the cable operator.
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On September 8, 1997, we were notified by the FCC that it had ruled that
certain of our upper levels of service for our New Jersey systems were
regulated levels of service and that our rates for these levels of service
exceeded the rates allowed by the FCC rate regulation rules. Since that time,
RCN and the FCC have negotiated a settlement under which the FCC finds that
our upper levels of service for our New Jersey and certain New York systems
are "New Product Tiers". Our rates for 1997 and prior years for those systems
are approved, except that we will give a $5.00 per subscriber refund to all
subscribers in our New Jersey systems and a refund of $3.30 per subscriber in
certain of our New York systems. The settlement has been subject to public
comment and is now awaiting final approval by the FCC. We do not believe that
the ultimate resolution of this matter, whether the settlement is finally
approved or not, will have a material impact on our results of operations or
financial condition.
Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and local
regulation, typically imposed through the franchising process. The terms and
conditions of state or local government franchises vary materially from
jurisdiction to jurisdiction. Generally, they contain provisions governing
cable service rates, franchise fees, franchise term, system construction and
maintenance obligations, customer service standards, franchise renewal, sale
or transfer of the franchise, territory of the franchisee and use and
occupancy of public streets and types of cable services provided. Local
franchising authorities may award one or more franchises within their
jurisdictions and prohibit non-grandfathered cable systems from operating
without a franchise. The Communications Act also provides that in granting or
renewing franchises, local authorities may establish requirements for
cable-related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications Act
limits franchise fees to 5% of revenues derived from cable operations and
permits the cable operator to seek modification of franchise requirements
through the franchise authority or by judicial action if changed circumstances
warrant.
Our ability to provide franchised cable television services depends
largely on our ability to obtain and renew our franchise agreements from local
government authorities on generally acceptable terms. We currently have 91
franchise agreements relating to the hybrid fiber/coaxial cable systems in New
York (outside New York City), New Jersey and Pennsylvania. These franchises
typically contain many conditions, such as time limitations on commencement
and completion of construction, conditions of service, including the number of
channels, the provision of free service to schools and certain other public
institutions, and the maintenance of insurance and indemnity bonds. These
franchises provide for the payment of fees to the issuing authorities and
generally range from 3% to 5% of revenues. The duration of these outstanding
franchises presently varies up to the year 2011. To date, all of our cable
franchises have been renewed or extended, generally at or before their stated
expirations and on acceptable terms. Approximately 39 of our hybrid
fiber/coaxial cable systems' franchises are due for renewal within the next
three years. We cannot assure you that we will be able to renew our franchises
on acceptable terms. No single franchise accounts for more than 4% of our
total revenue. Our five largest franchises account for approximately 11% of
our total revenue.
The hybrid fiber/coaxial cable systems are also subject to certain
service quality standards and other obligations imposed by the FCC and, where
effective competition has not been demonstrated to exist, to rate regulation
by the FCC as well. Our cable television system in Pennsylvania has been
operating in a competitive cable environment for almost 30 years, with
approximately 80% of the homes passed having access to an alternate cable
operator, Service Electric Cable TV. As a result, our Pennsylvania cable
system is exempt from many FCC cable television regulations, including rate
regulation. Our other cable television systems in New York State and New
Jersey currently remain subject to FCC rate regulation. As required by the
1996 Act, however, all cable programming services will be deregulated if
effective competition is shown to exist in the franchise area, or by March 31,
1999, whichever date is sooner. There has been widespread discussion in
Congress about possible legislation to keep cable rate regulation in effect
longer. We cannot assure you that such legislation will not be adopted. We
anticipate that the remaining provisions of the 1992 Act that do not relate to
rate regulation, including provisions relating to retransmission consent and
customer service standards, will remain in place and may reduce the future
operating margins of our hybrid fiber/coaxial cable television businesses as
video programming competition develops in our cable television service
markets.
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The FCC is required to regulate the rates, terms and conditions imposed
by public utilities for cable systems' use of utility pole and conduit space
unless state authorities can demonstrate that they adequately regulate pole
attachment rates. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. In some cases, utility companies have
increased pole attachment fees for cable systems that have installed fiber
optic cables and that are using these cables for the distribution of non-video
services. The FCC concluded that, in the absence of state regulation, it can
determine whether utility companies have justified their demand for additional
rental fees and that the Communications Act does not permit disparate rates
based on the type of service provided over the equipment attached to the
utility's pole. The 1996 Act and the FCC's implementing regulations modify the
current pole attachment provisions of the Communications Act. It immediately
permits certain providers of telecommunications services to rely upon the
protections of the current law and require that utilities provide cable
systems and telecommunications carriers with nondiscriminatory access to any
pole, conduit or right-of-way, controlled by the utility. The FCC has recently
adopted new regulations to govern the charges for pole attachments used by
companies providing telecommunications services, including cable operators.
These new pole attachment rate regulations will become effective five years
after enactment of the 1996 Act, and any increase in attachment rates
resulting from the FCC's new regulations will be phased in equal annual
increments over a period of five years beginning on the effective date of the
new FCC regulations. The ultimate outcome of these rulemakings and the
ultimate impact of any revised FCC rate formula or of any new pole attachment
rate regulations on us or our businesses cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any cable
operator or satellite video programmer affiliated with a cable company, or
with a common carrier providing video programming directly to its subscribers,
from favoring an affiliated company over competitors. These programmers are
required to sell their programming to other multichannel video distributors.
These provisions limit the ability of program suppliers affiliated with cable
companies or with common carriers providing satellite delivered video
programming directly to their subscribers to offer exclusive programming
arrangements to their affiliates. Except in limited circumstances, however,
these statutory and regulatory limitations do not apply to programming which
is distributed other than by satellite. We are experiencing difficulty in
securing access to certain local sports programming in the New York City
market, which we consider important to successful competition in that market.
The Communications Act also includes provisions concerning horizontal and
vertical ownership of cable systems, customer service, subscriber privacy,
marketing practices, equal employment opportunity, obscene or indecent
programming, regulation of technical standards and equipment compatibility.
In addition to the FCC regulations previously discussed, there are other
FCC regulations covering areas such as:
o equal employment opportunity;
o syndicated program exclusivity;
o network program non-duplication;
o registration of cable systems;
o maintenance of various records and public inspection files;
o microwave frequency usage;
o lockbox availability;
o sponsorship identification;
o antenna structure notification;
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o tower marking and lighting;
o carriage of local sports broadcast programming;
o application of rules governing political broadcasts;
o limitations on advertising contained in non-broadcast children's
programming;
o consumer protection and customer service;
o ownership and access to cable home wiring and home wiring in
multiple dwelling units;
o indecent programming;
o programmer access to cable systems;
o programming agreements;
o technical standards; and
o consumer electronics equipment compatibility and closed captioning.
The FCC has the authority to enforce its regulations through imposing
substantial fines, issuing cease and desist orders and/or imposing other
administrative sanctions, such as revoking FCC licenses needed to operate
certain transmission facilities often used in connection with cable
operations. We have difficulty gaining access to the video distribution wiring
in certain multiple dwelling units in the City of Boston in which Cablevision
is the incumbent provider of video services. In some buildings the management
will not permit us to install our own distribution wiring and Cablevision has
not been willing to permit us to use the existing wiring on some equitable
basis when we wish to initiate service to an individual unit previously served
by Cablevision. We have sought a ruling from the FCC's Cable Services Bureau
that existing FCC inside wiring rules require Cablevision to cooperate with us
to make such wiring available to it. The matter is currently pending before
the FCC's Cable Services Bureau staff.
Other bills and administrative proposals pertaining to cable television
have previously been introduced in Congress or considered by other
governmental bodies over the past several years. There will likely be
legislative proposals in the future by Congress and other governmental bodies
relating to the regulation of communications services.
Cable television systems are subject to federal compulsory copyright
licensing covering the retransmission of television and radio broadcast
signals. In exchange for filing certain reports and contributing a percentage
of their basic revenues to a federal copyright royalty pool, cable operators
can obtain blanket licenses to retransmit the copyrighted material on
broadcast signals.
Other Regulatory Issues
The data services business, including Internet access, is largely
unregulated at this time apart from federal, state, and local laws and
regulations applicable to businesses in general. However, we cannot assure you
that this business will not become subject to regulatory restraints. Some
federal, state, local and foreign governmental organizations are considering a
number of legislative and regulatory proposals with respect to Internet user
privacy, infringement, pricing, quality of products and services and
intellectual property ownership. We are also unsure how existing laws will be
applied to the Internet in areas such as property ownership, copyright,
trademark, trade secret, obscenity and defamation. Additionally, some
jurisdictions have sought to impose taxes and other burdens
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on providers of data services, and to regulate content provided via the
Internet and other information services. We expect that proposals of this
nature will continue to be debated in Congress and state legislatures in the
future. In addition, although the FCC has on several occasions rejected
proposals to impose additional costs on providers of Internet access service
and other data services for the use of local exchange telephone network
facilities for access to their customers, the FCC or Congress may consider
similar proposals in the future. The adoption of new laws or the 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.
We have interconnection agreements with Bell Atlantic and other incumbent
local exchange carriers ("ILECs") that entitle us to collect reciprocal
compensation payments from them for local telephone calls that terminate on
our facilities. We make similar payments for outbound local calls we deliver
to the incumbent local exchange carriers. However, ILECs around the country
have been contesting whether the obligation to pay reciprocal compensation to
CLECs should apply to local telephone calls from an ILEC's customers to
Internet service providers served by CLECs. The ILECs claim that this traffic
is interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. CLECs have contended that
the interconnection agreements provide no exception for local calls to
Internet service providers and reciprocal compensation is therefore
applicable. Currently, over 25 state commissions and several federal and state
courts have ruled that reciprocal compensation arrangements do apply to calls
to Internet service providers, and no jurisdiction has ruled to the contrary.
In the regions we are focusing on, the California, Massachusetts, New York,
Pennsylvania, Maryland and Virginia public utility commissions have issued
such orders. Certain of these are subject to appeal. Additional disputes over
the appropriate treatment of ISP traffic are pending in other states. On
February 26, 1999, the FCC released a Declaratory Ruling determining that ISP
traffic is interstate for jurisdictional purposes, but that its current rules
neither require nor prohibit the payment of reciprocal compensation for such
calls. In the absence of a federal rule, the FCC determined that state
commissions have authority to interpret and enforce the reciprocal
compensation provisions of existing interconnection agreements, and to
determine the appropriate treatment of ISP traffic in arbitrating new
agreements. The FCC also requested comment on alternative federal rules to
govern compensation for such calls in the future. In response to the FCC
ruling, some RBOCs have asked state commissions to reopen previous decisions
requiring the payment of reciprocal compensation on ISP calls. We are opposing
such efforts in Maryland, Massachusetts, and New York. We anticipate that
Internet service providers will be among our target customers, and adverse
decisions in state proceedings could limit our ability to service this group
of customers profitably.
In order to develop our networks, we must obtain local franchises and
other permits, as well as building access agreements and rights to use
underground conduit and pole space, private easements and other rights-of-way
and fiber capacity from entities such as incumbent local exchange carriers and
other utilities, railroads, long distance companies, state highway
authorities, local governments and transit authorities. We cannot assure you
that we will be able to maintain our existing franchises, permits and rights
or to obtain and maintain the other franchises, permits, building access
agreements and rights needed to implement our business plan on acceptable
terms. Although we do not believe that any of the existing arrangements will
be canceled or will not be renewed as needed in the near future, certain
cancellation or non-renewal of these arrangements could materially adversely
affect our business. In addition, our failure to enter into and maintain any
such required arrangements for a particular network, including a network which
is already under development, may affect our ability to acquire or develop
that network.
We have summarized present and proposed federal, state, and local
regulations and legislation affecting the telephone, video programming and
data service industries. This summary is not complete. Other existing federal
regulations, copyright licensing, and, in many jurisdictions, state and local
franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the operations of communications companies. The ultimate
outcome of these proceedings, and the ultimate impact of the 1996 Act or any
final regulations adopted under the new law on us or our businesses cannot be
determined at this time.
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Employees
As of December 31, 1998, we had approximately 2,150 full-time employees
including joint ventures, general office and administrative personnel and
approximately 200 part-time employees. We have a collective bargaining
agreement that covers approximately 70 employees, which is valid through
January 14, 2001. We consider relations with our employees to be good.
Legal Proceedings
In the normal course of business, there are various legal proceedings
outstanding, including both commercial and regulatory litigation. In the
opinion of management, these proceedings will not have a material adverse
effect on our results of operations or financial condition. For a description
of certain proceedings affecting certain of our affiliates, see "Regulation -
Regulation of Video Services."
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is based upon our
certificate of incorporation ("Certificate of Incorporation"), our bylaws
("Bylaws") and applicable provisions of law. We have summarized certain
portions of the Certificate of Incorporation and Bylaws below. The summary is
not complete. The Certificate of Incorporation and Bylaws are incorporated by
reference to the registration statement for these securities that we have
filed with the SEC, and have been filed as exhibits to our 10-K for the year
ended December 31, 1997. You should read the Certificate of Incorporation and
Bylaws for the provisions that are important to you.
Certain provisions of the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation and the Bylaws summarized in the following
paragraphs may have an anti-takeover effect. This may delay, defer or prevent
a tender offer or takeover attempt that a shareholder might consider in its
best interests, including those attempts that might result in a premium over
the market price for its shares.
Authorized Capital Stock
Our Certificate of Incorporation authorizes us to issue 200 million
shares of common stock, par value $1.00 per share, 400 million shares of Class
B common stock, par value $1.00 per share, and 25 million shares of preferred
stock par value $1.00 per share.
Common Stock
Subject to the rights of the holders of any preferred stock which may be
outstanding, each holder of common stock is entitled to receive any dividends
our Board of Directors declares out of funds legally available to pay
dividends. If we liquidate our business, holders of common stock are entitled
to share equally in any distribution of our assets after we pay our
liabilities and the liquidation preference of any outstanding preferred stock.
Each holder of common stock is entitled to one vote per share, and is entitled
to vote on all matters presented to a vote of shareholders, including the
election of directors. Holders of common stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities. In addition, there are no conversion rights or redemption or
sinking fund provisions. On December 31, 1998, there were 64,290,493 shares of
common stock issued and outstanding. The common stock is admitted for trading
on the Nasdaq National Market.
The Certificate of Incorporation contains no restrictions on the
alienability of the common stock. Except as disclosed in the section entitled
"Charter and Bylaw Provisions," below, there are no provision in the
Certificate of Incorporation or Bylaws and or any agreement or plan involving
RCN that would discriminate against any existing or prospective holder of
common stock as a result of a holder owning a substantial amount of common
stock.
Class B Stock
The Class B common stock is virtually identical to the Common Stock
except that:
o the Class B common stock is generally non-voting,
o the common stock is convertible at the option of the holder into
Class B common stock and
o in certain mergers, distributions and other transactions in which
the holders of common stock are entitled to receive equity interests
of one or more corporations (including RCN), the equity interests
distributed to holders of common stock and the Class B common stock
may have rights and privileges that are substantially equivalent to
the current rights and privileges of the common stock and the Class
B common stock, respectively.
41
<PAGE>
As of January 28, 1999, there are no outstanding shares of Class B common
stock and we do not have any current plan or intention to issue any Class B
common stock.
Preferred Stock
This prospectus describes certain general terms and provisions of our
preferred stock. When we offer to sell a particular series of preferred stock,
we will describe the specific terms of the securities in a supplement to this
prospectus. The prospectus supplement will also indicate whether the general
terms and provisions described in this prospectus apply to the particular
series of preferred stock. The preferred stock will be issued under a
certificate of designations relating to each series of preferred stock, and is
also subject to our Certificate of Incorporation.
We have summarized certain terms of the certificate of designations
below. The summary is not complete. The certificate of designations will be
filed with the SEC in connection with an offering of preferred stock.
Under the Certificate of Incorporation, our Board of Directors has the
authority to
o create one or more series of preferred stock,
o issue shares of preferred stock in any series up to the maximum
number of shares of preferred stock authorized, and
o determine the preferences, rights, privileges and restrictions of
any series.
Our Board may issue authorized shares of preferred stock, as well as
authorized but unissued shares of common stock, without further shareholder
action, unless shareholder action is required by applicable law or by the
rules of a stock exchange or quotation system on which any series of our stock
may be listed or quoted.
The prospectus supplement will describe the terms of any preferred stock
being offered, including:
o the number of shares and designation or title of the shares;
o any liquidation preference per share;
o any date of maturity;
o any redemption, repayment or sinking fund provisions;
o any dividend rate or rates and the dates of payment (or the method
for determining the dividend rates or dates of payment);
o any voting rights;
o if other than the currency of the United States, the currency or
currencies including composite currencies in which the preferred
stock is denominated and/or in which payments will or may be
payable;
o the method by which amounts in respect of the preferred stock may be
calculated and any commodities, currencies or indices, or value,
rate or price, relevant to such calculation;
o whether the preferred stock is convertible or exchangeable and, if
so, the securities or rights into which the preferred stock is
convertible or exchangeable, and the terms and conditions of
conversion or exchange;
42
<PAGE>
o the place or places where dividends and other payments on the
preferred stock will be payable; and
o any additional voting, dividend, liquidation, redemption and other
rights, preferences, privileges, limitations and restrictions.
All shares of preferred stock offered will be fully paid and
non-assessable. Any shares of preferred stock that are issued will have
priority over the common stock with respect to dividend or liquidation rights
or both.
Our Board of Directors could create and issue a series of preferred stock
with rights, privileges or restrictions which effectively discriminates
against an existing or prospective holder of preferred stock as a result of
the holder beneficially owning or commencing a tender offer for a substantial
amount of common stock. One of the effects of authorized but unissued and
unreserved shares of capital stock may be to make it more difficult or
discourage an attempt by a potential acquirer to obtain control of our company
by means of a merger, tender offer, proxy contest or otherwise. This protects
the continuity of our management. The issuance of these shares of capital
stock may defer or prevent a change in control of our company without any
further shareholder action.
The transfer agent for each series of preferred stock will be described
in the prospectus supplement.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. Our Board of
Directors are divided into three classes. The term of office of the first
class expires at the 2001 annual meeting, the term of office of the second
class expires at the 1999 annual meeting, and the term of office of the third
class expires at the 2000 annual meeting. At each annual meeting, beginning
with the 1999 annual meeting, a class of directors will be elected to replace
the class whose term has just expired. As a result, approximately one-third of
the members of our Board of Directors will be elected each year and generally,
each of the directors serves a staggered three-year term. Moreover, as the
DGCL permits in the case of a corporation having a classified board, our
directors may be removed only for cause.
These provisions could prevent a shareholder or a group of shareholders
having majority voting power from obtaining control of our Board of Directors
until the second annual meeting following the date the shareholder obtains
majority voting power. Accordingly, these provisions could have the effect of
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
Shareholder Action by Written Consent; Special Meetings. No action
required or permitted to be taken at an annual or special meeting of
shareholders may be taken without a meeting. No action may be taken by the
written consent of shareholders instead of a meeting. Only our Board, our
Chairman of the Board or our Chief Executive Officer may call a special
meeting of shareholders. These provisions may make it more difficult for
shareholders to take action opposed by our Board.
Advance Notice Provisions. Shareholders seeking to nominate candidates to
be elected as directors at an annual meeting or to bring business before an
annual meeting must comply with an advanced written procedure. Only persons
who are nominated by or at the direction of our Board, or by a shareholder who
has given timely written notice to our Secretary before the meeting to elect
directors, will be eligible as directors. At any shareholders' meeting the
business to be conducted is limited to business brought before the meeting by
or at the direction of the Board of Directors, or a shareholder who has given
timely written notice to our Secretary of its intention to bring business
before an annual meeting. A shareholder must give notice which is received at
our principal executive offices in writing between 60 to 90 days before the
meeting. If, however, we gave less than 70 days' notice or prior public
disclosure of the meeting date, we must receive the shareholder's notice no
later than the close of business on the 10th day following the day we gave the
notice or public disclosure of the meeting date. A shareholder's notice must
also contain certain information specified in the Bylaws. These provisions may
preclude or deter some shareholders from bringing matters before, or making
nominations for directors at, an annual meeting.
43
<PAGE>
Amendment of Certain Charter and Bylaw Provisions. Our Board may adopt,
amend or repeal any provision of the Bylaws. Bylaw provisions may be adopted,
amended or repealed by the affirmative vote of shareholders holding at least
66 2/3% of the total number of votes entitled to be cast in the election of
directors.
Any amendment, modification or repeal of the provisions of the
Certificate of Incorporation relating to
o the election and removal of directors,
o the right to call special meetings,
o the prohibition on action by written consent,
o amendment of the Bylaws and
o the limitation of liability and indemnification of officers and
directors
will require approval by the affirmative vote of shareholders holding at
least 66 2/3% of the total number of votes entitled to vote in the election of
directors.
Delaware Takeover Statute
We are subject to Section 203 of the DGCL ("Section 203"). In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested shareholder" for a period of three
years following the date that the shareholder became an interested
shareholder, unless:
(a) before such date either the business combination or the transaction
which resulted in the shareholder becoming an interested shareholder
is approved by the board of directors of the corporation,
(b) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for
purposes of determining the number of shares outstanding, shares
owned by
(1) persons who are both directors and officers and
(2) employee stock plans in certain circumstances), or
(c) on or after such date the business combination is approved by the
board and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned
by the interested shareholder.
A "business combination" includes a merger, consolidation, asset sale, or
other transaction resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more
of the corporation's voting stock.
The restrictions imposed by Section 203 will not apply to a corporation
if, among other things:
(a) the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or
44
<PAGE>
(b) 12 months have passed after the corporation, by action of its
shareholders holding a majority of the outstanding stock, adopts an
amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203.
The restrictions imposed by Section 203 will apply to us since we have
not elected not to be governed by that section. Our Board of Directors
approved of Level 3 becoming an interested shareholder and, consequently,
Section 203 would not apply to any business combination with Level 3.
Liability and Indemnification of Directors and Officers
Certain provisions of the DGCL and the Certificate of Incorporation and
the Bylaws relate to the limitation of liability and indemnification of our
directors and officers. These various provisions are described below.
Our Certificate of Incorporation provides that our directors are not
personally liable to us or our shareholders for monetary damages for breach of
their fiduciary duties as a director to the fullest extent permitted by the
DGCL. Under the DGCL, directors would not be personally liable to us or our
shareholders for monetary damages for breach of their fiduciary duties as a
director, except for
(a) any breach of the director's duty of loyalty to us or our
shareholders,
(b) acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law,
(c) any transaction from which the director derived improper personal
benefit or
(d) the unlawful payment of dividends or unlawful stock repurchases or
redemptions.
This exculpation provision may have the effect of reducing the likelihood
of derivative litigation against directors and may discourage or deter
shareholders or us from bringing a lawsuit against our directors for breach of
their fiduciary duties as directors. However, the provision does not affect
equitable remedies such as an injunction or rescission from being available.
We will indemnify and hold harmless to the fullest extent permitted by
the DGCL each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or proceeding. These include
civil, criminal, administrative or investigative proceedings, if that person
is or was a director or officer of RCN or is or was serving at our request as
a director or officer of another corporation, partnership, joint venture,
trust or other enterprise. We will also pay the expenses incurred in
connection with these proceedings before its final disposition to the fullest
extent authorized by the DGCL. This right to indemnification is a contract
right. By action of our Board of Directors, we provide indemnification to our
employees and agents to the extent our Board determines to be appropriate and
authorized by the DGCL.
We purchase and maintains insurance on behalf of any person who is or was
a director, officer, employee or agent of RCN, or is or was serving at our
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or her and incurred by him or her
in any such capacity, or arising out of his or her status, whether or not we
would have the power or the obligation to indemnify him or her against the
liability under the Certificate of Incorporation.
45
<PAGE>
SELLING SHAREHOLDERS
The table below sets forth certain information with respect to the
selling shareholders and their beneficial ownership of shares as of April 3,
1998. Except as specified in the table below, none of the selling shareholders
or their affiliates hold any positions, or offices or had any other material
relationships with RCN, or any of its predecessors or affiliates, during the
past three years. RCN's authorized capital stock includes common stock, Class
B stock and preferred stock. The economic rights of each class of RCN common
equity are identical, but voting and conversion rights differ. Holders of
common stock are entitled to one vote per share and holders of Class B stock
are not entitled to vote. Shares of common stock are convertible into shares
of Class B stock. See "Description of Capital Stock."
<TABLE>
<CAPTION>
Number of Shares of RCN Common Stock
----------------------------------------------------------------
Owned prior Percentage of
to Not Subject Subject to Outstanding
Name the Offering to Lockup Lockup Shares
---- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C>
Geoffrey J. Schultz(1) 278,532 57,418 221,114 *
Marcia J. Misiorski(2) 267,610 55,166 212,455 *
Robert M. Glorioso(2) 7,586 3,782 3,804 *
Patrick S. Harris 15,170 7,566 7,604 *
Alan C. Marshall(3)(4) and Linda O. Marshall(4) 15,170 7,566 7,604 *
Howard Salwen(2) 18,962 9,456 9,506 *
Blaine H. Schultz Revocable Trust (Blaine H. Schultz,
Trustee) 7,586 3,782 3,804 *
Muriel T. Schultz Revocable Trust (Muriel T. Schultz,
Trustee) 7,586 3,782 3,804 *
Leonard J. Umina(2) 56,888 28,372 28,516 *
Christopher W. Walsh(5) 7,586 3,782 3,804 *
The Flessas Family Trust 25,476 12,704 12,772 *
James W. Harshbarger 19,418 9,684 9,734 *
Robert A. Lanford 24,272 12,104 12,168 *
William F. Penney 33,098 16,506 16,592 *
Howard C. Salwen(2)(4) and Sheryl R. Marshall(4) 12,134 6,050 6,084 *
John A. Taverna 5,240 2,612 2,628 *
Leonard J. Umina(2) 64,474 32,154 32,320 *
Christopher Walsh(5) 23,596 11,768 11,828 *
</TABLE>
- ---------------
* Less than 1% of outstanding shares.
(1) Was President of Ultranet prior to the Ultranet Merger and is presently a
Senior Vice President of Engineering at RCN.
(2) Was a member of the Board of Directors of Ultranet prior to the Ultranet
Merger.
(3) Director of Technology at Ultranet prior to the Ultranet Merger and
presently a Director of Technology at RCN.
(4) Joint Tenants With Right Of Survivorship.
(5) Presently a Director of Engineering at RCN.
46
<PAGE>
Certain shares of RCN Common Stock owned by the selling shareholders are
"RCN Shares Subject to Lockup" under the terms of the Indemnification and
Noncompetition Agreement dated as of February 27, 1998, as amended, between
certain shareholders of Ultranet and RCN and as such may not be sold,
transferred or otherwise disposed of prior to February 27, 1999, in accordance
with the provisions of the Indemnification and Noncompetition Agreement. Those
shares of RCN common stock defined as "RCN Shares Subject to Lockup" are
included in the shares which are being registered for sale hereby. Because the
selling shareholders may sell all or part of the shares, no estimate can be
given as to the number of shares that will be held by any selling shareholder
upon termination of any offering made hereby.
RCN and the selling shareholders are parties to a Registration Rights
Agreement dated as of February 27, 1998 by and among RCN and the selling
shareholders pursuant to which RCN granted certain registration rights to the
selling shareholders. Pursuant to the Registration Rights Agreement, RCN agreed
to prepare and file with the Commission a Registration Statement providing for
the sale by the selling shareholders of shares from time to time on a delayed
or continuous basis pursuant to Rule 415 under the Act. Under the terms of the
Registration Rights Agreement, RCN has agreed to pay the fees and expenses
incurred in connection with the registration; provided, however, that RCN will
not pay any underwriting fees, discounts or commissions and fees and
disbursements of counsel for the selling shareholders attributable to the sale
of the shares.
47
<PAGE>
PLAN OF DISTRIBUTION
Any distribution hereunder of the shares by the selling shareholders may
be effected from time to time in one or more of the following transactions: (a)
through brokers, acting as principal or agent, in transactions (which may
involve block transactions) in The Nasdaq National Market or otherwise, in
special offerings, in the over-the-counter market, or otherwise, at market
prices obtainable at the time of sale, at prices related to such prevailing
market prices, at negotiated prices or at fixed prices, (b) to underwriters who
will acquire the shares for their own account and resell them in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale (any public offering
price and any discount or concessions allowed or reallowed or paid to dealers
may be changed from time to time), (c) directly or through brokers or agents in
private sales at negotiated prices, (d) to lenders pledged as collateral to
secure loans, credit or other financing arrangements and any subsequent
foreclosure, if any, thereunder, (e) through short sales of shares or (f) by
any other legally available means. Also, offers to purchase shares may be
solicited by agents designated by the selling shareholders from time to time.
Underwriters or other agents participating in an offering made pursuant to this
prospectus (as amended or supplemented from time to time) may receive
underwriting discounts and commissions under the Securities Act, and discounts
or concessions may be allowed or reallowed or paid to dealers, and brokers or
agents participating in such transactions may receive brokerage or agent's
commissions or fees. The selling shareholders may effect sales of shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders
and/or the purchasers of the shares for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
At the time a particular offering of any shares is made hereunder, to the
extent required by law, a prospectus supplement will be distributed which will
set forth the amount of shares being offered and the terms of the offering,
including the purchase price or public offering price, the name or names of
any underwriters, dealers or agents, the purchase price paid by any
underwriter for any shares purchased from the selling shareholders, any
discounts, commissions and other items constituting compensation from the
selling shareholders and any discounts, commissions or concessions allowed or
filed or paid to dealers. The shares may be sold from time to time in one or
more transactions at a fixed offering price, which may be changed, or at
varying prices determined at the time of sale or at negotiated prices. Such
prices will be determined by the selling shareholders or by agreement between
the selling shareholders and underwriters or dealers, if any. The selling
shareholders also may, from time to time, authorize dealers, acting as selling
shareholders' agents, to solicit offers to purchase the shares upon the terms
and conditions set forth in any prospectus supplement.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold hereunder in such jurisdictions only
through registered or licensed brokers or dealers.
RCN has been advised that, as of the date hereof, the selling
shareholders have made no arrangement with any broker for the sale of their
shares. The selling shareholders and any underwriters, brokers or dealers
involved in the sale of the shares may be considered "underwriters" as that
term is defined by the Securities Act, although the selling shareholders
disclaim such status. Under the Ultranet Registration Rights Agreement, RCN
has agreed to indemnify the selling shareholders, their officers, directors,
partners, and agents, any underwriter and each person or entity who controls
such selling shareholder or underwriter, as the case may be, against certain
liabilities which may be incurred in connection with the sale of the shares
under this prospectus. In addition, the selling shareholders have agreed to
indemnify RCN against certain liabilities. The Ultranet Registration Rights
Agreement also provides for rights of contribution if such indemnification is
not available. RCN has agreed to pay certain expenses incident to the
registration statement and the sale of the shares hereunder to the public,
other than commissions, fees and discounts of underwriters, agents or dealers.
RCN will not receive any proceeds from any sales of the shares pursuant to
this prospectus.
48
<PAGE>
Under applicable rules and regulations under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), any person engaged in the
distribution of the shares may not simultaneously engage in market making
activities with respect to the common stock of RCN for a period of two
business days prior to the commencement of such distribution. In addition and
without limiting the foregoing, each selling shareholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of RCN's common stock by the
selling shareholders.
In connection with any underwritten offering, certain underwriters and/or
selling group members may engage in passive market making transactions in the
shares on NASDAQ in accordance with Regulation M under the Exchange Act.
Regulation M permits, upon the satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that
are also NASDAQ market makers in the security being distributed to engage in
limited market making transactions during the period when Regulation M under
the Exchange Act would otherwise prohibit such activity. Regulation M
prohibits underwriters and selling group members engaged in passive market
making, generally, from entering a bid or effecting a purchase at a price that
exceeds the highest bid for those securities displayed on NASDAQ by a market
maker that is not participating in the distribution. Under Regulation M, each
underwriter and selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's
average daily trading volume during the two full calendar months immediately
preceding the date of the filing of the registration statement under the
Securities Act pertaining to the security to be distributed.
LEGAL MATTERS
The validity of the shares of common stock in respect of which this
prospectus is being delivered will be passed on for RCN by Davis Polk &
Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of RCN Corporation as of December
31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996,
appearing in the RCN 10-K for the year ended December 31, 1998 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.
49
<PAGE>
<TABLE>
=============================================================== ===================================================
<S> <C>
No person has been authorized to provide you with any [GRAPHIC OMITTED]
information or to make any representations, other than
those contained in this prospectus, in connection with
the offering made hereby. If such information or
representations are made to you, you may not rely on
them as having been authorized by RCN. Neither the RCN CORPORATION
delivery of this prospectus nor any sale made
hereunder implies that there has been no change in the
affairs of RCN since the date of this prospectus. This Common Stock
prospectus is not an offer to sell securities and is not
soliciting an offer to buy securities in any jurisdiction
where the offer or sale is not permitted.
-----------------------------------
----------------------
PROSPECTUS
TABLE OF CONTENTS
Page -----------------------------------
----
Prospectus Summary..................................2
Risk Factors........................................5
Where You Can Find More Information................11
Special Note on Forward-Looking
Statements......................................11 May 25, 1999
Use of Proceeds....................................12
Dividends..........................................12
Selected Historical Consolidated Financial
Data............................................13
Unaudited Pro Forma Consolidated Statements of
Operations......................................15
Description of Capital Stock.......................41
Selling Shareholders...............................46
Plan of Distribution...............................48
Legal Matters......................................49
Experts............................................49
=============================================================== ===================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distributions
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered
hereby. All amounts are estimates except the registration fee.
Amount to
be Paid
------------
Registration fee.......................................... $ 1,720
Printing.................................................. $ 15,000
Legal fees and expenses................................... $ 50,000
Accounting fees and expenses.............................. $ 20,000
Miscellaneous............................................. $ 5,000
-----------
TOTAL................................................ $ 91,720
===========
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law, which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty,
except (i) for any breach of the director's duty of loyalty to the corporation
or it stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the Delaware General Corporation Law (providing for
liability of directors for the unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director
derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law empowers the Company
to indemnify, subject to the standards set forth therein, any person in
connection with any action, suit or proceeding brought before or threatened by
reason of the fact that the person was a director, officer, employee or agent
of such company, or is or was serving as such with respect to another entity
at the request of such company. The Delaware General Corporation Law also
provides that the Company may purchase insurance on behalf of any such
director, officer, employee or agent.
RCN's Amended and Restated Articles of Incorporation provides in effect
for the elimination of the personal liability of RCN directors for breaches of
fiduciary duty and for the indemnification by the Company of each director and
officer of the Company, in each case, to the fullest extent permitted by
applicable law.
RCN purchases and maintains insurance on behalf of any person who is or
was a director, officer, employee or agent of RCN, or is or was serving at the
request of RCN as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her status as such,
whether or not RCN would have the power or the obligation to indemnify him or
her against such liability under the provisions of the RCN Certificate of
Incorporation.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit No. Document
- ------------ --------
2.1* Form of Distribution Agreement among C-TEC Corporation, Cable
Michigan, Inc. and RCN Corporation (incorporated by reference to
Exhibit 2.1 to Amendment No. 2 to RCN's Information Statement on
Form 10/A ("Form 10") filed on September 5, 1997)
2.2* Tax Sharing Agreement by and among C-TEC Corporation, Cable
Michigan, Inc. and the Registrant (incorporated by reference to
Exhibit 10.1 to RCN's Form 10)
2.3* Agreement and Plan of Merger dated as of January 21, 1998 among
Erols Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A.,
RCN Corporation and ENET Holding, Inc. (incorporated by reference
to Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998
8-K") filed on March 6, 1998)
2.4* Amendment No. 1 to Agreement and Plan of Merger dated as of
January 21, 1998 among Erols Internet, Inc., Erol Onaran, Gold &
Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc.
(incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1* Indenture dated as of February 6, 1998 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect to
the 9.80% Senior Discount Notes due 2008 (incorporated by
reference to Exhibit 4.1 to RCN's Registration Statement on Form
S-4 (Commission File No. 333- 48487) ("1998 Form S-4") filed on
March 23, 1998)
4.2* Form of the 9.80% Senior Discount Notes due 2008, Series B
(included in Exhibit 4.1) (incorporated by reference to Exhibit
4.2 to RCN's 1998 Form S-4)
4.3* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect to
the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4
(Commission File No. 333-41081) ("Form S-4") filed on November 26,
1997)
4.4* Form of the 10% Senior Exchange Notes due 2007 (included in
Exhibit 4.4) (incorporated by reference to Exhibit 4.2 to RCN's
Form S-4)
4.5* Indenture dated as of October 17, 1997 between the Company, as
Issuer, and The Chase Manhattan Bank, as Trustee, with respect to
the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to RCN's Form S-4)
4.6* Form of the 11 1/8% Senior Discount Exchange Notes due 2007
(included in Exhibit 4.6) (incorporated by reference to Exhibit
4.4 to RCN's Form S-4)
4.7* Indenture dated June 24, 1998 between the Company, as Issuer, and
The Chase Manhattan Bank, as Trustee, with respect to the 11%
Senior Discount Notes due 2008 (incorporated by Reference to
Exhibit 4.8 to RCN's Registration Statement on Form S-1
(Commission File No. 333-55673)
4.8* Form of 11% Senior Discount Note due 2008 (included in Exhibit
4.8) (incorporated by reference to Exhibit 4.8 to RCN's
Registration Statement on Form S-1 (Commission File No.
333-55673))
<PAGE>
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)
- ---------------
* Previously filed.
II-2
<PAGE>
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 July 23, 1998 among
certain shareholders of JavaNet, Inc. and RCN Corporation
5.1* Opinion of Davis Polk & Wardwell
11.1 Statement regarding Computation of Per Share Earnings (included
in the Notes to the Consolidated Financial Statements)
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN
Corporation
23.2* Consent of Ernst & Young LLP, Independent Auditors, with respect
to Erols Internet, Inc.
24.1* Power of Attorney (included on the signature page of the
Registration Statement)
</TABLE>
- ---------------
**Exhibits and schedules which have not been filed with Exhibit 4.10 will be
provided to the Commission by the Registrant upon request.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in paragraph (i)
and (ii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
(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
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Princeton, State of New
Jersey, on May 25, 1999.
RCN CORPORATION
By: /s/ Bruce C. Godfrey
--------------------------------
BRUCE C. GODFREY
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
- ---------------------------- Director, Chairman and Chief May 25, 1999
David C. McCourt Executive Officer
*
- ---------------------------- Director, President and Chief May 25, 1999
Michael J. Mahoney Operating Officer
/s/ Bruce C. Godfrey
- ---------------------------- Director, Executive Vice May 25, 1999
Bruce C. Godfrey President and Chief Financial
Officer
*
- ----------------------------
James Q. Crowe Director May 25, 1999
*
- ----------------------------
Alfred Fasola Director May 25, 1999
*
- ----------------------------
Stuart E. Graham Director May 25, 1999
*
- ----------------------------
Richard R. Jaros Director May 25, 1999
II-5
<PAGE>
*
- ---------------------------- Director May 25, 1999
Michael J. Levitt
*
- ---------------------------- Director May 25, 1999
Thomas May
*
- ---------------------------- Director May 25, 1999
Thomas P. O'Neill, III
*
- ---------------------------- Director May 25, 1999
Eugene Roth
*
- ---------------------------- Director May 25, 1999
Walter Scott, Jr.
*
- ---------------------------- Director May 25, 1999
Michael B. Yanney
*
- ----------------------------
Ralph S. Hromisin Senior Vice President and Chief May 25, 1999
Accounting Officer
*By: /s/ Bruce C. Godfrey
------------------------
Bruce C. Godfrey
Attorney-in-Fact
II-6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement of
RCN Corporation on Form S3 (No. 333-48797) and the related Prospectus, of our
report dated March 8, 1999, except Note 20, as to which the date is March 18,
1999, on our audits of the consolidated financial statements of RCN Corporation
as of December 31, 1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996. We also consent to the reference to our Firm under the caption
"Experts."
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
May 24, 1999
