<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of March 31, 1999.
Common Stock 66,523,546
<PAGE>
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended
March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets-
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 11-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Sales $ 67,388 $ 40,138
Costs and expenses, excluding
depreciation and amortization 88,837 48,455
Depreciation and amortization 32,274 18,131
Nonrecurring acquisition costs: In-process technology - 18,293
--------------- ---------------
Operating (loss) (53,723) (44,741)
Interest income 13,403 12,815
Interest expense (31,790) (22,735)
Other income (expense), net 707 (899)
--------------- ---------------
(Loss) before income taxes (71,403) (55,560)
(Benefit) for income taxes (1,014) (11,682)
--------------- ---------------
(Loss) before equity in unconsolidated
entities and minority interest (70,389) (43,878)
Equity in (loss) of unconsolidated entities (3,903) (1,493)
Minority interest in loss of
consolidated entities 6,538 3,586
--------------- ---------------
Net (loss) $ (67,754) $ (41,785)
=============== ===============
Basic and Diluted (loss) per average common share:
Net loss to shareholders $ (1.03) $ (0.74)
=============== ===============
Weighted average shares outstanding 65,629,601 56,216,310
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 90,127 $ 120,126
Short-term investments 824,547 892,448
Accounts receivable from related parties 15,581 6,919
Accounts receivable, net of reserve for
doubtful accounts of $7,253 at March 31,
1999 and $5,766 at December 31, 1998 33,221 29,988
Material and supply inventory, at average cost 6,298 3,870
Prepayments and other 15,152 15,368
Deferred income taxes 754 712
Investments restricted for debt service 23,445 23,437
-------------- -------------
Total current assets 1,009,125 1,092,868
Property, plant and equipment, net of accumulated
depreciation of $170,018 at March 31, 1999 and
$153,304 at December 31, 1998 505,075 448,375
Investments restricted for debt service 20,468 19,869
Investments 131,142 129,529
Intangible assets, net of accumulated amortization
of $111,372 at March 31, 1999 and $97,313 at
December 31, 1998 161,654 169,718
Deferred charges and other assets 52,410 47,256
-------------- -------------
Total assets $ 1,879,874 $ 1,907,615
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 4,074 $ 4,097
Accounts payable 60,576 65,623
Accounts payable to related parties 19,750 7,153
Advance billings and customer deposits 20,598 21,679
Accrued interest 10,753 5,267
Accrued telephony cost of sales 12,820 12,000
Accrued expenses 62,167 62,250
-------------- -------------
Total current liabilities 190,738 178,069
Long-term debt 1,287,279 1,263,036
Deferred income taxes 2,199 3,281
Other deferred credits 15,028 14,667
Minority interest 60,268 77,116
Commitments and contingencies
Preferred stock, par value $1 per share: Authorized
25,000,000 shares - -
Common shareholders' equity:
Common stock, par value $1 per share: Authorized
200,000,000 shares: Issued and outstanding
67,085,546 at March 31, 1999 and 65,477,493
December 31, 1998 67,085 65,477
Class B Common stock, par value $1 per share:
Authorized 400,000,000 shares: - -
Additional paid-in capital 560,323 539,770
Cumulative translation adjustments (3,055) (3,055)
Unrealized appreciation on investments (288) 1,113
Treasury stock, 562,000 shares at cost at
March 31, 1999 (9,391) (9,301)
Deficit (290,312) (222,558)
-------------- -------------
Total common shareholders' equity 324,362 371,446
-------------- -------------
Total liabilities and shareholders' equity $ 1,879,874 $ 1,907,615
============== =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (21,406) $ 8,277
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (75,592) (28,064)
Investment in unconsolidated joint venture (3,302) (12,500)
Purchase of short-term investments (505,377) (77,614)
Sales and maturities of short-term investments 574,480 82,014
Acquisitions - (40,717)
Other (716) 602
-------------- --------------
Net cash (used in) investing activities (10,507) (76,279)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt - 350,588
Redemption of long-term debt & capital lease obligation (235) (122)
Purchase of treasury stock (90) (255)
Payments made for debt financing costs (306) (5,652)
Contribution from minority interest partner - 11,025
Proceeds from the exercise of stock options 2,545 1,270
-------------- --------------
Net cash provided by financing activities 1,914 356,854
-------------- --------------
Net increase (decrease) in cash and
temporary cash investments (29,999) 288,852
Cash and temporary cash investments at beginning of year 120,126 222,910
-------------- --------------
Cash and temporary cash investments at March 31 $ 90,127 $ 511,762
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 25,538 $ 16,711
============== ==============
Income taxes $ 505 $ 75
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Amounts)
1. RCN Corporation (the "Company" or "RCN") 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.
2. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1998.
3. The Company owns a 40% equity interest in Megacable. For the quarters ended
March 31, 1999 and 1998, the Company recorded equity in the earnings of
Megacable which consists of its proportionate share of income and amortization
of excess cost over equity in net assets of $376 and $709, respectively.
Summarized information for the financial position and results of operations of
Megacable, as of and for the three months ended March 31, 1999 and 1998, is as
follows:
(In U.S. Dollars)
1999 1998
------- -------
Assets $106,841 $76,449
Liabilities 27,061 6,150
Shareholders' equity 79,780 70,299
Sales 10,512 9,219
Cost and expenses 7,169 6,085
Foreign currency transaction losses - 104
Net income $ 3,343 $ 2,638
Since the U.S. dollar was treated as the functional currency all translation
adjustments were included in income for the period ending March 31, 1998. The
Company had no adjustments for the period ended March 31, 1999. The Company's
proportionate share of such adjustments were losses of $(41) for the three
month period ended March 31, 1998, which were included in the condensed
consolidated statement of operations in the equity in loss of unconsolidated
entities.
<PAGE>
<PAGE>
4. During the first quarter of 1999, approximately 565,000 options were
granted, approximately 494,957 were exercised yielding cash proceeds of $2,545
and approximately 257,118 options were canceled. At March 31, 1999, there are
approximately 8,665,067 options outstanding at exercise prices ranging from
$1.30 to $29.81 under RCN's 1997 Plan.
5. Basic earnings per share is computed based on net (loss) divided by
the weighted average number of shares of common stock outstanding during the
period.
Diluted earnings per share is computed based on net (loss) divided by the
weighted average number of shares of common stock outstanding during the period
after giving effect to convertible securities considered to be dilutive common
stock equivalents. The conversion of stock options during the periods in which
the Company incurs a loss from continuing operations is not assumed since the
effect is anti-dilutive. The number of stock options which would have been
converted in the first quarter of 1999 and have a dilutive effect if the Company
had income from continuing operations is 4,310,145.
Quarter Ended March 31,
-----------------------------
1999 1998
---------- -----------
Net (loss) $ (67,754) $ (41,785)
Basic earnings per average common share:
Weighted average shares outstanding 65,629,601 56,216,310
Loss per average common share $ (1.03) $ (0.74)
Diluted earnings per average common share:
Weighted average shares outstanding 65,629,601 56,216,310
Dilutive shares resulting from stock options - -
---------- ----------
Weighted average shares and common stock
equivalents outstanding 65,629,601 56,216,310
========== ==========
Loss per average common share $ (1.03) $ (0.74)
6. In February 1999, Boston Edison Company ("BECO") and the Company entered
into an exchange agreement pursuant to which BECO converted a portion of
its ownership interest in RCN-BECOCOM into 1,107,539 shares of RCN common
stock. The transaction was valued as of January 20, 1998, the date on which
BECO gave notice to us of its intent to convert its ownership interest.
<PAGE>
7. In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 - "Reporting Comprehensive
Income" ("SFAS 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim
and annual periods beginning after December 15, 1997. The Company primarily
has two components of comprehensive income, cumulative translation adjustments
and unrealized appreciation on investments. The amount of other comprehensive
loss for the quarter ended March 31, 1999 was ($69,155).
8. On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks, Muse, Tate &
Furst Equity Fund IV, L.P., ("Hicks Muse Fund IV") purchased $250 million of
a new issue of the Company's Series A 7% Senior Convertible Preferred Stock
("Series A Preferred Stock"). The Series A Preferred Stock has a 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 common stock at any time. The
issue has a final maturity of 15 years, but may be called by the Company after
four years.
9. On March 18, 1999 the Company entered into a commitment 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. It is expected that
this transaction will close in the second quarter of 1999.
10. On April 28, 1999, the Company acquired a 47.5% stake in JuniorNet
Corporation, a commercial-free online learning service for children.
The Company purchased the ownership stake for approximately $47 million in
cash. Concurrently with that transaction, JuniorNet purchased the Company's
Lancit Media subsidiary ("Lancit") for approximately $25 million in cash.
The Company acquired Lancit in June 1998 for approximately $0.4 million in
cash and shares of its common stock with a fair value at the time of
issuance of approximately $7.4 million
11. The Company announced on May 10, 1999 that it intends to issue 8 million
shares of its common stock. The underwriters will have the option to purchase
approximately 1.2 million shares of additional common stock solely to cover
overallotments, if any. The offering will be made only by means of a prospectus,
a copy of which may be obtained from the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR") maintained by the Securities and Exchange Commission.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars, Except Per Share Data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to expected capital
expenditures, capital contributions to joint ventures by joint venture partners,
and expected trends in operating losses and cash flows associated with
investments in new markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's Form 10-K.
General
RCN Corporation (the "Company" or "RCN") 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 Company's 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 venture to generate
revenues and cash flow, competition in the Company's markets and any potential
adverse regulatory developments. The Company will be dependent on various
financing sources to fund its growth as well as continued losses from
operations. There can be no assurance that such funding will be available,
or available on terms acceptable to the Company. See "Liquidity and Capital
Resources."
<PAGE>
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
For the three months ended March 31, 1999, sales increased 67.9% to $67,388
from $40,138 for the same period in 1998. Operating losses before depreciation,
amortization and acquired in-process technology was $(21,449) as compared to
$(8,317) for the same period in 1998.
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
advanced fiber customers, primarily in Lehigh Valley, New York City, and Boston.
Voice sales include local telephone service fees consisting primarily of monthly
line charges, local toll and special features and long-distance telephone
service fees based on minutes of traffic and tarrified 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.
Total sales increased $27,250, or 67.9% to $67,388 for the quarter ended
March 31, 1999 from $40,138 for the quarter ended March 31, 1998. The increase
was fueled by higher total service connections which increased 34.2% to
approximately 886,000 at March 31, 1999 (including connections of the Starpower
joint venture) from approximately 660,000 at March 31, 1998. The increase in
service connections resulted principally from growth in dial-up Internet
connections and growth in advanced fiber connections, which increased 645.0%
from approximately 20,000 at March 31, 1998 to approximately 149,000 at March
31, 1999. Advanced fiber units passed increased 457.1% to approximately 351,000
units at March 31, 1999 from approximately 63,000 units at March 31, 1998.
Voice sales increased $8,205, or 233.7%, to $11,715 for the quarter ended March
31, 1999 from $3,510 for the quarter ended March 31, 1998. Approximately $5,500
of the increase in voice sales is attributable to higher average connections.
Advanced fiber voice connections increased approximately 799.1% to approximately
40,000 at March 31, 1999 (including connections of the Starpower joint venture)
from approximately 4,500 at March 31, 1998. Off-net voice connections increased
approximately 48.4% to approximately 60,000 at March 31, 1999 from approximately
40,500 at March 31, 1998.
During the fourth quarter of 1998, the Company ceased marketing resale of its
competitors' local phone service to new customers. The Company believes that
the effect of this decision will be lower revenue growth than would result if
such resale continued; however, the Company also believes this decision will
have a positive impact on the Company's overall gross margin percentage and a
neutral effect on operating income (loss) before depreciation and amortization
("EBITDA"). Approximately $2,700 of the increase in voice sales is attributable
to higher revenue per connection.
Video sales increased $3,641, or 13.6% to $30,348 for the quarter ended March
31, 1999 from $26,707 for the quarter ended March 31, 1998. The increase was
primarily due to approximately 26,000 additional video connections and the
conversion of approximately 58,000 off-net video connections to the advanced
fiber network at March 31, 1999 as compared to March 31, 1998. On-net video
connections grew 83,499 or 535.3% to 99,098 at March 31, 1999 (including
connections of the Starpower joint venture) from 15,599 at March 31, 1998.
Off-net video connections were 170,323 and 227,588 at March 31, 1999 and 1998,
respectively. Overall higher service connections contributed approximately
$1,800 to the increase in video sales and higher average revenue per
connection contributed approximately $1,800.
<PAGE>
Data sales increased $12,947, or 453.5% to $15,802 for the quarter ended March
31, 1999 from $2,855 for the quarter ended March 31, 1998 primarily due to a
full quarter of data revenue in 1999 from the acquisitions of Erols and UltraNet
in late February 1998, Interport in June 1998 and JavaNet in July 1998 ("the
acquisitions").
At March 31, 1999, the Company had approximately 506,000 off-net data
connections and approximately 10,000 advanced fiber data connections, including
connections of the Starpower joint venture. At March 31, 1998, the Company had
approximately 370,000 off-net 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 sales increased $2,458, or 34.8% to $9,523 for the
quarter ended March 31, 1999 from $7,065 for the quarter ended March 31, 1998.
The increase was due primarily to an increase in average commercial main access
lines of approximately 8,100 in 1999 over 1998, which contributed approximately
$1,300 to the increase. Higher revenue per commercial main access line
contributed approximately $200. Additionally, contributing approximately $900
to the increase was higher wholesale long-distance revenue from Commonwealth
Telecom Services, Inc. ("CTSI"), a wholly-owned subsidiary of Commonwealth
Telephone Enterprises, Inc. ("CTE"). 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 CTE.)
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the three months ended March 31, 1999,
the Company's average monthly churn rate was approximately 2.2%.
Costs and expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Direct expenses include direct costs of providing services, primarily video
programming, franchise costs, and network access fees.
Direct expenses increased $15,601, or 81.4% to $34,762 for the quarter ended
March 31, 1999 from $19,161 for the quarter ended March 31, 1998. The increase
was the result of higher sales and a lower margin on video sales due to higher
franchise fees and programming rates. These increases were partially offset
by a higher margin on voice sales resulting primarily from the decision in the
fourth quarter of 1998 to cease marketing resale of competitors' local phone
service to new customers and a change in the overall revenue mix to a
higher volume of data sales which has a higher margin than the Company's other
products.
Operating, selling, 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, general and administrative costs increased $24,781, or
84.6% to $54,075 for the quarter ended March 31, 1999 from $29,294 for the
quarter ended March 31, 1998.
<PAGE>
Advertising costs increased approximately $900 or 16.5%, for the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998. The increase
is primarily due to advertising associated with the rollout of the rcn.com
brand in the first quarter of 1999. Additionally, Internet advertising increased
due to the acquisitions of Erols and UltraNet which occurred late in the first
quarter of 1998 but which is included in the Company's operations for the full
first quarter of 1999.
Customer services costs, including order processing, increased approximately
$2,900, or 51.0%, for the quarter ended March 31, 1999 as compared to the
quarter ended March 31, 1998. Approximately $1,600 of the increase in customer
service costs is attributable to the acquisitions in 1998 which were included
for the full first quarter in 1999. The remaining increase of approximately
1,300, or 23.0%, is primarily personnel related to support the 34.5% increase
in total connections over the end of the comparable period in 1998 and to
increase the level of service.
Technical expense, including installation and provisioning, increased
approximately $4,000, or 64.4%, for the quarter ended March 31, 1999 as compared
to the quarter ended March 31, 1998. Technical expense increases of
approximately $2,600 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Rental expense, primarily for material
storage and hub sites, increased approximately $400. Approximately $1,400 of
the increase in technical expense is attributable to the acquisitions in 1998
which were included for the full first quarter in 1999. These increases were
partially offset by an increase of approximately $1,000 in technical costs
capitalized as part of the cost basis of the telecommunications network. Higher
utilities and right-of-way use fees primarily account for the remaining
increases in technical expense.
Sales and marketing costs increased approximately $1,600, or 27.7%, for the
quarter ended March 31, 1999 as compared to the quarter ended March 31, 1998.
Increases of approximately $900 resulted from additional staff and related
commissions and benefits, to cover increases in marketable homes, to increase
penetration in the Company's existing markets and to increase the number of
services per customer. Approximately $1,200 of the increase in sales and
marketing expense is attributable to the acquisitions in 1998 which were
included for the full first quarter in 1999. Partially offsetting the increases
were decreases in telemarketing expenses resulting from 1998 promotional
expenses associated with the start-up of telephony services in the Lehigh
Valley.
General and administrative expenses increased approximately $15,000, or 243.5%,
for the quarter ended March 31, 1999 as compared to the quarter ended March 31,
1998. Information technology expenses increased approximately $5,000. The
Company is in the process of developing information technology systems which
will provide a sophisticated customer care infrastructure as well as other
administrative support systems. The expense increases represent staff additions
to both support this effort and maintain the systems as well as consulting
expenses associated with the planning and analysis stages of such systems
development. The Company expects that such charges may increase in the future
periods until the planning and analysis stages of its IT systems development
projects are complete.
Higher bad debt expense of approximately $900 was associated with the increase
in sales. Property taxes increased approximately $400 as a result of expanded
operations. Legal expense increased approximately $1,600 primarily associated
with the procurement of regulatory approvals for potential future markets.
Approximately $2,800 of the increase in general and administrative expense is
attributable to the acquisitions, including Lancit, in 1998, which were included
for the full first quarter in 1999. The remaining increase primarily represents
additional development and support expenses associated with expanding operations
and new markets.
<PAGE>
Depreciation and amortization
- -----------------------------
Depreciation and amortization is comprised principally of depreciation related
to the Company's advanced fiber network, its wireless network, and its hybrid
fiber/coaxial cable systems; and amortization of subscriber lists, building
access rights and goodwill resulting primarily from its acquisitions of Erols
and UltraNet.
Depreciation and amortization was $32,274 for the three month period ending
March 31, 1999 and $18,131 for the three month period ending March 31, 1998.
The increase of $14,143, or 78.0% was the result of 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 in
1998. The cost basis of property, plant and equipment at March 31, 1999 and
1998 was $675,093 and $366,157, respectively. The basis of intangible assets
was $273,026 and $220,205 at March 31, 1999 and 1998, respectively.
Non-recurring Acquisition Costs
- -------------------------------
Acquisition costs - In-process technology was $18,293 for the quarter ended
March 31, 1998. In the allocation of purchase price associated with the
acquisition of Erols and UltraNet, $13,228 and $5,065, respectively, was
determined to represent acquired in-process research & 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. The fair value of the IPR&D projects associated with
these acquisitions is based upon a discounted cash flow analysis modified to
represent only that portion of the project associated with completed research
and development efforts at the date of acquisition. For both the Erols and the
UltraNet acquisitions, RCN identified the R&D development projects to include-
-Cable Modem Internet access for subscribers, consisting of projects to
develop the hardware, systems and software to permit subscribers to be offered
high-speed Internet access through direct cable connection. The remaining
development effort is concerned with technical standards for this service and
with the design and integration of this product into RCN's cable and fiber
optic network. RCN management estimated that this project for both
acquisitions was approximately 70% complete at the date of acquisition.
-Internet Telephony, representing projects to develop the potential for dial-
up telephone service through the Internet. This service area presented
significant technical challenges as well as political, commercial and market
challenges to be faced before service could be offered to subscribers. Since
at the acquisition date neither hardware nor systems have been acquired or
developed in support of this new product, a high degree of development
activity remains. RCN management estimated that this project for both
acquisitions was only approximately 20% complete at the date of acquisition.
-E-Commerce Systems, consisting of the companies' efforts to develop a
suitable system that would permit subscribers to conduct commercial activities
over the Internet. Following evaluation of commercially-available packages,
none were capable of meeting subscriber needs and development of the suitable
system was undertaken. RCN management estimated that the project for both
acquisitions was approximately 90% complete at the date of acquisition.
<PAGE>
-High-speed shared office Internet access, representing a blending of fiber
optic and Internet networking technologies, was under development as a package
to be offered to commercial clients. While the technical challenges were still
being addressed at the acquisition date, there was no certainty that this
system would result in a competitive product offering in the market. The
management of RCN estimated that the project for both acquisitions was
approximately 75% complete at the date of acquisition.
Relative to the qualification of these projects as IPR&D projects under the
meaning within Statement of Financial Accounting Standards No. 2 ("SFAS 2"),
each represented at the date of acquisition a development project associated
with new and uncertain technology that was incomplete and had not reached
technical feasibility. Further, the technology under development in each of
these areas was not seen to present opportunities for alternative future use
should the contemplated development project fail to achieve completion. In each
of the above projects, the uncertainty associated with each, in the absence of a
successful product introduction, may result in the possible abandonment of the
project and the loss of both invested development funds and the profit
contributions that such projects were expected to bring to the business as a
whole.
Interest income
- ----------------
Interest income was $13,403 and $12,815 for the three month periods ended March
31, 1999 and 1998, respectively. The increase of $588, or 4.6%, results from
higher average cash, temporary cash investments and short-term investments as
compared to the same period in 1998. Cash, temporary cash investments and
short-term investments were approximately $914,674 at March 31, 1999 and
approximately $923,000 at March 31, 1998. 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.
Interest expense
- ----------------
For the quarter ended March 31, 1999, interest expense was $31,790 as compared
to $22,735, for the quarter ended March 31, 1998. The increase resulted from the
debt financings described above.
Other (expense) income
- ----------------------
Other income (expense) was $707 and $(899) for the quarterly periods ended
March 31, 1999 and 1998, respectively. The primary component of other income
for the quarter ended March 31, 1999 was realized gains on short-term
investments. The primary component of other expense for the quarter ended
March 31, 1998 was the write down of certain of the Company's information
technology assets which were replaced by higher capacity state-of-the-art
products in connection with an overall internal technology upgrade.
<PAGE>
Income tax
- ----------
The Company's effective income tax rate was a benefit of 1.5% and 21.9% for the
quarters ended March 31, 1999 and March 31, 1998, respectively. The primary
reason for the difference is that 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.
As a result, generally accepted accounting principles do not permit the
recognition of such excess losses in the financial statements. This accounting
treatment does not impact cash flows for taxes or the amounts or expiration
periods of actual net operating loss carryovers.
Minority interest
- -----------------
For the first quarter of 1999 and 1998 minority interest of $6,538 and $3,586,
respectively, primarily represents the 49% interest of Boston Edison Company
("BECO") in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
- ---------------------------------------------
For the first quarter of 1999, 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 of $376 and the Company's 50% interest
in the loss of Starpower of $3,527. For the first quarter of 1998, 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 of
$709 and the Company's 50% interest in the loss of Starpower of $784.
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,
upgrading 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 to the Company's fiber
optic network 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 statements that may change if circumstances related to
construction, timing or 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 $125 million has been contributed, to the joint ventures
through 2000 in connection with development of the Boston and Washington, D.C.
markets.
<PAGE>
The Company expects to supplement its existing available credit facilities and
operating cash flow by continuing to seek to raise capital to increase its
network coverage and pay for other capital expenditures, working capital, debt
service requirements, anticipated future operating losses and acquisitions.
The Company's current joint venture agreements reduce the amount of expenditures
required by RCN to develop the network due both to access to the joint venture
partners' existing facilities and to the anticipated joint venture partners'
equity contributions. However, the joint venture arrangements will also reduce
the potential cash flows to be realized from operation of the networks in the
markets in which the joint ventures operate and restrict the Company's access
to cash flow generated by the joint ventures (which will be paid in the form of
dividends). The Company may enter into additional joint ventures in the future
as the Company begins to develop new markets.
Pursuant to an exchange agreement between BECO and the Company, BECO had the
right at the time of the distribution of RCN common stock in September 1997, and
has the right every two years thereafter, to convert all or a portion of its
ownership interest in the RCN-BECOCOM joint venture into RCN common stock
pursuant to specific terms and conditions, including exercise periods, appraisal
procedures and restrictions specifically set forth in the exchange agreement.
BECO may exercise its conversion rights, in whole or in part, from time to time.
The exchange agreement also grants customary registration rights to BECO with
respect to shares of common stock issued upon exchange of its investment
interest in RCN-BECOCOM. In February 1999, BECO converted a portion of interest
into 1,107,539 shares of RCN common stock pursuant to its rights under the
exchange agreement. Capital contributions to the joint venture will continue
to be made 49% by BECO and 51% by RCN unless BECO disposes of shares it receives
on any conversion. BECO has indicated to the Company that it may make future
conversions of its ownership interest in respect of the option to exchange
expiring in September 1999.
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
approximately $44,000 of restricted cash to be used to fund the Escrow Account
to pay interest on the 10% Senior Notes for three years. In February 1998, the
Company raised $350,587 in gross proceeds from an offering of $567,000 principal
amount at maturity of 9.8% 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 9.8% Senior Discount Notes will mature on
February 15, 2008. The 9.8% Senior Discount Notes will not bear cash interest
prior to February 15, 2003. Thereafter, cash interest on the notes will accrue
at 9.8% 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 5, 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.
<PAGE>
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 9.8% 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 9.8% 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.
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 have in place collaterized credit
facilities comprised of a five-year revolving credit facilities 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 March 31, 1999, $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 March 31, 1999, 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 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.
<PAGE>
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 pledges and the Borrowers
must apply certain cash proceeds realized from certain asset sales, certain
payments under insurance policies and certain incurrences or 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 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 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 1.05:1 thereafter. The Credit Agreement also includes customary events
of default.
The Company expects to replace its existing Credit Agreement with a new
facility. On March 18, 1999, the Company entered into a commitment with The
Chase Manhattan Bank ("Chase") pursuant to which Chase has agreed to provide
an aggregate principal amount of $1 bllion of senior secured credit facilities
to certain of the Company's wholly-owned subsidiaries. It is expected that
this transaction will close in the second quarter of 1999.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At March 31, 1999 the Company had an
aggregate of approximately $1,291,000 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 $914,674 and a current ratio of approximately 5.3:1.
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 the Company's
Series A 7% Senior Convertible Preferred Stock ("Series A 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 the Company's common stock at any time. The issue has a final
maturity of 15 years, but may be called by the Company after four years. In
connection with the transaction, Hicks, Muse, Tate & Furst Equity Fund IV
nominated Michael J. Levitt, a Partner of Hicks, Muse, Tate & Furst, to become
a member of RCN's Board of Directors.
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.
<PAGE>
The extent of the Company's leverage may have the following consequences: (i)
limit the ability of the Company to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) require that a substantial portion of the Company's cash flows
from operations be dedicated to the payment of principal and interest on its
indebtedness and therefore not be available for other purposes; (iii) limit the
Company's flexibility in planning for, or reacting to, changes in its business;
(iv) place the Company at a competitive disadvantage as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
For the quarter ended March 31, 1999, the Company's net cash used in
operating activities was $(21,406), comprised primarily of a net loss of
($67,754) adjusted by non-cash depreciation and amortization of $32,274, other
non-cash items totaling $23,185, working capital changes of $(7,526). Net cash
used in investing activities of ($10,507) consisted primarily of purchases of
short-term investments of $505,377, additions to property, plant and equipment
of $75,592, an investment in an unconsolidated joint venture of $3,302 partially
offset by sales and maturities of short-term investments of $574,480. Net cash
provided by financing activities of $1,914 consisted primarily of proceeds from
the exercise of stock options $2,545, partially offset by payments made for debt
financing costs and capital lease obligations of $306 and $235 respectively.
<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.
State of Readiness
The Company has certain information technology ("IT") systems (systems used in
the management of the business) and non-information technology ("non-IT")
systems (systems used to provide service to customers) which are subject to
Year 2000 exposures and require remediation. The Company has established a Year
2000 Program Management Office ("PMO") 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 and, on a periodic basis, to a
Year 2000 Steering Committee comprised of the Company's Chairman, President,
Chief Financial Officer, Senior Vice President of IT, General Counsel and
President of Network Technology. The PMO 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.
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.
<PAGE>
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 400 critical vendors and has sent surveys regarding
the Year 2000 remediation to those vendors. The Company has received responses
from approximately 60% of these vendors and is in the process of assessing
these responses. 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 (see "Risk
Assessment and Contingencies" below). 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. To date,
approximately $800 has been incurred of which approximately $400 was
incurred in the first quarter of 1999. 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 most significant risk posed to the Company due to vendor noncompliance
is a possible disruption of service to cable modem customers associated with
noncompliant software of a critical vendor. The Company is preparing
contingency plans to replace current cable modems if compliant software is not
delivered in a timely manner.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Company has adopted Item 305 of Regulation S-K "Quantitative & qualitative
disclosures about market risk" which is effective in financial statements for
fiscal years ending after June 15, 1998. The Company currently has no items that
relate to "trading portfolios". Under the "other than trading portfolios" the
Company does have four short-term investment portfolios categorized as available
for sale securities that are stated at cost, which approximates market, and
which are re-evaluated at each balance sheet date and one portfolio that is
categorized as held to maturity which is an escrow account against a defined
number of future interest payments related to the company's 10% Senior Discount
Notes. These portfolios consist of Federal Agency notes, Commercial Paper,
Corporate Debt Securities, Certificates of Deposit, U.S. Treasury notes, and
Asset Backed Securities. The Company believes there is limited exposure to
market risk due primarily to the small amount of market sensitive investments
that have the potential to create material market risk. Furthermore, the
Company's internal investment policies have set maturity limits, concentration
limits, and credit quality limits to minimize risk and promote liquidity. The
Company did not include trade accounts payable and trade accounts receivable
in the "other than trading portfolio" because their carrying amounts approximate
fair value.
The objective of the Company's "other than trading portfolio" is to invest in
high quality securities and seeks to preserve principal, meet liquidity needs,
and deliver a suitable return in relationship to these guidelines.
<PAGE>
Part II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
On April 7, 1999 the Company sold $250 million of a new issue of
Series A 7% Senior Convertible Preferred Stock ("Series A Preferred Stock") to
Hicks, Muse, Tate & Furst, through Hicks, Muse, Tate & Furst Equity Fund IV,
L.P., in a private placement transaction pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The Company received gross proceeds of
$250 million in cash in connection with the placement of the Series A Preferred
Stock. 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 price of $39.00
per share. 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.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(3.1) Amended and Restated Articles of Incorporation of the Company
(incorporated by Reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Commission File No.
333-61223)).
(27) Financial Data Schedule
(b.) Reports on Form 8-K
On March 22, 1999, the Company filed a report on Form 8-K announcing
its agreement to sell $250 million of a new issue of Series A Preferred Stock.
In addition, the Company announced that it had also received a commitment
for $1 billion of senior secured credit facilities from The Chase Manhattan
Bank.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RCN Corporation
Date: May 17, 1999
/s/ Bruce C. Godfrey
------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND IN THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 90,127
<SECURITIES> 824,547
<RECEIVABLES> 40,474
<ALLOWANCES> 7,253
<INVENTORY> 6,298
<CURRENT-ASSETS> 1,009,125
<PP&E> 675,093
<DEPRECIATION> 170,018
<TOTAL-ASSETS> 1,879,874
<CURRENT-LIABILITIES> 190,738
<BONDS> 1,287,279
0
0
<COMMON> 67,085
<OTHER-SE> 257,277
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<INTEREST-EXPENSE> 31,790
<INCOME-PRETAX> (71,403)
<INCOME-TAX> (1,014)
<INCOME-CONTINUING> (67,754)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (67,754)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
