<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NO. 333-71525
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. This prospectus supplement and the accompanying prospectus do not +
+constitute an offer to sell these securities or solicitation of an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 10, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus Dated May 4, 1999)
[LOGO OF RCN]
8,000,000 Shares
RCN Corporation
Common Stock
-----------
We are selling shares of our common stock. The underwriters named in this
prospectus supplement may purchase up to 1,200,000 additional shares of our
common stock from us under certain circumstances.
Our common stock is quoted on the Nasdaq National Market under the symbol
"RCNC". The last reported sale price of the common stock on the Nasdaq National
Market on May 7, 1999, was $44 5/8 per share.
-----------
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 7 of the accompanying prospectus.
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.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to RCN Corporation (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
-----------
Salomon Smith Barney Merrill Lynch & Co.
-----------
Morgan Stanley Dean Witter Donaldson, Lufkin & Jenrette
-----------
First Union Capital Markets Corp.
Prudential Securities
NationsBanc Montgomery Securities LLC
Deutsche Bank Securities
Chase Securities Inc.
, 1999
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in or
incorporated by reference in this prospectus supplement and the accompanying
prospectus is accurate as of any date other than the date on the front of
this prospectus supplement and the accompanying prospectus.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement Summary............................................ S-2
Use of Proceeds.......................................................... S-8
Dilution................................................................. S-9
Capitalization........................................................... S-10
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-11
Underwriting............................................................. S-26
Legal Matters............................................................ S-28
Prospectus
Summary.................................................................. 2
Risk Factors............................................................. 7
Where You Can Find More Information...................................... 12
Special Note on Forward-Looking Statements............................... 13
Use of Proceeds.......................................................... 14
Dividends................................................................ 14
Market Price and Dividend Information.................................... 15
Selected Historical Consolidated Financial Data.......................... 16
Unaudited Pro Forma Consolidated Statements of Operations................ 18
Business................................................................. 22
Description of Capital Stock............................................. 43
Description of Debt Securities........................................... 48
Plan of Distribution..................................................... 55
Legal Matters............................................................ 55
Experts.................................................................. 56
Financial Statements
Report of Independent Accountants........................................ F-2
Consolidated Statements of Operations for the three years ended December
31, 1998, 1997 and 1996................................................. F-3
Consolidated Balance Sheets at December 31, 1998 and 1997................ F-4
Consolidated Statements of Cash Flows for the three years ended December
31, 1998, 1997 and 1996................................................. F-5
Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 1998, 1997 and 1996............................ F-8
Notes to Consolidated Financial Statements............................... F-10
</TABLE>
S-1
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus supplement and the accompanying
prospectus, including the financial data and related notes immediately
following the accompanying prospectus, 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 March 31, 1999, we had approximately
885,000 total service connections, including approximately 149,000 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:
. 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.
. 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.
. 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. By connecting customers to our own network, we improve our
operating economics and have complete control over our customers'
experience with us.
S-2
<PAGE>
. 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 3/31/99
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Connections:
Voice....................... 28,114 44,950 60,480 78,950 95,890 100,219
Video....................... 239,403 243,157 249,360 255,100 261,662 269,421
Data........................ 150 370,538 400,148 474,127 497,809 516,102
------- ------- ------- ------- ------- -------
Total..................... 267,667 658,645 709,988 808,177 855,361 885,742
------- ------- ------- ------- ------- -------
On-Net Connections............ 15,148 20,339 48,212 82,842 123,393 149,235
Homes Passed.................. 44,045 63,386 122,977 213,983 304,505 350,733
Marketable Homes.............. -- -- 111,187 181,353 270,406 301,546
</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, 08540, and our telephone number is (609) 734-3700. We
maintain a website at www.rcn.com where general information about us is
available. We are not incorporating the contents of the website into this
prospectus supplement.
S-3
<PAGE>
Summary Historical Consolidated Financial Data
The table below sets forth our selected historical consolidated financial
data. We did not operate as an independent company prior to September 30, 1997.
Therefore, we had to make certain assumptions in preparing data for prior
periods, and the data may not reflect the results of operations or the
financial condition which would have resulted if we had operated as a separate,
independent company during those periods. The data is not necessarily
indicative of our future results of operations or financial condition.
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 which immediately follow the accompanying
prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Statement of Operations Data:
Sales....................................... $104,910 $ 127,297 $ 210,940
Costs and expenses, excluding depreciation
and amortization........................... 79,107 134,967 262,352
Nonrecurring charges(1)..................... -- 10,000 --
Acquired in-process research and
development(1)............................. -- -- 18,293
Depreciation and amortization............... 38,881 53,205 89,088
-------- ---------- ----------
Operating (loss)............................ (13,078) (70,875) (158,793)
Interest income............................. 25,602 22,824 58,679
Interest expense............................ (16,046) (25,602) (112,239)
Other (expense) income, net................. (546) 131 (1,889)
(Benefit) provision for income taxes........ 979 (20,849) (4,998)
Equity in (loss) of unconsolidated
entities................................... (2,282) (3,804) (12,719)
Minority interest in loss of consolidated
entities................................... 1,340 7,296 17,162
Extraordinary charge-debt prepayment
penalty, net of tax of $1,728.............. -- (3,210) --
Cumulative effect of change in accounting
for start-up costs, net of tax............. -- -- (641)
-------- ---------- ----------
Net (loss).................................. $ (5,989) $ (52,391) $ (205,442)
======== ========== ==========
Balance Sheet Data (at end of period):
Cash, temporary cash investments and short-
term investments........................... $108,674 $ 638,513 $1,012,574
Investments restricted for debt service..... -- 61,911 43,306
Total assets................................ 628,085 1,150,992 1,907,615
Long-term debt (excluding current portion).. 131,250 686,103 1,263,036
Shareholders' equity........................ 390,765 356,584 371,446
Other Data:
EBITDA before nonrecurring charges(2)....... 25,803 (7,670) (51,412)
Cash Provided by (Used in):
Operating Activities........................ 23,831 2,069 35,110
Investing Activities........................ (9,377) (475,860) (828,176)
Financing Activities........................ 9,391 634,858 690,282
</TABLE>
- --------
In the table above:
(1) Nonrecurring charges represent costs of $10,000 incurred in 1997 as a
result of 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 acquisitions.
S-4
<PAGE>
(2) EBITDA before nonrecurring charges represents earnings before interest,
depreciation and amortization, and income taxes. Because of the capital
intensive nature of the business and resulting large non-cash charges for
depreciation, EBITDA is commonly used in the communications industry by
management, investors, and analysts to analyze companies on the basis of
operating performance, leverage and liquidity. 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. Certain of these covenants are based on EBITDA
performance measures.
S-5
<PAGE>
Recent Developments
First Quarter 1999 Results (Dollars in Thousands)
Sales were $67,388 for the quarter ended March 31, 1999 as compared to
$62,822 for the quarter ended December 31, 1998. This increase was primarily a
result of higher total service connections, which increased from 855,361 at
December 31, 1998 to 885,742 at March 31, 1999, and higher revenue per voice
connection.
Costs and expenses, excluding depreciation and amortization, were $88,837 for
the quarter ended March 31, 1999 as compared to $79,720 for the quarter ended
December 31, 1998. This increase reflects continued development of our
operations in the Boston to Washington, D.C. corridor and San Francisco Bay
area.
Operating income before depreciation, amortization, non-recurring charge and
acquired research and development was $(16,898) for the quarter ended March 31,
1999 as compared to $(21,449) for the quarter ended December 31, 1998.
Net loss was $(67,754), or $(1.03) per average common share, for the quarter
ended March 31, 1999 and $(65,432), or $(1.01) per average common share, for
the quarter ended December 31, 1998.
Advanced fiber homes passed increased over the quarter by more than 46,000 to
350,733, while marketable homes increased from 270,406 to 301,546. Marketable
homes represent the segment of homes passed which are being offered our full
package of on-net products. Advanced fiber connections also increased 21% to
149,235, representing increased penetration in our on-net markets.
Hicks, Muse, Tate & Furst Investment and New Credit Facility
On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks, Muse, Tate &
Furst Equity Fund IV, L.P., purchased $250 million of a new issue of our Series
A 7% Senior Convertible Preferred Stock. The Series A Preferred Stock has an
annual dividend rate of 7% payable quarterly in cash or additional shares of
Series A Preferred Stock and has an initial conversion price of $39.00 per
share. The Series A Preferred Stock is convertible into our common stock at any
time. The issue has a final maturity of 15 years, but may be called by us after
four years.
On March 18, 1999, we announced that we have entered into a fully
underwritten commitment with The Chase Manhattan Bank pursuant to which Chase
has agreed to provide an aggregate principal amount of $1 billion of senior
secured credit facilities to certain of our wholly-owned subsidiaries. We
expect this transaction to close in the second quarter of 1999.
Acquisition of Stake in JuniorNet Corporation
On April 28, 1999, we announced that we acquired a 47.5% stake in JuniorNet
Corporation, a commercial-free online learning service for children. We
purchased the ownership stake for approximately $47 million in cash.
Concurrently with that transaction, JuniorNet purchased our Lancit Media
subsidiary for approximately $25 million in cash. We acquired Lancit Media in
June 1998 for approximately $0.4 million in cash and shares of our common stock
with a fair value at the time of issuance of approximately $7.4 million.
S-6
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered............................... 8,000,000
Common stock outstanding as of March 31, 1999...... 66,522,888
Common stock to be outstanding after the offering.. 74,522,888
Nasdaq National Market symbol...................... "RCNC"
Use of Proceeds.................................... The net proceeds of the
offering will be
approximately $ million,
after deducting
commissions and estimated
offering expenses. The
proceeds from the offering
of common stock will be
used to fund operating
losses and for general
corporate purposes.
</TABLE>
The above information assumes no exercise of the underwriters' over-allotment
option.
S-7
<PAGE>
USE OF PROCEEDS
Our net proceeds from this offering are estimated to be approximately $
million, based on an assumed offering price of $ per share, (approximately
$ million if the underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and estimated expenses. We will use the
net proceeds from the sale of common stock to fund operating losses and for
general corporate purposes.
S-8
<PAGE>
DILUTION
As of , our net tangible book value was $ million, or $ per share
of common stock. Net tangible book value per share represents our net worth
less intangible assets of $ million divided by the total number of shares of
common stock outstanding. After giving effect to our sale of shares of common
stock pursuant to this offering and deducting the underwriting discounts and
estimated expenses from this offering, our pro forma net tangible book value
as of would have been $ million, or $ per share of common stock. Such
amount represents an immediate increase in pro forma net tangible book value
of $ per share to our existing stockholders and an immediate dilution to
new investors of $ per share based upon an offering price of $ per share
of common stock. The following table illustrates the dilution in pro forma net
tangible book value per share to new investors:
<TABLE>
<S> <C> <C>
Public offering price.............................................. $
Net tangible book value before the offering...................... $
Increase in net tangible book value attributable to our net
proceeds from the offering......................................
----- -----
Pro forma net tangible book value after the offering...............
-----
Dilution of net tangible book value to new investors...............
=====
</TABLE>
S-9
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998.
The "As Adjusted" column reflects our capitalization after giving effect to
this offering. You should read this table along with our historical
consolidated financial statements which immediately follow the accompanying
prospectus.
<TABLE>
<CAPTION>
As of December 31,
1998
-------------------
As
Historical Adjusted
---------- --------
(dollars in
thousands)
<S> <C> <C>
Cash, temporary cash investments and short-term
investments.............................................. $1,012,574 $
========== =====
Investments restricted for debt service................... $ 43,306 $
========== =====
Credit Agreement.......................................... 100,000
10% Senior Notes due 2007................................. 225,000
11 1/8% Senior Discount Notes due 2007.................... 398,827
9.80% Senior Discount Notes due 2008...................... 382,216
11% Senior Discount Notes due 2008........................ 158,573
Capital lease obligations................................. 2,517
---------- -----
Total long-term debt...................................... 1,267,133
---------- -----
Shareholders' equity...................................... 371,446
---------- -----
Total capitalization.................................. $1,638,579 $
========== =====
</TABLE>
The Senior Discount Notes listed in the table above were originally recorded
at their initial issue price and the amount reported represents such original
issue price plus a ratable portion of the accrual of the original issue
discount.
The table above does not reflect the issuance and sale of $250 million of
Series A 7% Senior Convertible Preferred Stock to Hicks, Muse, Tate & Furst on
April 7, 1999. See "Recent Developments."
S-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this prospectus supplement are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and are thus prospective. Such forward-looking statements
include, in particular, statements made as to plans to develop networks and
upgrade facilities, the market opportunity presented by markets targeted by
the Company, the Company's intention to connect certain wireless video resale
telephone and Internet service customers to its advanced fiber optic networks,
the development of the Company's businesses, the markets for the Company's
services and products, the Company's anticipated capital expenditures, the
Company's anticipated sources of capital, the Company's state of Year 2000
readiness, and effects of regulatory reform and competitive and technological
developments. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. Such statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from future results expressed or implied by such forward-
looking statements.
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
General
The Company provides a wide range of telecommunications services through
high speed, high capacity advanced fiber optic networks. RCN currently offers
local and long distance telephone, video and data services, including high
speed Internet access. We provide our services primarily to residential
customers in selected markets with high levels of population density and
favorable demographics. RCN's initial advanced fiber optic networks have been
established in selected markets in the Boston to Washington D.C. corridor and
RCN has begun developing advanced fiber optic networks in the San Francisco to
San Diego corridor.
The Company expects that the operating and net losses from its business will
rise in the future as it expands and develops its network and customer base.
There can be no assurance that RCN will achieve or sustain profitability or
positive operating income in the future as it develops its advanced fiber
optic network.
The operating losses have resulted primarily from expenditures associated
with the development of the Company's operational infrastructure and marketing
expenses. The Company expects it will continue to experience negative
operating income while it continues to invest in its networks and until such
time as revenue growth is sufficient to fund operating expenses. The Company
expects to achieve positive operating margins over time by (i) increasing the
number of customers it serves, (ii) increasing the number of connections per
customer by cross marketing its services and promoting bundled service options
and therefore increasing the revenue per customer, (iii) lowering the costs
associated with new subscriber additions and (iv) reducing the cost of
providing services by capturing economies of scale. The Company expects its
operating revenues will increase in future periods through internal growth of
its current advanced fiber optic networks, increases in penetration, and
increases in the number of services per customer; however, the Company also
expects that operating losses will increase for some period of time as the
Company initiates network development in new markets and expands its current
networks. When the Company makes its initial investment in a new market, the
operating losses typically increase as the network and sales force are
expanded to facilitate growth. The Company's ability to generate positive cash
flow in the future will depend on the extent of capital expenditures in
current and additional markets, the ability of the joint ventures to generate
revenues and cash flow, competition in the Company's markets and any potential
adverse regulatory developments. The Company will be dependent on various
financing sources to fund its growth as well as continued losses from
operations. There can be no assurance that such funding will be available, or
available on terms acceptable to the Company. See --"Liquidity and Capital
Resources."
S-11
<PAGE>
The terms of the Company's joint ventures require the mutual consent of the
Company and its joint venture partner to distribute or advance funds to the
Company. The Company's debt agreements allow subsidiaries and joint ventures
to incur indebtedness for network buildout costs, which indebtedness may
contain limitations on the subsidiaries' and the joint ventures' ability to
pay dividends and distributions to the Company. Cash flows available to the
Company in future periods will be affected by the extent to which operations
are conducted through joint ventures. Due to the degree of control that the
Company has in the joint ventures, RCN accounts for the BECO joint venture on
a consolidated basis and for Starpower under the equity method of accounting.
Prior to September 30, 1997, the Company was operated as part of C-TEC
Corporation. On September 30, 1997, C-TEC distributed 100% of the outstanding
shares of common stock of its wholly-owned subsidiaries, RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of record of C-
TEC's Common Stock and C-TEC's Class B Common Stock as of the close of
business on September 19, 1997 (the "Distribution") in accordance with the
terms of a Distribution Agreement dated September 5, 1997 among C-TEC, RCN and
Cable Michigan. At the time of the distribution, RCN consisted primarily of C-
TEC's high growth, bundled residential voice, video and Internet access
operations in the Boston to Washington, D.C. corridor, its existing New York,
New Jersey and Pennsylvania cable television operations, a portion of its long
distance operations and its international investment in Megacable, S.A. de
C.V. C-TEC, RCN and Cable Michigan have entered into certain agreements
providing for the Distribution, and governing various ongoing relationships
between the three companies, including a distribution agreement and a tax-
sharing agreement. On November 6, 1998, Cable Michigan announced that its sale
to Avalon Cable of Michigan, Inc. was complete. As a result of the sale, Cable
Michigan has no ongoing support services relationship with RCN and CTE. The
historical financial information presented herein reflects periods during
which the Company did not operate as an independent company and accordingly,
certain assumptions were made in preparing such financial information. Such
information, therefore, may not necessarily reflect the results of operations
or the financial condition of the Company which would have resulted had the
Company been an independent, public company during the reporting periods, and
are not necessarily indicative of the Company's future operating results or
financial condition.
In June 1997 the Financial Accounting Standards Board (FASB) issued
statement of Financial Accounting Standard No. 131 "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement, which
establishes standards for the reporting of information about operating
segments in interim and year end financial statements, is effective for fiscal
years beginning after December 15, 1997. If applicable, this statement would
only require additional disclosures in the Company's consolidated financial
statements and as such, its adoption will not have any impact on the Company's
consolidated financial position or results of operations. The Company's
operations involve developing an advanced fiber network to provide a bundled
service package of voice, video and data services to new customers in high
density markets and migrating as many customers as is economically justified
which were served by the Company's previously separate lines of business, for
which profitability was separately measurable and monitored, to the single
source network. While the Company's chief decision makers monitor the revenue
streams of the various products, operations are managed and financial
performance is evaluated based upon the delivery of multiple services to
customers over a single network. This allows the Company to leverage its
network costs to maximum profitability. It is management belief that the
Company operates as one reportable operating segment which contains many
shared expenses generated by the Company's various revenue streams and that
any segment allocation of shared expenses incurred on a single network to
multiple revenue streams would be impractical and arbitrary; futhermore, the
Company currently does not make such allocations internally. The Company's
chief decision makers do, however, monitor financial performance in a way
which is different from that depicted in the historical general purpose
financial statements in that such measurement includes the consolidation of
all joint ventures, including Starpower which is not consolidated under
generally accepted accounting principles. Such information, however, does not
represent a separate segment under generally accepted accounting principles
and therefore it is not separately disclosed.
S-12
<PAGE>
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
Sales were $210,940 for the year ended December 31, 1998 as compared to
$127,297 for the year ended December 31, 1997.
Operating income before depreciation, amortization, non-recurring charge and
acquired research and development was ($51,412) for the year ended December
31, 1998 as compared to ($7,670) for the year ended December 31, 1997.
Net loss was ($205,442), or ($3.36) per average common share for 1998 and
($52,391) or ($0.95) per average common share for 1997.
Sales
Video sales are comprised primarily of subscription fees for basic, premium
and pay-per-view cable television services; for both wireless and hybrid
fiber/coaxial cable customers in New York, New Jersey and Pennsylvania which
the Company expects to migrate to its advanced fiber networks over time as
well as for advanced fiber customers, primarily in Allentown, New York City
and Boston.
Voice sales include local telephone service fees consisting primarily of
monthly line charges, local toll, special features and long-distance telephone
service fees based on minutes of traffic and tariffed rates or contracted
fees. Voice sales include both resold services and traffic over the Company's
own switches.
Data sales represent Internet access fees billed at contracted rates.
For the year ended December 31, 1998 total sales were $210,940, an increase
of $83,643 or 65.7%, from $127,297 for the year ended December 31, 1997. The
increase resulted from higher total service connections which increased 219.6%
to approximately 855,000 at December 31, 1998 from approximately 268,000 at
December 31, 1997. The increase in total service connections resulted
principally from dial-up internet connections from the acquisitions of Erols
Internet, Inc. ("Erols") and UltraNet Communications ("UltraNet") in February
1998, and growth in advanced fiber connections, which increased 714.6% from
approximately 15,000 in 1997 to approximately 123,000 at December 31, 1998.
The service connections at December 31, 1998 include connections of the
Starpower joint venture which is accounted for under the equity method of
accounting. The Starpower service connections resulted primarily from
customers in the joint venture market acquired from Erols Internet, Inc. in
February 1998.
Voice revenues increased $21,424 or 534.7% to $25,431 for the year ended
December 31, 1998 from $4,007 for the year ended December 31, 1997, primarily
due to higher average connections. Advanced fiber voice connections increased
approximately 860.4% to approximately 31,000 at December 31, 1998 from
approximately 3,000 at December 31, 1997. Off-net voice connections increased
approximately 161.1% to approximately 65,000 at December 31, 1998 from
approximately 25,000 at December 31, 1997. Contributing to the increase in
off-net voice connections was the launch of telephony service in the Lehigh
Valley, Pennsylvania market in the fourth quarter of 1997.
Overall, higher service connections contributed approximately $20,500 to the
increase in voice revenues and higher revenue per connection contributed
approximately $1,000.
During the fourth quarter of 1998, the Company ceased marketing new
customers for resale of its competitors' local phone service. The Company
expects that the effect of this decision will be lower revenue growth than
would result if such resale continued; however, this decision is also expected
to have a positive impact on the Company's overall gross margin percentage and
a neutral effect on operating income before depreciation and amortization
("EBITDA").
Video revenues increased $9,707 or 9.4% to $113,078 for the year ended
December 31, 1998 from $103,371 for the year ended December 31, 1997. Video
revenues for 1997 included one time launch incentive revenue of approximately
$1,000 related to the launch of certain new channels. The increase in 1998 was
primarily due to increases of approximately 22,000 additional video
connections and the conversion of approximately 50,000 off-net connections to
the advanced fiber network at December 31, 1998 as compared to December 31,
1997.
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On-net video connections grew 74,565 or 632.8% to 86,349 at December 31,
1998 from 11,784 at December 31, 1997. Off-net video connections were 175,313
and 227,619 at December 31, 1998 and 1997, respectively.
Overall, higher service connections contributed approximately $6,000 to the
increase in video revenues and higher average revenue per connection
contributed approximately $5,000 offset by the one time launch incentive
revenue of approximately $1,000 received in 1997.
Data revenues increased $40,280 to $40,321 for the year ended December 31,
1998 from $41 for the year ended December 31, 1997 primarily due to the
acquisitions of Erols and UltraNet in February 1998, Interport in June 1998
and Javanet in July 1998. At December 31, 1998, the Company had approximately
492,000 off-net data connections and approximately 6,000 advanced fiber data
connections, including connections of the Starpower joint venture.
During the fourth quarter of 1998, dial-up Internet access replaced resold
local phone service as the Company's initial product offering in areas in
which RCN's fiber optic network is still under construction. The Company
expects that its advanced fiber networks will eventually be extended to reach
most of its dial-up Internet connections.
Commercial and other revenues increased $12,232 or 61.5% to $32,110 for the
year ended December 31, 1998 from $19,878 for the year ended December 31,
1997. The increase was due primarily to an increase in average commercial main
access lines of approximately 9,800 in 1998 over 1997, which contributed
approximately $5,000 to the increase. Higher revenue per commercial main
access line contributed approximately $3,000. Additionally, contributing
approximately $6,000 to the increase was higher wholesale long distance
revenue from Commonwealth Telecom Services, Inc. ("CTSI"), a wholly-owned
subsidiary of Commonwealth Telephone Enterprises, Inc. (formerly C-TEC
Corporation). CTSI is a Competitive Local Exchange Carrier ("CLEC") which
operates in areas adjacent to the traditional service area of Commonwealth
Telephone Company (also a wholly-owned subsidiary of Commonwealth Telephone
Enterprises, Inc.)
The Company recognizes that managing customer turnover is an important
factor in maximizing revenues and cash flow. For the quarter ended December
31, 1998, the Company's average monthly churn rate was approximately 2.8%.
Costs and Expenses, excluding depreciation and amortization
Costs and expenses, excluding depreciation and amortization are comprised of
direct costs, operating, selling and general and administrative expenses.
Direct expenses include direct costs of providing services, primarily video
programming, franchise costs and network access fees.
Direct expenses increased $50,553 or 97.7% to $102,310 for the year ended
December 31, 1998 from $51,757 for the year ended December 31, 1997. The
increase was primarily due to higher voice connections, primarily resold
voice, which contributed approximately $27,500 to the increase. Higher video
programming costs of approximately $8,000 resulted from higher programming
rates, new channels and increased video connections. The remaining increase
primarily represents Internet access costs associated with the increase in
data revenues.
Operating, selling, and general and administrative expenses primarily
include customer service costs, advertising, sales, marketing, order
processing, telecommunications network maintenance and repair ("technical
expenses"), general and administrative expenses, installation and provisioning
expenses and other corporate overhead.
Operating, selling, and general and administrative costs increased $76,832
or 92.3%, to $160,042 for the year ended December 31, 1998 from $83,210 for
the year ended December 31, 1997.
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Advertising costs increased approximately $14,000 or 136.9% for the year
ended December 31, 1998 as compared to the year ended December 31, 1997. Costs
associated with an extensive high visibility multi-media campaign primarily in
New York City and Boston, which commenced in June 1997, increased
approximately $4,400 over 1997. Internet advertising, primarily associated
with the acquisition of Erols, increased approximately $5,300. Promotional
materials expense increased approximately $1,000. Ad agency fees and costs to
promote the commencement of telephony product offering in Lehigh Valley,
Pennsylvania are the significant contributions to the remaining increase in
advertising expense.
Customer service costs, including order processing, increased approximately
$19,500 or 182.1% for the year ended December 31, 1998 as compared to the year
ended December 31, 1997. Increases of approximately $7,500, primarily
personnel related, were due to customer base support for Internet
acquisitions. Other staff and temporary labor increases to support expanding
operations in New York City, Boston, and Lehigh Valley, Pennsylvania
contributed approximately $9,000 to the increase. Higher billing costs of
approximately $3,000 for increased customers comprises the remainder of the
increase in customer service costs.
Technical expense, including installation and provisioning, increased
approximately $11,000 or 58.1% for the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
Technical expense increases of approximately $8,500 were due to engineering
and construction headcount and contract labor additions made to plan and
execute network expansion and network operations center control monitoring.
Resale telephony installation costs contributed approximately $1,700 to the
increase. Retail expense primarily for materials and hub sites increased
approximately $1,500. Technical expense increases associated with Internet
acquisitions in 1998 were approximately $3,500. These increases were partially
offset by approximately $5,200 of technical costs capitalized as part of the
cost basis of the telecommunications network. The remaining increase in
technical expenses is primarily due to higher right of way use fees.
Sales and marketing costs increased approximately $13,000 or 84.6% for the
year ended December 31, 1998 as compared to the year ended December 31, 1997.
The increase resulted from additional staff, contract labor and related
commissions and benefits, aggregating approximately $4,900 to cover increases
in marketable homes, to increase penetration in the Company's existing markets
and to increase the number of services per customer. Telemarketing expense
increased approximately $1,200 due to increased campaigns. Sales and marketing
increases associated with Internet acquisitions in 1998, primarily Erols, were
approximately $5,400.
General and administrative expenses increased approximately $19,000 or
69.5%. Internet and Lancit acquisitions in 1998 contributed approximately
$6,800. Legal expense increased approximately $1,500 primarily as a result of
various start-up regulatory expenses related to the procurement of franchise
and OVS agreements. Higher bad debt expense of approximately $1,500 was
associated with the increase in sales. Higher salaries and benefits of
approximately $3,800 were due to staff additions, primarily to support the
expansion, maintenance and upgrade of the Company's management information
systems, new product development and integration of acquisitions. In addition,
the Company met certain quarterly performance targets established for 1998
relative to the determination of a potential contribution to its ESOP plan and
accrued the related amounts aggregating approximately $1,000. Expenditures in
1998 relative to Year 2000 planning and remediation were approximately $400.
The Company is in the process of developing information technology systems
which will provide a sophisticated customer care infrastructure. Expenses
associated with the planning and analysis stages of such systems development
were approximately $5,000 in 1998. The Company expects that such charges may
increase in future periods during 1999 until the planning and analysis stages
of its IT systems development projects are complete. The above increases were
partially offset by a one-time credit of approximately $2,400 related to the
reversal of an accrual for damages related to contract termination which was
settled between the Company and the counterparty.
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Depreciation and amortization
Depreciation and amortization was $89,088 for the year ended December 31,
1998 and $53,205 for the year ended December 31, 1997. The increase of
$35,883, or 67.4% was the result of both a higher depreciable basis of plant,
resulting primarily from expansion of the Company's advanced fiber network,
and amortization of intangible assets arising from the acquisitions of Erols
and UltraNet in February 1998. The cost basis of property, plant and equipment
at December 31, 1998 and 1997 was $601,679 and $307,759, respectively. The
basis of intangible assets was $267,031 and $149,935 at December 31, 1998 and
1997, respectively.
In future periods, depreciation and amortization are expected to exceed
amounts recorded in 1998 due to depreciation with respect to expansion of the
Company's advanced fiber optic network and the effect of a full year of
depreciation and amortization related to acquisitions in 1998.
Acquired in-process research and development
In connection with the acquisitions of Erols and UltraNet, RCN has allocated
$13,228 for Erols and $5,065 for UltraNet to in-process research and
development ("IPR&D"). Specifically, four projects were identified which
qualified as IPR&D by definition of not having achieved technological
feasibility and representing technology which at the point of acquisition
offered no alternative use other than the defined project. Those projects were
cable modem Internet access for subscribers, Internet telephony, E-Commerce
systems, and high-speed shared office Internet access (Note 4). The IPR&D
valuation charge was measured by the stage of completion method. The expected
completion percentages are estimated based on the latest available financial
information at the date of acquisition and were established on a project by
project basis primarily calculated by dividing the costs incurred to date by
the total expected R&D expenses specific to the project. The significant
assumptions utilized by management were as follows:
Cash flow projections, utilizing risk adjusted discount rates of between 35%
and 40% for Erols projects, commenced in 1998, and were expected to grow
significantly in 1999 and 2000. Cash flow projections, utilizing risk adjusted
discount rates of between 30% and 33% for UltraNet projects, were expected to
commence in 1999, growing significantly in 2000 and 2001. The IPR&D
projections are founded on significant assumptions with regard to timing of
market entrance, levels of penetration and costs of provisioning.
RCN is constructing new telecommunications networks. The margins on products
expected to result from acquired in-process technologies in some cases
represent higher margins than RCN's margins on existing products primarily due
to the efficiencies in delivering multiple products, including bundled-service
offerings, over a single state of the art high capacity fiber optic network.
Interest income
Interest income was $58,679 and $22,824 for the years ended December 31,
1998, and 1997, respectively. The increase of $35,855, or 157.1% results from
higher cash, temporary cash investments and short-term investments as compared
to the same period in 1997. Cash, temporary cash investments and short-term
investments were approximately $1,013,000 at December 31, 1998 and
approximately $639,000 at December 31, 1997. Included in the cash, temporary
cash investments and short-term investments balance at December 31, 1997 were
proceeds from 10% Senior Notes, issued in October 1997, which generated gross
proceeds of $225,000 and yielded net proceeds of $218,250; and 11 1/8% Senior
Discount Notes, issued in October 1997, which generated gross proceeds of
$350,001 and yielded net proceeds of $337,751. Additionally, during 1998,
proceeds from the following increased cash, temporary cash investments and
short-term investments: 9.8% Senior Discount Notes, issued in February 1998,
which generated gross proceeds of $350,587 and yielded net proceeds of
$344,855; 11% Senior Discount Notes, issued in June 1998, which generated
gross proceeds of $149,999 and yielded net proceeds of $147,187 and the
issuance of 6,098,355 shares of the Company's Common Stock, issued in June
1998, which yielded net proceeds of $112,866.
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Interest expense
For the year ended December 31, 1998, interest expense was $112,239 as
compared to $25,602 for the year ended December 31, 1997. The increase
resulted from the debt financings referred to above, offset by a reduction due
to the prepayment in September 1997 and $131,250 of 9.65% Senior Secured
Notes.
Other (expense) income
Other (expense) income was ($1,889) and $131 for the years ended December
31, 1998 and 1997, respectively. The 1998 expense primarily represents the
write down of certain of the Company's information technology assets which the
Company upgraded with higher capacity state of the art products in connection
with an overall internal technology upgrade.
Income tax
The Company's effective income tax rate was a benefit of 2.3% and 29.8% for
the years ended December 31, 1998 and 1997, respectively. The primary reasons
for the difference include the charge for in-process technology which is not
deductible for tax purposes and for which a tax benefit was correspondingly
not recorded. Additionally, during 1998, the tax effect of the Company's
cumulative losses has exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. Except in unusual cases, generally accepted accounting principles do
not permit the recognition of tax benefits of such excess losses in the
financial statements. This accounting treatment does not impact the amount or
expiration periods of actual net operating loss carryovers or cash flows for
taxes. For an analysis of the changes in income taxes, see the reconciliation
of the effective income tax rate in note 11 to the consolidated financial
statements.
Minority interest
For the year ended December 31, 1998, minority interest of $17,162 primarily
represents the 49% interest of BECO in the loss of RCN-BECOCOM. For the year
ended December 31, 1997, minority interest primarily represents the 49%
interest of BECO in the loss of RCN-BECOCOM of $6,563 and the 19.9% minority
interest in the loss of Freedom of $966. The Company purchased the remaining
19.9% ownership interest in Freedom on March 21, 1997.
Equity in loss of unconsolidated entities
For the year ended December 31, 1998, equity in the loss of unconsolidated
entities primarily represents the Company's 50% interest in the loss of
Starpower of $10,335 and the Company's share of the losses and amortization of
excess cost over net assets of Megacable of $2,384. In January 1995, the
Company purchased a forty percent equity position in Megacable, a Mexican
cable television provider, for cash of $84,115. The Company is exposed to
foreign currency translation adjustments resulting from translation into U.S.
dollars of the financial statements of Megacable, which through December 1996
utilized the peso as the local and functional currency. Such adjustments have
historically been included as a separate component of shareholders' equity.
Effective January 1, 1997 since the three year cumulative rate of inflation at
December 31, 1996 exceeded 100%, Mexico is being treated for accounting
purposes under Statement of Financial Accounting Standards No. 52-- "Foreign
Currency Translation" as having a highly inflationary economy through December
31, 1998. As a result, the financial statements of Megacable are remeasured as
if the functional currency were the U.S. dollar. The remeasurement of the
Mexican peso into U.S. dollars creates translation adjustments which are
included in net income. The Company is also exposed to foreign currency
translation losses resulting from transactions of Megacable which are made in
currencies different from Megacable's own. The Company's proportionate share
of translation gains (losses) are included in income as they occur. The
Company does not hedge its foreign currency exchange risk and it is not
possible to determine what effect future currency fluctuations will have on
the Company's operating results. Exchange gains (losses) of ($768), ($12), and
$247 in 1998, 1997 and 1996, respectively, including translation losses in
1998 and 1997, are included in the respective statements of operations through
the Company's porportionate share of losses of Megacable.
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<PAGE>
In 1998, Megacable had sales of $37,480, operating income before
depreciation and amortization of $13,409 and net income of $9,739. In 1997,
Megacable had sales of $30,441, operating income before depreciation and
amortization of $10,504 and net income of $6,653. The Company's investment in
Megacable exceed its underlying equity in the net assets of Megacable when
acquired by approximately $94,000, which goodwill is being amortized on a
straight-line basis over 15 years. In 1998 and 1997 amortization of the
Company's excess purchase price over the net assets of Megacable when acquired
was $6,280 in each year. For the year ended December 31, 1997, equity in the
loss of unconsolidated entities primarily represents the Company's share of
the losses and amortization of excess cost over net assets of Megacable.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996:
Sales were $127,297 for the year ended December 31, 1997 as compared to
$104,910 for the year ended December 31, 1996.
Operating income before depreciation, amortization and nonrecurring charge
was ($7,670) for the year ended December 31, 1997 as compared to $25,803 for
the year ended December 31, 1996.
Net loss was ($52,391) or ($.95) per average common share for 1997 and
($5,989) or ($.11) per average common share for 1996.
Sales
For the year ended December 31, 1997, total sales were $127,297, an increase
of $22,387 or 21.3%, from $104,910 for the year ended December 31, 1996,
primarily due to higher total service connections which increased 20.6% to
approximately 268,000 at December 31, 1997 from approximately 222,000 at
December 31, 1996. The increase is due to the commencement of service through
advanced fiber optic network facilities as well as growth in resold voice and
off-net video connections.
Voice revenues increased $3,177 to $4,007 for the year ended December 31,
1997 from $830 for the year ended December 31, 1996. The increase was
primarily due to an increase in off-net connections. Off-net connections were
24,900 and 1,875 at December 31, 1997 and 1996, respectively.
Video revenue increased $15,901 or 18.2% to $103,371 for the year ended
December 31, 1997 from $87,470 for the year ended December 31, 1996. The
increase was due to an increase in off-net video sales principally resulting
from higher basic service revenue resulting from approximately 4,850
additional average monthly subscribers over 1996, the effects of a rate
increase in the first quarter of 1997 and cash incentives related to the
launch of certain new channels. Additionally, other video sales increased
primarily due to the acquisition of Freedom on August 30, 1996 (the "Freedom
Acquisition"), which resulted in approximately 38,000 wireless video
connections for a full year in 1997 as compared to four months in 1996. The
Company also began providing video service over its advanced fiber network
during 1997 and had approximately 11,800 advanced fiber connections at
December 31, 1997.
Commercial and other revenues increased $3,272, or 19.7% to $19,878 for the
year ended December 31, 1997 from $16,606 for the year ended December 31,
1996. The increase primarily results from terminating access provided to CTSI.
An increase in commercial main access lines of approximately 5,200 over 1996
accounted for approximately $1,100 of the increase in commercial and other
revenues.
Costs and expenses, excluding depreciation and amortization
For the year ended December 31, 1997, direct expenses were $51,757, an
increase of $16,531 or 46.9% as compared to direct expenses of $35,226 in
1996. The increase is primarily attributable to higher sales and a change in
overall revenue mix to a higher volume of resold voice, which has a lower
margin than the Company's other products. The resold voice increase represents
planned marketing primarily in the Boston and New York
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<PAGE>
City markets ahead of construction of the advanced fiber network to build a
customer base which is intended to be migrated to the advanced fiber network.
Origination and programming costs increased approximately $7,200 primarily due
to higher video connections, rate increases and additional channels. The
remaining increase in direct costs and expenses is principally attributable to
higher commercial long distance network capacity in anticipation of volume
growth in the Company's markets resulting in higher recurring costs.
Operating, selling and general and administrative expenses increased $39,329
or 89.6% to $83,210 for the year ended December 31, 1997 from $43,881 for the
year ended December 31, 1996. Advertising costs increased approximately $9,000
for the year ended December 31, 1997 primarily due to a high visibility multi-
media campaign to promote name recognition primarily in New York City and
Boston. Customer service costs increased approximately $4,100, or 60.3%
primarily related to headcount additions to support the increase in the
customer base and to meet the Company's objectives for world class customer
service. Technical expense increased approximately $8,300, or 75.1% for the
year ended December 31, 1997. The increase is primarily related to salaries
and benefits associated with increased network engineering staff, responsible
for planning the development and construction of the advanced fiber network,
and increased installation and repair technicians. Sales and marketing costs
increased approximately $8,500, or 116.7%, for the year ended December 31,
1997. The increase relates to higher sales staff to increase penetration in
the Company's markets, higher marketing staff to monitor and coordinate the
Company's direct advertising efforts and plan sales promotions and to higher
telemarketing expenses. The remaining increase in operating, selling and
general and administrative expenses is attributable to several factors
including costs associated with the spin-off of the Company from C-TEC.
Additionally, in connection with the Distribution (Note 1), C-TEC completed a
comprehensive study of its employee benefit plans in 1996. As a result of this
study, effective December 31, 1996, in general, employees of RCN no longer
accrued benefits under the defined benefit pension plan, but became fully
vested in their defined pension benefits accrued through that date. C-TEC
notified affected participants in December 1996. In December 1996, C-TEC
allocated pension plan assets of $6,984 to a separate plan for employees who
no longer accrued benefits after December 31, 1996. The underlying liabilities
were also allocated. The allocation of assets and liabilities resulted in a
curtailment/settlement gain of $4,292. The Company's allocable share of this
gain was $3,437. Such gain did not recur in 1997.
Depreciation and amortization
Depreciation and amortization increased $14,324, or 36.8% to $53,205 for the
year ended December 31, 1997 as compared to $38,881 for 1996. The increase is
principally due to the additional depreciation and amortization resulting from
the Freedom Acquisition and depreciation related to the Company's advanced
fiber optic networks in New York City and Boston.
Nonrecurring charges
Nonrecurring charges of $10,000 in 1997 represent costs incurred with
respect to the termination of a marketing services agreement held by Freedom.
Interest income
For the year ended December 31, 1997, interest income was $22,824, a
decrease of $2,778, or 10.9% primarily due to lower average cash balances and
lower average notes receivable with related parties. Average cash balances
decreased principally as a result of the Freedom Acquisition in August 1996
(as well as the acquisition in March 1997 of the remaining 19.9% ownership
interest in Freedom) and capital expenditures, partially offset by the
proceeds of the Company's high yield debt offering in October 1997.
Interest expense
For the year ended December 31, 1997, interest expense was $25,602, an
increase of $9,556, or 59.6% primarily due to interest expense on the
Company's $225,000 of 10% Senior Notes and $601,045 aggregate principal amount
at maturity of 11 1/8% Senior Discount Notes placed in October 1997 (Note 10).
This was partially offset by lower interest expense resulting from the
required principal payment in December 1996 of
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$18,750 on 9.65% Senior Secured Notes. Additionally, the Company paid $922 to
Kiewit Telecom Holdings, Inc. in 1996 in connection with the Company's August
1996 acquisition of Kiewit Telecom Holdings, Inc.'s 80.1% interest in Freedom.
This portion of the consideration represents an amount to compensate Kiewit
Telecom Holdings, Inc. for forgone interest on the amount which it had
invested in Freedom.
Income tax
Benefit for income taxes increased $21,828 primarily due to the increase of
$65,020 in loss after minority interest and equity in unconsolidated entities
before income taxes. For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in Note 11 to the Consolidated
Financial Statements.
Minority interest
Minority interest in the loss of consolidated entities increased $5,956
primarily as a result of the minority share of the losses of the BECO joint
venture (Note 7), which began operations in June 1997. Additionally, the
minority share of the losses of Freedom from January 1 through March 21, at
which time the Company acquired the remaining 19.9% ownership interest, was
$966.
Equity in loss of unconsolidated entities
The Company's equity in the (loss) of unconsolidated entities was ($3,804)
in 1997 and ($2,282) in 1996, and is comprised principally of the Company's
share of the operating results of Megacable. Exchange gains (losses) of ($12),
$247, and ($932) in 1997, 1996 and 1995, respectively, including translation
losses in 1997, are included in the respective statements of operations
through the Company's proportionate share of losses of Megacable.
In 1997, Megacable had sales of $30,441, operating income before
depreciation and amortization of $10,504 and net income of $6,653. In 1996,
Megacable had sales of $23,225, operating income before depreciation and
amortization of $10,183 and net income of $10,226.
Extraordinary charge
In September 1997, the Company prepaid Senior Secured Notes with the
proceeds of new credit facilities (Note 10). The early extinguishment of the
Senior Secured Notes resulted in an extraordinary charge of $3,210, net of
taxes.
Liquidity and Capital Resources
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 its current growth plan, the Company expects that it will require a
substantial amount of capital to expand the development of its network and
operations into new areas within its larger target markets. The Company needs
capital to fund the construction of its advanced fiber optic networks, upgrade
its hybrid fiber/coaxial plant, fund operating losses and repay its debts. The
Company currently estimates that its 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 the Company's fiber optic newtork in high
density areas in the Boston, New York, Washington, D.C. and San Francisco Bay
markets as well as to expand into new markets and to develop its information
technology systems. These estimates are forward-looking
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statements that may change if circumstances related to construction, timing of
receipt of regulatory approvals and opportunities to accelerate the deployment
of the Company's networks do not occur as expected. In addition to the
Company's own capital requirements, its joint venture partners are each
expected to contribute approximately $275 million, of which approximately $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, the Company expects to supplement
its existing available credit facilities and operating cash flow by continuing
to seek to raise additional capital to increase its network coverage and pay
for other capital expenditures, working capital, debt service requirements and
anticipated further operating losses.
Sources of funding for the Company's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. There can be no assurance that
sufficient additional financing will continue to be available to the Company
or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain such financing could result in the delay or
curtailment of the Company's development and expansion plans and expenditures.
Any of these events could impair the Company's ability to meet its debt
service requirements and could have a material adverse effect on its business.
In October 1997, the Company raised $575,000 in gross proceeds from an
offering of two tranches of debt securities. The offering was comprised of
$225,000 principal amount of 10% Senior Notes and $601,045 principal amount at
maturity of 11 1/8% Senior Discount Notes, both due in 2007. The proceeds
include $61,000 of restricted cash to be used to fund an Escrow Account to pay
interest on the 10% Senior Notes for three years. In February 1998, the
Company raised $350,587 in gross proceeds from an offering of $567,000
principal amount at maturity of 9.80% Senior Discount Notes, due in 2008. In
June 1998, the Company raised $149,999 in gross proceeds from an offering of
$256,755 principal amount at maturity of 11% Senior Discount Notes, due 2008.
Also in June 1998, the Company raised $112,866 in net proceeds from an
offering of 6,098,355 shares of the Company's Common Stock. The preceding
Indentures all contain similar provisions. The Chase Manhattan Bank acts as
Trustee for each of the Indentures. All the aforementioned Notes are general
senior unsecured obligations of RCN. The 9.80% Senior Discount Notes will
mature on February 15, 2008. The 9.80% Senior Discount Notes will not bear
cash interest prior to February 15, 2003. Thereafter, cash interest on the
notes will accrue at 9.80% per annum and will be payable semi-annually in
arrears on February 15 and August 15 of each year commencing February 15,
2003. The 10% and 11 1/8% Notes (the "1997 Notes") will mature on October 15,
2007. Interest on the 10% Senior Notes is payable in cash at a rate of 10% per
annum semi-annually in arrears on each April 15 and October 15, commencing
April 15, 1998. The 11 1/8% Senior Discount Notes will not bear cash interest
prior to October 15, 2002. Thereafter, cash interest on the notes will accrue
at a rate of 11 1/8% per annum and will be payable semi-annually in arrears on
April 15 and October 15 of each year commencing April 15, 2002. The 11% Senior
Discount Notes will not bear cash interest prior to January 1, 2003.
Thereafter, cash interest on the notes will accrue at a rate of 11% per annum
and will be payable semi-annually in arrears on January 1 and July 1 of each
year, commencing July 1, 2003.
The 9.80% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after February 15, 2003 at the option of RCN. The 9.80% Senior
Discount Notes may be redeemed at redemption prices starting at 104.900% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest. The 1997 Notes are
redeemable, in whole or in part, at any time on or after October 15, 2002 at
the option of RCN. The 10% Senior Notes may be redeemed at redemption prices
starting at 105% of the principal amount and declining to 100% of the
principal amount, plus any accrued and unpaid interest. The 11 1/8% Senior
Discount Notes may be redeemed at redemption prices starting at 105.562% of
the principal amount at maturity and declining to 100% of the principal amount
at maturity, plus any accrued and unpaid interest. The 11% Senior Discount
Notes will be redeemable, in whole or in part, at any time on or after July 1,
2003 at the option of RCN. The 11% Senior Discount Notes may be redeemed at
redemption prices starting at 105.5% of the principal amount at maturity and
declining to 100% of the principal amount at maturity, plus accrued and unpaid
interest.
S-21
<PAGE>
RCN may, at its option, use the net proceeds of certain offerings of RCN
Common Stock to redeem up to an aggregate of 35% of the aggregate principal
amount at maturity of the debt securities issued under the Indentures at a
certain premium. Upon the occurrence of a change of control, RCN must make an
offer to purchase all of the debt securities issued under the Indentures then
outstanding at a premium.
The Indentures contain certain convenants that, among other things, limit
the ability of RCN and its subsidiaries to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
RCN Cable and certain of its subsidiaries ("Borrowers") have in place
collaterized credit facilities comprised of a five-year revolving credit
facility in the amount of $25,000 (the "Revolving Credit Facility") and an
eight-year term credit facility in the amount of $100,000 (the "Term Credit
Facility"), both of which facilities are governed by a single credit agreement
dated as of July 1, 1997 (the "Credit Agreement"). As of December 31, 1998,
$100,000 of the Term Credit Facility was outstanding. The term loan must be
repaid over six years in quarterly installments, at the end of September,
December, March and June of each year from September 30, 1999 through June 30,
2005. As of December 31, 1998, no principal was outstanding under the
Revolving Credit Facility. Revolving loans may be repaid and reborrowed from
time to time. All borrowings under the Credit Agreement will be pari passu and
will be collaterized under a common collateral package.
The interest rate on the Credit Agreement is, at the election of the
Borrowers, based on either a LIBOR or a Base Rate option (each as defined in
the Credit Agreement). In the case of LIBOR option, the interest rate includes
a spread that varies, based on RCN Cable's Leverage Ratio (defined as the
ratio of Total Debt at the last day of the most recently ended fiscal quarter
to Operating Cash Flow for the four fiscal quarters then ended), from 50 basis
points to 125 basis points. In the case of the Revolving Credit Facility, a
fee of 20 basis points on the unused revolving commitment accrues and is
payable quarterly in arrears.
The Credit Agreement contains customary covenants for facilities of this
nature, including covenants limiting debt, liens, investments, consolidations,
mergers, acquisitions and sales of assets, payment of dividends and other
distributions, capital expenditures and transactions with affiliates. In
addition, the Borrowers are subject to a prohibition on granting negative
pledges and the Borrowers must apply certain cash proceeds realized from
certain asset sales, certain payments under insurance policies and certain
incurrences of additional debt to repay the Revolving Credit Facility. The
Credit Agreement requires the Borrowers to maintain the following financial
ratios: (i) the ratio of Total Debt at any fiscal quarter end to Operating
Cash Flow for the trailing four fiscal quarters is not to exceed 5.0:1
initially, adjusting over time to 4.0:1; (ii) the ratio of Operating Cash Flow
to Interest Expense for any four consecutive fiscal quarters is not to fall
below 2.75:1 for periods ending during the first 3 years after the Closing
Date, adjusting to 3.0:1 thereafter; and (iii) the ratio of Operating Cash
Flow (minus certain capital expenditures, cash taxes and cash dividends) to
Fixed Charges (defined as scheduled principal payments and interest expense)
for any four consecutive quarters is not to fall below 1.0:1 for periods
ending on or before December 31, 2000 and adjusting to 1.05:1 thereafter. The
Credit Agreement also includes customary events of default.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At December 31, 1998, the Company has an
aggregate of approximately $1,267,000 of indebtedness outstanding, and the
ability to borrow up to an additional $25,000 under the Credit Agreement. The
Company also has cash, temporary cash investments and short-term investments
aggregating approximately $1,013,000 and a current ratio of approximately 6 to
1.
On March 18, 1999, the Company announced that Hicks, Muse, Tate & Furst,
through Hicks, Muse, Tate & Furst Equity Fund IV, L.P., signed a commitment to
purchase up to $250 million of a new issue of Series A 7% Senior Convertible
Preferred Stock ("Series A Preferred Stock") of the Company in a private
placement transaction. The Series A Preferred Stock will have an annual
dividend rate of 7% payable quarterly in cash or additional shares of Series A
Preferred Stock at the option of the Company and will have an initial
conversion
S-22
<PAGE>
price of $39.00 per share (which represents a 30% premium over the average
five-day closing price of the Common Stock of the Company). The Series A
Preferred Stock is convertible into Common Stock of the Company at any time.
The issue has a final maturity of 15 years, but may be called by the Company
after four years.
The Company also announced on March 18, 1999 that it had entered into a
commitment letter with The Chase Manhattan Bank ("Chase") pursuant to which
Chase has agreed to provide an aggregate principal amount of $1 billion of
senior secured credit facilities to certain of the Company's wholly-owned
subsidiaries. The facilities will be comprised of a seven-year senior secured
revolving credit facility in an amount of $250 million, a seven-year senior
secured multi-draw term loan facility in an amount of $350 million and an
eight-year senior secured single-draw term loan facility in an amount of $400
million. All borrowings under the facilities will be pari passu and will be
collaterilized under a common collateral package covering substantially all of
the assets of the Company and its domestic subsidiaries.
As a result of the substantial indebtedness of the Company, the Company's
fixed charges are expected to exceed its earnings for the foreseeable future.
Based on its current plans, the Company will require substantial additional
capital particularly in connection with the buildout of the Company's networks
and the introduction of its telecommunications services to new markets. The
leveraged nature of the Company could limit its ability to effect future
financing or may otherwise restrict the Company's business activities.
The extent of the Company's leverage may have the following consequences:
(i) limit the ability of the Company to obtain necessary financing in the
future of working capital, capital expenditures, debt service requirements or
other purposes; (ii) require that a substantial portion of the Company's cash
flows from operations be dedicated to the payment of principal and interest on
its indebtedness and therefore not be available for other purposes; (iii)
limit the Company's flexibility in planning for, or reacting to, changes in
its business; (iv) place the Company at a competitive disadvantage as compared
with less leveraged competitors; and (v) render the Company more vulnerable in
the event of a downturn in its business.
For the year ended December 31, 1998, the Company's net cash provided by
operating activities was $35,110 comprised primarily of a net loss of
($205,442) adjusted by non-cash depreciation and amortization of $89,088,
other non-cash items totaling $95,569 and working capital changes of $58,133.
Net cash used in investing activities of $828,176 consisted primarily of
additions to property, plant and equipment of $285,867, purchase of short-term
investments of $936,401, investment in unconsolidated joint venture of $20,000
and acquisitions of $47,361 (primarily the Erols, UltraNet and JavaNet
acquisitions), partially offset by net sales and maturities of short-term
investments of $461,795. Net cash provided by financing activities of $690,282
included the issuance of long-term debt of $502,587, proceeds from the
issuance of stock of $112,866, contribution from minority interest partner of
$77,849 and decrease in investments restricted for debt service of $22,375,
partially offset by the repayment of long-term debt of $7,770, purchase of
treasury stock of $9,301 and payments made for debt financing costs of
$10,185.
For the year ended December 31, 1997, the Company's net cash provided by
operating activities was $2,069, comprised primarily of a net loss of
($52,391) adjusted by non-cash depreciation and amortization of $53,205, other
non-cash items totaling ($203), working capital changes of $377 and changes in
other deferred expenses of $1,081. Net cash used in investing activities of
$475,860 consisted primarily of purchases of short-term investments of
$445,137, additions to property, plant and equipment of $79,042 and
acquisitions of $30,490 (primarily acquisition of the minority interest of
Freedom) partially offset by sales and maturities of short-term investments of
$76,923. Net cash provided by financing activities of $634,858 consisted
primarily of issuance of long-term debt of $688,000, change in affiliate notes
of $97,624 and transfers from C-TEC of $89,323 partially offset by repayment
of long-term debt of $141,250, transfers to C-TEC of $23,474, payments made
for debt financing costs of $20,151 and an increase related to cash restricted
for debt service of $61,250.
S-23
<PAGE>
Impact of the Year 2000 Issue
Certain statements concerning Year 2000 issues, which contain more than
historical information, may be considered forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and are
thus subject to risks and uncertainties. Actual results may differ materially
from those expressed by any forward-looking statements. The Company's Year
2000 discussion should be read in conjunction with the Company's statement on
forward-looking statements which appears at the beginning of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For the year ended December 31, 1998, the Company's net cash provided by
operating activities was $35,110 comprised primarily of a net loss of
($205,442) adjusted by non-cash depreciation and amortization of $89,088,
other non-cash items totaling $95,569 and working capital changes of $58,133.
Net cash used in investing activities of $828,176 consisted primarily of
additions to property, plant and equipment of $285,867, purchase of short-term
investments of $936,401, investment in unconsolidated joint venture of $20,000
and acquisitions of $47,361 (primarily the Erols, UltraNet and JavaNet
acquisitions), partially offset by net sales and maturities of short-term
investments of $461,795. Net cash provided by financing activities of $690,282
included the issuance of long-term debt of $502,587, proceeds from the
issuance of stock of $112,866, contribution from minority interest partner of
$77,849 and decrease in investments restricted for debt service of $22,375,
partially offset by the repayment of long-term debt of $7,770, purchase of
treasury stock of $9,301 and payments made for debt financing costs of
$10,185.
For the year ended December 31, 1997, the Company's net cash provided by
operating activities was $2,069, comprised primarily of a net loss of
($52,391) adjusted by non-cash depreciation and amortization of $53,205, other
non-cash items totaling ($203), working capital changes of $377 and changes in
other deferred expenses of $1,081. Net cash used in investing activities of
$475,860 consisted primarily of purchases of short-term investments of
$445,137, additions to property, plant and equipment of $79,042 and
acquisitions of $30,490 (primarily acquisition of the minority interest of
Freedom) partially offset by sales and maturities of short-term investments of
$76,923. Net cash provided by financing activities of $634,858 consisted
primarily of issuance of long-term debt of $688,000, change in affiliate notes
of $97,624 and transfers from C-TEC of $89,323 partially offset by repayment
of long-term debt of $141,250, transfers to C-TEC of $23,474, payments made
for debt financing costs of $20,151 and an increase related to cash restricted
for debt service of $61,250.
State of Readiness
The Company has certain information technology ("IT") systems (system used
in the management of the business) and non-information technology systems
("non- IT") (System used to produce service to customers) which are subject to
Year 2000 exposures and require remediation. The Company has established a
Year 2000 Program Office which is staffed with personnel who address, on a
full-time and ongoing basis, the Year 2000 issue. This group is led by a full-
time Director who reports in the organization, on a daily basis, directly to
the Senior Vice President of IT, on a periodic basis, to a Year 2000 Steering
Committee comprised of the Chairman, President, Chief Financial Officer,
Senior Vice President of IT, General Counsel and President of Network
Technology of the Company. The Year 2000 Program Office personnel work with
subject matter experts consisting of current employees from various
disciplines across the Company to specifically identify these
systems and implement a plan for remediation. This plan, the Year 2000
Compliance Program, includes a 5-step process of remediation as follows:
1. inventory
2. planning
3. assessment
4. repair
5. integration
The Company has evaluated which systems are critical to its operations and
has prioritized its Year 2000 remediation efforts to address these systems
first. As a result, the Company is in different stages of this Program for its
various systems.
S-24
<PAGE>
For business reasons unrelated to Year 2000 issues, the Company is replacing
its financial, billing, operational support, and customer services systems.
These systems are critical to the Company's operations. The financial system
replacement involved converting the legacy of financial systems to a state-of-
the-art Oracle system. The Oracle system, which went into production use on
November 1, 1998, is expected to ensure Year 2000 compliance in financial
applications. The replacement systems for the Company's billing, operational
support and customer services will also be Year 2000 compliant at
installation. The replacement of the billing, operational support and customer
service systems is in process and includes substantial risk of not progressing
along the planned time line due to the scope of the project. To manage this
risk, the Company has assumed that the replacement systems will not be
available before the Year 2000. To ensure business continuity, and as a
contingency strategy, the Company is renovating the current billing,
operational support and customer service systems which are not already Year
2000 compliant. The Company's switches and head-ends are also critical systems
and are either currently Year 2000 compliant or are expected to be compliant
with the next vendor software upgrade. Such software upgrades are expected to
be installed by June 30, 1999.
The Company expects most renovations to IT systems to be completed by May
31, 1999. The Company has begun testing of some of its critical systems and
expects thorough integration testing to be completed by June 30, 1999. The
Company completed an inventory of its non-IT systems which must be remediated
and is in the process of developing a specific remediation plan and timetable
for those systems.
The Year 2000 compliance status of interdependent third parties is not yet
fully known. The Company recognizes the importance of communication with third
parties to determine their plans for becoming Year 2000 compliant. The Company
estimates that it has approximately 200 critical vendors and has sent surveys
regarding the Year 2000 remediation to those vendors. The Company has received
responses from approximately 40% of these vendors. The Company is vigorously
pursuing the timely receipt of relevant information from the remaining
vendors. The Company will assess its remediation plans based on those
responses. The Company is also working with integrated providers and will be
setting up testing, according to their communications. The Company will be
reviewing the process of risk and contingency planning associated with
noncompliant vendor responses. There can be no assurance that third party
systems will be made Year 2000 compliant in a timely manner or that non-
compliance of these systems would not have a material adverse effect on the
Company's operations and financial condition.
No other IT projects have been deferred due to the Year 2000 remediation
efforts.
Cost
Based upon its current assessment, the total cost associated with the
Company's Year 2000 Compliance Program is not expected to be material to the
Company's results of operations or financial position. The estimated
total cost of the Company's Year 2000 Compliance Program is approximately
$5,500. This is comprised of approximately $3,300 for salaries, facilities and
consulting services; approximately $1,200 for program code remediation;
approximately $500 for equipment replacement and approximately $500 for
testing. Approximately $400 has been incurred through December 31, 1998. The
cost for replacing systems which had been planned, and for which the timeline
for replacement was not accelerated due to Year 2000 issues, have not been
included.
Risk Assessment and Contingencies
Through current and constant systems reassessment, the Company does not
believe it is exposed to any significant Year 2000 risk with respect to its
critical systems other than would be caused by substantial deviation from the
plans and time frames set forth above, in particular, with respect to our
ability to bill customers, track collections of receivables and provide
services for new orders. The Company is currently in the process of
identifying its other systems requiring remediation and intends to apply its
five-step program as outlined above to these systems based on each system's
priority in operations. The company is not currently able to assess the most
significant risk associated with vendor non-compliance.
S-25
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in an underwriting agreement,
each underwriter named below has severally agreed to purchase, and RCN
Corporation has agreed to sell to each underwriter, the number of shares set
forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number
of
Name Shares
- ---- ------
<S> <C>
Salomon Smith Barney Inc. ...............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................
Morgan Stanley & Co. Incorporated........................................
Donaldson, Lufkin & Jenrette Securities Corporation......................
First Union Capital Markets Corp. .......................................
Prudential Securities Incorporated.......................................
NationsBanc Montgomery Securities LLC....................................
Deutsche Bank Securities Inc. ...........................................
Chase Securities Inc. ...................................................
----
Total................................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. After the initial offering of the shares to
the public, the public offering price and such concessions may be changed by
the representatives.
RCN Corporation has granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 1,200,000
additional shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent such option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
RCN Corporation and its officers and directors have agreed that, for a
period of 90 days from the date of this prospectus, they will not, without the
prior written consent of Salomon Smith Barney Inc., offer, sell, contract to
sell, or otherwise dispose of, any shares of common stock of RCN Corporation
or any securities convertible into, or exercisable or exchangeable for, its
common stock. Salomon Smith Barney Inc. in its sole discretion may release any
of the securities subject to these lock-up agreements at any time without
notice.
The common stock is quoted on the Nasdaq National Market under the symbol
"RCNC".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by RCN Corporation in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by RCN
Corporation
----------------------
No
Exercise Full Exercise
-------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the
S-26
<PAGE>
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of common stock made for the purpose of preventing
or retarding a decline in the market price of the common stock while the
offering is in progress. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when Salomon Smith Barney Inc., in
covering syndicate short positions or making stabilizing purchases,
repurchases shares originally sold by that syndicate member. These activities
may cause the price of the common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions.
These transactions may be effected on the Nasdaq National Market or in the
over-the-counter market, or otherwise and, if commenced, may be discontinued
at any time.
In connection with this offering, the underwriters and certain selling group
members may engage in passive market making transactions in our common stock
on the Nasdaq National Market in accordance with Regulation M under the
Securities Exchange Act of 1934 during a period before the commencement of
offers or sales of common stock under this prospectus.
The representatives have performed certain investment banking and advisory
services for RCN from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in
transactions with and perform services for RCN in the ordinary course of their
business. Each of Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, NationsBanc Montgomery Securities LLC and Donaldson,
Lufkin & Jenrette Securities Corporation acted as underwriters in the offering
of our 11% Senior Discount Notes due 2008 and each of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Smith Barney Inc., NationsBanc Montgomery
Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation and
Prudential Securities Incorporated, acted as underwriters in the offering of
our common stock in June 1998.
RCN has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
S-27
<PAGE>
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 Corporation by Davis
Polk & Wardwell, New York, New York. Certain legal matters relating to this
offering will be passed upon for the underwriters by Cahill Gordon & Reindel
(a partnership including a professional corporation), New York, New York.
S-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,000,000 Shares
RCN Corporation
Common Stock
[RCN Logo Appears Here]
--------
PROSPECTUS
May 10, 1999
--------
Salomon Smith Barney
Merrill Lynch & Co.
Morgan Stanley Dean Witter
Donaldson, Lufkin & Jenrette
First Union Capital Markets Corp.
Prudential Securities
NationsBanc Montgomery Securities LLC
Deutsche Bank Securities
Chase Securities Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
