As filed with the Securities and Exchange Commission on March 5, 1999
Registration No. 333-71525
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
AMENDMENT NO.1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RCN CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3498533
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
John J. Jones, Esq.
RCN Corporation
105 Carnegie Center
Princeton, NJ 08540-6215
(609) 734-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------
Copy to:
Julia K. Cowles, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
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Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
-----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH , 1999
PROSPECTUS
[LOGO]
$1,000,000,000
RCN Corporation
Common Stock, Preferred Stock, Debt Securities
-----------------------
We will offer from time to time common stock, preferred stock or debt
securities. We will provide specific terms of these securities in supplements to
this prospectus. You should read this prospectus and any supplement carefully
before you invest.
-----------------------
Our common stock trades on the Nasdaq National Market under the symbol
"RCNC".
-----------------------
Investing in these securities involves certain risks. See "Risk Factors"
beginning on page 8.
-----------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus is
accurate as of any date other than the date on the front of this prospectus.
-----------------------
TABLE OF CONTENTS
Page
----
Summary........................................................................2
Risk Factors...................................................................8
Where You Can Find More Information...........................................14
Special Note on Forward-Looking Statements....................................14
Use of Proceeds...............................................................15
Dividends.....................................................................15
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..................................................42
Description of Debt Securities................................................47
Plan of Distribution..........................................................56
Legal Matters.................................................................58
Experts.......................................................................58
<PAGE>
SUMMARY
-------
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision.
We are building high-speed, high-capacity advanced fiber optic networks in
selected markets with high levels of population density. Our strategy is to
become the leading single source provider of voice, video and data services to
residential customers in each of our markets by offering individual or bundled
service options, superior customer service and competitive prices. We are also
constructing our networks with significant excess capacity in order to
accommodate expanded services in the future.
Our initial advanced fiber optic networks have been established in selected
markets in the Boston to Washington, D.C. corridors, which includes New York
City, and also in the San Francisco Bay area. In Boston and Washington, we
operate through joint ventures with Boston Edison Company and PEPCO
Communications, L.L.C., respectively. We are typically building the first true
local network to compete with the aging infrastructure of the incumbent service
providers in our markets.
The construction and operation of our local networks are highly
scalable. The economic viability of a market area is principally dependent
upon achieving a minimum number of homes passed in the area being served by
each switching and head end facility. We phase our market entrance or
expansion projects such that we have sufficient cash on hand to reach these
home passed minimums. Additional funding accelerates our ability to enter
new markets or further expand existing ones.
We have extensive operating experience in the telephone, video and Internet
industries and in the design, development and construction of telecommunications
facilities. As of December 31, 1998, we had approximately 855,000 total service
connections, including approximately 123,000 connections provided to customers
on our advanced fiber optic network.
Business Strategy
- -----------------
Our goal is to become the leading provider of communication services to
residential customers in our target markets by pursuing the following key
strategies:
o Exploit the "Last Mile" Bottleneck in Existing Local Networks.
Existing local networks are typically low capacity, single service
facilities without the bandwidth for multiple or new services and
revenue streams. We seek to be the first operator of an advanced fiber
optic network offering advanced communications services to residential
customers in our target markets.
o Continue Construction of Advanced Fiber Optic Networks. Our advanced
fiber optic networks are designed with sufficient capacity to meet the
growing demand for high speed, high capacity, voice, video and data
services. Our networks also have a significant amount of excess
capacity which will be available for the introduction of new products.
o Leverage our Network and Customer Base. We are able to leverage our
network by delivering a broad range of communications products and by
focusing on high density residential markets. This bandwidth capacity
and home density allows us to maximize the revenue potential per mile
of constructed network. We believe we can further exploit our network
capacity and customer base by exploring opportunities to deliver new
products and services in the future, including complementary
commercial and wholesale products and services.
o Offer Bundled Voice, Video and Data Services with Quality Customer
Service. By connecting customers to our own network, we improve our
operating economics and have complete control over our customers'
experience with us.
2
<PAGE>
o Continue to Use Strategic Alliances. We have been able to enter
markets quickly and efficiently and to reduce the up-front capital
investment required to deploy our networks by entering into strategic
alliances.
Connections
- -----------
Because we deliver a variety of services to our customers, we report the
total number of our various revenue generating service connections for local
telephone, video programming and Internet access. For example, a single customer
who purchases local telephone, video programming and Internet access counts as
three connections. The table below shows our growth in total connections and
growth in customers connected to advanced fiber optic networks, which we refer
to as "On-Net Connections".
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------
12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Total Connections:
Voice............................... 28,114 44,950 60,480 78,950 95,890
Video............................... 239,403 243,157 249,360 255,100 261,662
Data................................ 150 370,538 400,148 474,127 497,809
------- ------- ------- ------- -------
Total............................ 267,667 658,645 709,988 808,177 855,361
======= ======= ======= ======= =======
On-Net Connections..................... 15,148 20,339 48,212 82,842 123,393
Homes Passed........................... 44,045 63,386 122,977 213,983 304,505
Marketable Homes....................... -- -- 111,187 181,353 270,406
</TABLE>
Our off-net connections are delivered through a variety of facilities
including hybrid fiber/coaxial cable systems and a wireless video system.
-----------------------
Our principal executive offices are located at 105 Carnegie Center,
Princeton, New Jersey, 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.
3
<PAGE>
About this Prospectus
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf process, we may
sell any combination of the securities described in this prospectus in one or
more offerings up to a total dollar amount of $1,000,000,000. This prospectus
provides you with a general description of the securities we may offer. Each
time we sell securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. You should read both this prospectus and any prospectus supplement
together with additional information described under the heading WHERE YOU CAN
FIND MORE INFORMATION.
Risk Factors
You should carefully consider all of the information in this prospectus
and, in particular, you should evaluate the specific risk factors set forth
under the caption "Risk Factors", beginning on page 8.
4
<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 also do not necessarily
indicate our future results of operations or financial condition.
We conduct portions of our business through joint ventures, including our
joint ventures with Boston Edison Company (which is consolidated in our
historical results of operations) and with Pepco Communications, L.L.C. (which
is accounted for under the equity method in our historical results of
operations). The unaudited financial information set forth under "Consolidation
of Joint Ventures--Results of Operations" in the table below presents our
results of operations as if all domestic joint ventures were fully consolidated.
We believe that this unaudited financial data provides useful disclosure in
analyzing our business.
The selected historical consolidated financial data for the years ended
December 31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997 are
derived from and should be read in conjunction with our audited historical
consolidated financial statements incorporated by reference to our report on
Form 8-K dated March o, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
--------- ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data:
Total sales............................................................. $ 104,910 $ 127,297 $ 210,940
Costs and expenses, excluding depreciation and amortization............. 79,107 134,967 262,352
Nonrecurring charges.................................................... -- 10,000 --
Acquired research and development....................................... -- -- 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 1,907,838
Long-term debt.......................................................... 131,250 686,103 1,263,036
Shareholders' equity (excluding current portion)........................ 390,765 356,584 371,446
Other Data:
EBITDA before nonrecurring charges...................................... 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>
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
--------- ------------ ------------
<S> <C> <C> <C>
Consolidation of Joint Ventures--Results of Operations:
Total sales............................................................. $ 104,910 $ 127,297 $ 245,125
Direct costs............................................................ 35,226 51,757 112,371
Operating, selling, general and administrative.......................... 43,881 83,422 181,248
EBITDA before nonrecurring charges...................................... 25,803 (7,882) (48,494)
Depreciation and amortization........................................... 38,881 53,205 113,383
Operating (loss)........................................................ (13,078) (71,087) (180,170)
Cash, temporary cash investments and short-term investments............. 108,674 638,513 1,028,600
Property, plant and equipment........................................... 220,357 307,920 645,005
Long-term debt (excluding current portion).............................. 131,250 686,103 1,263,036
</TABLE>
In the table above:
(1) Nonrecurring charges represent costs of $10,000 incurred in 1997 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.
(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.
(3) The financial information under "Consolidation of Joint Ventures --
Results of Operations" reflects the consolidation of the Starpower joint
venture, which is not consolidated under generally accepted accounting
principles.
6
<PAGE>
Summary Pro Forma Financial Data
The following unaudited summary pro forma financial data include
adjustments to our historical statements of operations for the year ended
December 31, 1998 as if each of the transactions described under "Unaudited Pro
Forma Consolidated Statements of Operations" on page 18 had occurred on the
first day of each of the periods listed below. These adjustments result
primarily from changes in our capital structure and accounting for the
acquisition of Erols Internet, Inc. The following unaudited pro forma financial
data are provided for your information only. You should not rely on the
unaudited pro forma financial data as an indication of the results of operation
and financial condition that would have been achieved if the transactions had
occurred on the dates we assumed. In addition, the unaudited pro forma financial
data do not necessarily indicate our future results of operations or financial
condition.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
--------------
(dollars in
thousands)
<S> <C>
Statement of Operations Data:
Total sales..................................................................... $ 214,269
Costs and expenses, excluding depreciation and amortization..................... 265,561
Nonrecurring acquisition costs: In-process technology........................... 18,293
Depreciation and amortization................................................... 90,918
-----------
Operating (loss)................................................................ (160,503)
Interest income................................................................. 58,679
Interest expense................................................................ (124,374)
Other (expense), net............................................................ (1,894)
-----------
(Loss) before income taxes...................................................... (228,092)
(Benefit) for income taxes...................................................... (4,998)
-----------
(Loss) before equity in unconsolidated entities and minority interest........... (223,094)
Equity in loss of unconsolidated entities....................................... (15,406)
Minority interest in loss of consolidated entities.............................. 17,162
-----------
(Loss) before cumulative effect of change in accounting principle............... $ (221,338)
===========
Other Data:
EBITDA before nonrecurring charge and acquired research and development......... $ (51,292)
</TABLE>
In the table above, "EBITDA" before nonrecurring charges represents
earnings before interest, depreciation and amortization, and income taxes.
EBITDA is commonly used in the communications industry to analyze companies on
the basis of operating performance, leverage and liquidity. 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.
7
<PAGE>
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in our
securities. Some of the following risks relate principally to our business in
general and the industry in which we operate. Other risks relate principally to
the securities markets and ownership of our securities. The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our securities could
decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this prospectus.
We have a limited operating history and have incurred negative cash flow and
operating losses
We have only recently begun operating a voice, video and data services
business. Accordingly, you will need to evaluate our performance based on a
limited operating history. In connection with entering this business, we have
incurred operating and net losses and negative cash flows and expect to continue
to do so for the next five to seven years as we expand our network and customer
base. Whether we continue to have negative cash flow in the future will be
affected by a variety of factors including:
o our pace of entry into new markets;
o the time and expense required for constructing our fiber optic
network as we planned;
o our success in marketing services;
o the intensity of competition; and
o the availability of additional capital to pursue our business
plans.
We had operating losses after depreciation and amortization and
nonrecurring charges of $158,793,000, $70,875,000 and $13,078,000 for the years
ended December 31, 1998, 1997 and 1996. We can not assure you that we will
achieve or sustain profitability or positive cash flows from operating
activities in the future.
Additional growth will require additional capital, and our total capital needs
may be substantial
We expect that we will require a substantial amount of capital to expand
the development of our network and operations into new areas. We will need
capital to fund the construction of our advanced fiber optic networks, upgrade
our hybrid fiber/coaxial plant and fund operating losses and pay our debts.
Based on our current growth plan, we currently estimate that our capital
requirements for the period from January 1, 1999 through 2000 will be
approximately $1.8 billion, which include capital expenditures of approximately
$700 million in 1999 and approximately $1 billion in 2000. These capital
expenditures do not include amounts our joint venture partners contribute to the
Boston and Washington, D.C. joint ventures. We are obligated to pay our portion
of any capital contributions required by the joint ventures' annual budget or
capital contribution schedule. If our joint venture partner(s) fail to make
anticipated capital contributions, it could have a material adverse effect on
our business. See "Business--Network Development and Financing Plan."
We may seek sources of funding from vendor financing, public offerings or
private placements of equity and/or debt securities, and bank loans. We cannot
assure you that additional financing will be available to us or, if available,
that it can be obtained on a timely basis and on acceptable terms. If we fail to
obtain financing, it could
8
<PAGE>
result in the delay or curtailment of our development and expansion plans and
expenditures and could have a material adverse effect on our business.
Our estimates of capital requirements are forward-looking statements that
are subject to change. The actual timing and amount of capital required to
develop our network and to fund operating losses may vary materially from our
estimates if there are significant departures from the current business plan,
unforeseen delays, cost overruns, engineering design changes or other
unanticipated expenses or occurrences.
Our substantial indebtedness limits our business flexibility
We have indebtedness that is substantial in relation to our shareholders'
equity and cash flow. As of December 31, 1998, we had an aggregate of
approximately $1,267 million of indebtedness outstanding. As a result of our
substantial indebtedness, fixed charges are expected to exceed earnings for the
foreseeable future, and our operating cash flow may not be sufficient to pay
principal and interest on our various debt securities. The extent of our
leverage may also have the following consequences:
o limit our ability to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements
or other purposes;
o require that a substantial portion of our cash flows from
operations be dedicated to paying principal and interest on our
indebtedness and therefore not be available for other purposes;
o limit our flexibility in planning for, or reacting to, changes in
our business;
o place us at a competitive disadvantage as compared
with our competitors who do not have as much debt; and
o render us more vulnerable in the event of a downturn in our business.
Our outstanding debt securities contain customary covenants limiting our
flexibility, including covenants limiting our ability to incur additional debt,
make liens, make investments, consolidate, merge or acquire other businesses and
sell assets, pay dividends and other distributions, make capital expenditures
and enter into transactions with affiliates.
Our holding company structure structurally subordinates our creditors, including
holders of our debt securities
We are a holding company with limited assets that conducts substantially
all of our operations through subsidiaries and joint ventures. The securities
will be solely our obligations and no other entity has any obligation,
contingent or otherwise, to make any payments under the securities. Accordingly,
we will be dependent on dividends and other distributions from subsidiaries and
joint ventures to pay off our obligations, including the principal and interest
on debt securities that may be issued by means of this prospectus. The ability
of our subsidiaries and joint ventures to pay dividends to us will be subject to
the terms of their debt instruments and applicable law. In addition, our joint
ventures require our consent and the consent of our joint venture partner to
distribute or advance funds to us. Claims of holders of the debt securities will
be effectively junior in priority to the debt and other liabilities and
commitments of our subsidiaries and joint ventures. Our interest in the joint
ventures will be limited to the extent of our direct or indirect equity interest
in the joint ventures. Consequently, in the event our subsidiaries or joint
ventures become insolvent, liquidate, reorganize, dissolve or otherwise wind up
their business, our creditors' claims will be junior to the prior claims of
those entities' creditors, including trade creditors, and any prior or equal
claim of any joint venture partner. Any distributions of our equity interests in
our non-wholly owned subsidiaries or in joint ventures may be expected to be
made on an equal basis to all equity holders. We expect that a majority of our
cash flow in the advanced fiber optic network business will ultimately be
derived from our joint venture investments. The indenture under which the debt
securities will be issued will permit substantial indebtedness to be incurred by
our subsidiaries and joint ventures. The indenture does not, except under
limited circumstances, require our subsidiaries to guarantee the debt
securities. In addition, the indenture will
9
<PAGE>
permit our subsidiaries and joint ventures to become parties to debt instruments
that limit these entities' ability to pay dividends or make distributions to us.
We may not be able to manage our growth or integrate our acquisitions
The expansion and development of our operations, including the construction
and development of additional networks, will depend on several factors,
including our ability to:
o access markets,
o design fiber optic network backbone routes,
o install or lease fiber optic cable and other facilities, including
switches, and
o obtain rights-of-way, building access rights and any government
authorizations, franchises and permits,
all in a timely manner, at reasonable costs and on satisfactory terms and
conditions.
In addition to the markets we are presently developing, we continually
evaluate other potential markets. These markets may be within the Boston to
Washington, D.C. corridor or in non-contiguous areas. As is the case in our
present markets, we intend to evaluate potential markets in terms of population
density and favorable demographics, and to apply a strategy of building network
facilities to meet the needs of targeted subscribers in new markets. We cannot
assure you that we will be able to expand our existing network or to identify
and develop new markets. Furthermore, our ability to manage our expansion
effectively will also require us to continue to implement and improve our
operating and administrative systems and attract and retain qualified management
and professional and technical personnel. If we are not able to manage our
planned expansion effectively, it could have a material adverse effect on our
business.
We recently announced our intention to begin developing advanced fiber
optic networks in selected high density markets outside of the Boston to
Washington, D.C. corridor, initially in the San Francisco Bay Area. Our proposed
expansion into non-contiguous markets could place additional strain on
management resources. Furthermore, although we believe that our experience in
the Northeast will provide us with strategic advantages in developing new
markets, we cannot assure you that our experience in our current markets will be
replicated in the western United States.
We have experienced significant growth through acquisitions and will
continue to consider acquisition opportunities that arise from time to time.
Acquisitions may place a significant strain on our resources, and we may incur
additional expenses during the integration of the acquired company with our
business. For instance, the process of integrating the Internet service provider
businesses we acquired in 1998 may take a significant period of time and require
significant expenditure, including costs to upgrade the systems and internal
controls of these businesses. As a result, we cannot assure you that we will be
able to integrate these businesses successfully or in a timely manner.
Our business is dependent upon acceptance of fiber optic technology as the
platform of choice
The telecommunications industry has been and will continue to be subject to
rapid and significant changes in technology. The effect of technological changes
on our business cannot be predicted, and we cannot assure you that the fiber
optic technology that we use will not be supplanted by new or different
technologies. See "Business--Competition."
10
<PAGE>
We are dependent on our strategic relationships and joint ventures
We have entered into a number of strategic alliances and relationships
which allowed us to enter into the market for telecommunications services
earlier than if we had made the attempt independently. As our network is further
developed, we will be dependent on some of these arrangements to provide a full
range of telecommunications service offerings. Our key strategic relationships
include:
o our arrangements with MFS Communications Company, Inc. (a subsidiary
of WorldCom, Inc.) to lease portions of MFS/WorldCom's fiber optic
network in New York City and Boston;
o our joint venture with Boston Edison Company under which we have
access to its extensive fiber optic network in Greater Boston;
o our joint venture with Pepco Communications to develop and operate
an advanced fiber optic network in the Washington, D.C. market; and
o our agreement with Level 3 to provide us with access to its
cross-country fiber network.
Our joint venture agreements with Boston Edison Company and Pepco
Communications contain provisions for the management, governance and ownership
of the RCN-BECOCOM and Starpower joint ventures, respectively. Certain matters
require the approval of our joint venture partner, including some matters beyond
our control, such as a change of control. In addition, although certain
covenants contained in our indentures apply to the joint venture companies,
neither the joint venture companies nor our joint venture partners are parties
to these indentures and are not bound to comply with the indentures. A
disagreement with our joint venture partners over certain business actions,
including actions related to compliance with these indentures, could impede our
ability to conduct our business. It may also trigger deadlock provisions in the
joint venture agreements which could force us to sell our interest in the
relevant joint venture or buy out the interest of the other joint venturer. See
"Business -- Strategic Relationships and Facilities Agreements."
In addition, any disruption of our relationships or arrangements with
incumbent local exchange carriers, such as Bell Atlantic, could have a material
adverse effect on our company. We cannot assure you that we will successfully
negotiate agreements with the incumbent local exchange carrier in new markets or
renew existing agreements. Our failure to negotiate or renew required
interconnection and resale agreements could have a material adverse effect on
our business.
We may encounter difficulties in competing in the highly competitive
telecommunications industry
In each of the markets where we offer our services, we face significant
competition from larger, better-financed telephone carriers and cable companies.
Virtually all markets for voice, video and data services are extremely
competitive, and we expect that competition will intensify in the future. Our
principal competitors include:
o traditional and competitive telephone companies, including Bell
Atlantic, AT&T, Sprint, and MCI WorldCom, some of which are
constructing extensive fiber optic networks and expanding into data
services;
o cable television service operators such as Time Warner, some of which
are beginning to offer telephone and data services through cable
networks using fiber optic networks and high-speed modems;
o established online services, such as America Online and Internet
services of other telecommunications companies;
11
<PAGE>
o alliances and combinations of telephone companies, cable service
providers and Internet companies, including the recently announced
alliance that will combine services of AT&T, TCI and At Home; and
o developing technologies such as Internet-based telephony and satellite
communications services.
It may be difficult to gain customers from the incumbent providers which have
historically dominated their markets.
Other new technologies may become competitive with services that we offer.
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environment are constantly occurring. In
addition, a continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors. We
cannot predict the extent to which competition from such developing and future
technologies or from such future competitors will impact our operations. See
"Business -- Competition".
Our business plan depends upon continued application of regulations that have
been challenged in the past
Our ability to provide telephone and video programming transmission
services was made possible by important changes in government regulations which
have been subsequently challenged and may be subject to change in the future.
These regulations often have a direct or indirect impact on the costs of
operating our networks, and therefore the profitability of our services. In
addition, we will continue to be subject to other regulations at the federal,
state and local levels, all of which may change in the future. We cannot assure
you that we will be able to obtain all of the authorizations we need to
construct advanced fiber optic network facilities or to retain the
authorizations we have already acquired. It is possible that changes in existing
regulations could have an adverse impact on our ability to obtain or retain
authorizations and on our business. See "Business--Regulation."
We may not be able to procure programming services from the third parties we
depend on
Our video programming services are dependent upon our management's ability
to procure programming that is attractive to our customers at reasonable
commercial rates. We are dependent upon third parties for the development and
delivery of programming services. These programming suppliers charge us for the
right to distribute the channels to our customers. The costs to us for
programming services is determined through negotiations with these programming
suppliers. Management believes that the availability of sufficient programming
on a timely basis will be important to our future success. We cannot assure you
that we will have access to programming services or that management can secure
rights to such programming on commercially acceptable terms.
The expansion of our Internet services business has subjected us to additional
risks
The expansion of our Internet services business has subjected us to
additional risks. These risks will affect our ability to develop a profitable
Internet services business. These special factors include:
o evolving industry standards which have the potential to make our
services obsolete by replacing or providing lower-cost alternatives to
our services;
o constraints on server capacity or supply of equipment (such as modems
and servers) which could result in a strain on incoming access lines,
causing busy signals and/or delays for our subscribers;
o network infrastructure and risk of system failure, such as viruses,
which could lead to interruptions, delays, or cessation of our
services, as well as corruption of our or our subscribers' computer
systems;
o possible claims of liability against us as a result of computer
viruses or security breaches; and
12
<PAGE>
o the evolving competitive and regulatory environment concerning
Internet services.
Our management may have conflicts of interest with other companies
Level 3 Telecom beneficially owns approximately 46% of our common stock.
Level 3 Telecom effectively has the power to elect a majority of our directors
and to decide the outcome of substantially all matters voted on by shareholders.
This may tend to deter non-negotiated tender offers or other efforts to obtain
control of our company and thereby deprive shareholders of opportunities to sell
shares at prices higher than the prevailing market price. Moreover, a
disposition by Level 3 Telecom of a significant portion of our common stock, or
the perception that such a disposition may occur, could affect the trading price
of our common stock and the control of our company. The common stock of Level 3
Telecom is owned 90% by Level 3 and 10% by David C. McCourt, our Chairman and
Chief Executive Officer. Mr. McCourt has been a member of the Board of Directors
and President of Level 3 Telecom since September 1992. Based upon a review of
documents filed with the SEC, we believe that as of December 31, 1998, 16.1% of
the common stock of Level 3 was owned by directors and executive officers of
Level 3, five of whom (Walter Scott, Jr., Richard R. Jaros, David C. McCourt,
James Q. Crowe and Michael B. Yanney) are executive officers or directors of
RCN. The remaining shares of Level 3 common stock are owned by other persons,
none of whom own more than 5% of outstanding shares.
As a result of the September 30, 1997 spin-off of our shares to holders of
common equity of Commonwealth Telephone Enterprises, Inc., relationships exist
that may lead to conflicts of interest. Level 3 Telecom effectively controls
both us and Commonwealth Telephone. In addition, the majority of our named
executive officers are also directors and/or executive officers of Commonwealth
Telephone. Our success may be affected by the degree which our officers and
directors are involved in our business and the abilities of officers, directors
and employees in managing both our company and Commonwealth Telephone. We will
deal with potential conflicts of interest on a case-by-case basis taking into
consideration relevant factors including the requirements of The Nasdaq National
Market and prevailing corporate practices.
On January 12, 1999, we announced that we had entered into an agreement
with Level 3 for to provide us with access to its cross-country fiber network.
Although this agreement is designed to reflect similar agreements entered into
by parties negotiating at arm's length, we cannot assure you that we would not
be able to obtain better terms from an unrelated third party.
The price of our securities may fluctuate significantly following any offering
Prior to an offering, there has been no public market for the debt
securities and the preferred stock. We cannot assure you that any market will
develop for the debt securities or the preferred stock. After we issue
securities, they may trade at prices that are higher or lower than your purchase
price. The trading price for our securities will depend on prevailing interest
rates, the market for similar securities and other factors, including economic
conditions and our financial condition, performance and prospects. In
particular, the prices of non-investment grade securities historically have been
highly volatile. We cannot assure you that the future market for our debt
securities will not be subject to similar volatility.
13
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. You may also inspect our filings at the
regional offices of the SEC located at Citicorp, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048
or over the Internet at the SEC's WEB site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities:
(a) Annual Report on Form 10-K for the year ended December 31, 1997, as
amended;
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as
amended;
(c) Current Report on Form 8-K dated May 8, 1998;
(d) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, as
amended;
(e) Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, as amended; and
(f) Current Report on Form 8-K dated March o, 1999.
You may request a copy of these filings at no cost, by writing or
telephoning the office of Valerie Haertel, RCN Corporation, 105 Carnegie Center,
Princeton, N.J. 08540-6215, telephone number (609) 734 -3700.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties, and assumptions about our business, including, among other
things:
o plans to develop networks and upgrade facilities;
o opportunities presented by target markets;
o plans to connect certain wireless video, resale telephone and
Internet service customers to advanced fiber optic networks;
o development of existing businesses;
o current and future markets for services and products;
o anticipated capital expenditures;
o impact of the Year 2000 issue;
o anticipated sources of capital; and
o effects of regulatory reform and competitive and technological
developments.
We have no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or risks. New
information, future events or risks may cause the forward-looking events we
discuss in this prospectus not to occur.
14
<PAGE>
USE OF PROCEEDS
Unless otherwise indicated in a prospectus supplement, the net proceeds
from the sale of the securities will be used to fund our network development,
operating losses and for general corporate purposes.
DIVIDENDS
We anticipate that future revenues will be used principally to support
operations and finance business growth. Accordingly, we do not intend to declare
or pay cash dividends in the foreseeable future. Our Board of Directors has the
discretion to declare or pay any cash dividends in the future. Their decision to
declare any dividends and the amount of any dividends will depend on a number of
factors, including our financial condition, capital requirements, funds from
operations, future business prospects and any other factor that they may deem
relevant. We are a holding company and our ability to pay cash dividends is
dependent on our ability to receive cash dividends, advances and other payments
from our subsidiaries. Our credit agreement contains restrictions on our
subsidiaries' ability to pay dividends. In addition, we have entered into
indentures in connection with our debt securities which also restrict our and
certain of our subsidiaries' ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
10-K for the year ended December 31, 1997 and our 8-K dated March o, 1999.
MARKET PRICE AND DIVIDEND INFORMATION
Our common stock (symbol: "RCNC") currently trades on the Nasdaq National
Market.
The following table sets forth the high and low bid prices per share of the
common stock on the Nasdaq National Market and cash dividends declared on the
common stock since September 30, 1997:
<TABLE>
<CAPTION>
Common stock
---------------------------------
Market Price($) Cash
------------------- Dividends
High Low Declared($)
------- ------ -----------
<S> <C> <C> <C>
1997
- ----
Quarter ending September 30............... 15 11/16 10 9/16 0
Quarter ending December 31................ 21 1/2 12 1/2 0
1998
- ----
Quarter ending March 31................... 30 5/8 15 7/8 0
Quarter ending June 30.................... 29 3/8 19 1/4 0
Quarter ending September 30............... 24 5/16 12 3/8 0
Quarter ending December 31................ 25 8 3/4 0
</TABLE>
Our common stock was distributed on September 30, 1997 to holders of record
of the common stock of Commonwealth Telephone Enterprises, Inc. on September 19,
1997. Accordingly, market price and dividend information have only been set
forth in the table above for the quarter ending September 30, 1997 and
subsequent periods. Information for the quarter ending September 30, 1997
reflects the partial period between September 19, 1997 through September 30,
1997.
The last reported sale price per share of our common stock on March 4,
1999, the last practicable date prior to the filing of this prospectus, was
$24.00.
On December 31, 1998, there were approximately 2,795 holders of common
stock. On December 31, 1998, 64,920,493 shares of common stock were outstanding.
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below sets forth our selected historical consolidated financial
data. Prior to September 30, 1997, we operated as part of C-TEC Corporation. The
historical consolidated financial data presented below reflect periods during
which we did not operate as an independent company. Accordingly, we had to make
certain assumptions to reflect the results of operations or the financial
condition which would have resulted if we had operated as a separate,
independent company during the periods listed below. You should not rely on the
historical consolidated financial data as an indication of our results of
operation and financial condition that would have been achieved if we had
operated as a separate, independent company during the periods listed below. The
historical consolidated financial data also do not necessarily indicate our
future results of operation or financial condition.
We conduct portions of our business through joint ventures, including our
joint ventures with Boston Edison Company (which is consolidated in our
historical results of operations) and with Pepco Communications, L.L.C. (which
is accounted for under the equity method in our historical results of
operations). The unaudited financial information set forth under "Consolidation
of Joint Ventures--Results of Operations" in the table below presents our
results of operations as if all domestic joint ventures were fully consolidated.
We believe that this unaudited financial data provides useful disclosure in
analyzing our business.
The selected historical consolidated financial data for the year ended
December 31, 1994 and as of December 31, 1994 are derived from our unaudited
historical consolidated financial statements not included in this prospectus.
The selected historical consolidated financial data as of December 31, 1995 are
derived from our audited historical consolidated financial statements not
included in this prospectus. The selected historical consolidated financial data
for the year ended December 31, 1995 and as of December 31, 1996 are derived
from and should be read in conjunction with our audited historical consolidated
financial statements incorporated by reference to our 10-K for the year ended
December 31, 1997. The selected historical consolidated financial data for the
years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and
1997 are derived from and should be read in conjunction with our audited
historical consolidated financial statements incorporated by reference to the
our 8-K dated March o, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our 10-K for the year ended
December 31, 1997 and our 8-K dated March o, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 59,500 $ 91,997 $ 104,910 $ 127,297 $ 210,940
Costs and expenses, excluding depreciation
and amortization......................... 49,747 75,003 79,107 134,967 262,352
Nonrecurring charges........................ -- -- -- 10,000 --
Acquired research and development........... -- -- -- -- 18,293
Depreciation and amortization............... 9,803 22,336 38,881 53,205 89,088
--------- --------- --------- ---------- -----------
Operating (loss)............................ (50) (5,342) (13,078) (70,875) (158,793)
Interest income............................. 21,547 29,001 25,602 22,824 58,679
Interest expense............................ (16,669) (16,517) (16,046) (25,602) (112,239)
Other (expense) income, net................. 1,343 (304) (546) 131 (1,889)
(Benefit) provision for income taxes........ 2,340 1,119 979 (20,849) (4,998)
Equity in loss of unconsolidated entities... -- (3,461) (2,282) (3,804) (12,719)
Minority interest in loss (income) of
consolidated entities.................... (95) (144) 1,340 7,296 17,162
Extraordinary charge- debt prepayment
penalty, net of tax of $1,728............ -- -- -- (3,210) --
Cumulative effect of changes in accounting
principles............................... (83) -- -- -- (641)
--------- --------- ---------- --------- ----------
Net (loss) income........................... $ 3,653 $ 2,114 $ (5,989) $ (52,391) $ (205,442)
========= ========= ========== ========= ==========
Ratio of earnings to fixed charges.......... 1.36 1.41 0.75 (1.87) (0.91)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (at end of period):
Total assets................................ $ 568,586 $ 649,610 $ 628,085 $1,150,992 $1,907,838
Long-term debt excluding current portion.... 154,000 135,250 131,250 686,103 1,263,036
Shareholders' equity........................ 372,847 394,069 390,765 356,584 371,446
Other Data:
EBITDA before nonrecurring charges.......... 9,753 16,994 25,803 (7,670) (51,412)
Cashed Provided by (Used in):
Operating Activities........................ 6,193 48,559 23,831 2,069 35,110
Investing Activities........................ (140,152) (146,203) (9,377) (475,860) (828,176)
Financing Activities........................ 280,014 (31,203) 9,391 634,858 690,282
Consolidation of Joint Ventures--Results of
Operations:
Total Sales................................. $ 104,910 $ 127,297 $ 245,125
Direct costs................................ 35,226 51,757 112,371
Operating, selling, general and administrative 43,881 83,422 181,248
EBITDA before nonrecurring charges.......... 25,803 (7,882) (48,494)
Depreciation and amortization............... 38,881 53,205 113,383
Operating (loss)............................ (13,078) (71,087) (180,170)
Cash, temporary cash investments and short-
term investments......................... 108,674 638,513 1,028,600
Property, plant and equipment............... 220,357 307,920 645,005
Long-term debt (excluding current portion).. 131,250 686,103 1,263,036
</TABLE>
In the table above:
(1) Nonrecurring charges represent costs of $10,000 incurred in 1997 the
termination of a marketing services agreement related to our wireless video
services, and costs of $18,293 incurred in 1998 relating to acquisition of
in-process technology in connection with the acquisitions.
(2) The deficiency of earnings to fixed charges is based on income from
continuing operations and has been computed on a total enterprise basis.
Earnings represent income before income taxes, and fixed charges. Fixed charges
consist of interest expense and debt amortization costs. RCN's earnings were
insufficient to cover fixed charges by $73.5 million for the year ended December
31, 1997 and by $214.2 million for the year ended December 31, 1998.
(3) EBITDA before nonrecurring charges represents earnings before interest,
depreciation and amortization, and income taxes. Because of the capital
intensive nature of the business and resulting large non-cash charges for
depreciation, EBITDA is commonly used in the communications industry by
management, investors, and analysts to analyze companies on the basis of
operating performance, leverage and liquidity. RCN intends to judge the success
of its initial rollout of fiber optic networks before deciding whether to
undertake additional capital expenditures to expand its network in new areas.
RCN believes that EBITDA is a critical measure of success. Because RCN is in a
growth-oriented and capital intensive phase of development, it incurs
depreciation and amortization charges in new markets which may obscure its
earnings growth in more mature markets. In addition, EBITDA provides a measure
of the availability of funds for various uses including repayment of debt,
expansion into new markets and acquisitions. EBITDA is not intended to represent
cash flows for the period and should not be considered as an alternative to cash
flows from operating, investing or financing activities as determined in
accordance with U.S. GAAP. EBITDA is not a measurement under U.S. GAAP and may
not be comparable with other similarly titled measures of other companies.
Certain of our debt agreements contain certain covenants that, among other
things, limit our and our subsidiaries' ability to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, engage in
transactions with stockholders and affiliates, create liens, sell assets and
engage in mergers and consolidations.
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Prior to September 30, 1997, RCN was operated as part of C-TEC. The
following unaudited pro forma consolidated statements of operations set forth
the historical statements of operations of RCN for the year ended December 31,
1998 and as adjusted for the following:
o RCN's acquisition of Erols in February 1998;
o RCN's February 1998 issuance and sale of its 9.80% Senior Discount
Notes due 2008 (the "9.80% Notes"); and
o RCN's June 1998 issuance and sale of 6,098,355 shares of Common Stock
(the "Stock Offering") and its 11% Senior Discount Notes due 2008
(the "11% Notes").
and the related transactions and events described in the notes thereto, as if
such transactions and events had been consummated on the first day of 1998.
Management believes that the assumptions used provide a reasonable basis on
which to present such unaudited pro forma statements of operations. The
unaudited pro forma statements of operations should be read in conjunction with
the financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 8-K dated March o, 1999.
The unaudited pro forma statements of operations are provided for
information purposes only and should not be construed to be indicative of RCN's
results of operations had the spin-off and the transactions and events described
above been consummated on the dates assumed, may not reflect the results of
operations or financial condition which would have resulted had RCN been
operated as a separate, independent company during such period, and are not
necessarily indicative of RCN's future results of operations or financial
condition.
18
<PAGE>
<TABLE>
<CAPTION>
RCN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
($ in thousands, except per share amounts and number of shares)
Erols
Historical
Adjustments 1/1/98-
RCN for the 2/28/98
Historical 9.8% Notes (2)
------------ ----------- ----------
<S> <C> <C> <C>
Sales............................................................ $ 210,940 $ 8,700
Cost and expenses excluding depreciation and amortization........ 262,352 8,388
Nonrecurring acquisition costs: In-process technology............ 18,293
Depreciation and amortization ................................... 89,088 1,478
------------ ---------- ---------
Operating (loss)................................................. (158,793) (1,166)
Interest income.................................................. 58,679
Interest expense................................................. (112,239) $ (3,492)(1) (164)
Other (expense), net............................................. (1,889) (5)
------------ ---------- ---------
(Loss) before income taxes....................................... (214,242) (3,492) (1,335)
(Benefit) for income taxes....................................... (4,998) (1) -
------------ ---------- ---------
(Loss) before equity in unconsolidated entities and minority
interest (209,244) (3,492) (1,335)
Equity in (loss) of unconsolidated entities...................... (12,719)
Minority interest in loss of consolidated entities............... 17,162
------------ ---------- ---------
Loss before cumulative effect of change in accounting principle.. $ (204,801) $ (3,492) $ (1,335)
============ ========== =========
Unaudited pro forma loss per average common share before
cumulative effect of change in accounting principle........... $ (3.35)
Weighted average number of common shares and common stock
equivalents outstanding....................................... 61,187,354
<CAPTION>
Adjustments
for the Stock
Acquisition Offering and
Adjustments the 11%
For Erols Notes Pro Forma
----------- ------------- -------------
<S> <C> <C> <C>
Sales............................................................ $ (5,371)(3) $ 214,269
Cost and expenses excluding depreciation and amortization........ (5,179)(3) 265,561
Nonrecurring acquisition costs: In-process technology............ 18,293
Depreciation and amortization ................................... 352 (4) 90,918
--------- --------- -------------
Operating (loss)................................................. (544) (160,503)
Interest income.................................................. 58,679
Interest expense................................................. 101 $ (8,580)(6) (124,374)
Other (expense) income, net...................................... (1,894)
--------- --------- -------------
(Loss) before income taxes....................................... (443) (8,580) (228,092)
(Benefit) for income taxes....................................... - (5) (4,998)
--------- --------- -------------
(Loss) before equity in unconsolidated entities and minority
interest (443) (8,580) (223,094)
Equity in (loss) of unconsolidated entities...................... (2,687 (3) (15,406)
Minority interest in loss of consolidated entities............... 17,162
--------- --------- -------------
Loss before cumulative effect of change in accounting principle.. $ (3,130) $ (8,580) $ (221,338)
========= ========= =============
Unaudited pro forma loss per average common share before
cumulative effect of change in accounting principle........... $ (3.62)
Weighted average number of common shares and common stock
equivalents outstanding....................................... 61,187,354
See Notes to Unaudited Pro Forma Statement of Operations
</TABLE>
19
<PAGE>
RCN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands)
The Unaudited Pro Forma Consolidated Statement of Operations assumes that
RCN was an autonomous entity rather than a wholly owned subsidiary of C-TEC for
the periods shown. The pro forma adjustments, as described below, are keyed to
the corresponding amounts shown in the relevant statement.
(1) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the 9.8% Notes aggregating $3,492 for
the year ended December 31, 1998. A pro forma adjustment was not assumed for
income tax benefits associated with the pro forma adjustment for additional
interest expense for the year ended December 31, 1998 because the realization of
such benefit would be uncertain.
(2) On February 20, 1998, RCN completed the acquisition of Erols,
Washington, D.C.'s largest Internet service provider. RCN accounted for this
transaction under the purchase method of accounting and accordingly, the
financial statements of Erols are not consolidated with RCN's historical
financial statements as of and for the year ended December 31, 1997. In 1998,
the financial results of Erols also are not consolidated with RCN's historical
financial statements for the period prior to February 20, 1998. The financial
information relating to Erols was provided by Erols.
<TABLE>
<CAPTION>
A summary of the transaction is as follows:
<S> <C>
Cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt of
approximately $5,100).................................$ 36,000
Fair value of RCN stock issued............................. 45,000
Fair value of stock options exchanged...................... 11,000
Liabilities assumed........................................ 55,000
---------
Fair value of assets acquired..............................$ 147,000
=========
</TABLE>
<TABLE>
<CAPTION>
The fair value of assets acquired was allocated as follows:
<S> <C> <C>
In-process technology......................................$ 13,228
Property, plant & equipment................................ 19,100
Current assets............................................. 2,280
Other assets............................................... 3,800
Intangible assets:
Estimated Useful
Life (months)
Customer base......................................... 15,000 48
Goodwill.............................................. 90,339 48
Tradename............................................. 3,253 13
---------
$ 147,000
=========
</TABLE>
(3) Such adjustments include a pro forma allocation of historical operating
results of Erols to the joint venture with Pepco Communications (see below)
based upon the relationship of the number of subscribers contributed to the
joint venture to the total number of subscribers acquired in the merger. RCN's
share of such operating results, including the depreciation and amortization
effects of the allocation of a portion of the total purchase price to the joint
venture, representing the agreed upon value of the subscribers to be contributed
to the joint venture, are included in the adjustment for "equity in (loss) of
unconsolidated entities."
20
<PAGE>
A subsidiary of RCN is a party to a joint venture with a subsidiary of
Pepco Communications, to provide the greater Washington, D.C. area residents and
businesses local and long-distance telephone, cable television, and Internet
services as a package from a single source. As a result of this joint venture,
RCN contributed to the joint venture the subscribers acquired in the merger with
Erols which are located in the relevant joint venture market. This represents
approximately 62% of the customer base acquired from Erols. The value of such
contribution as agreed to by the joint venture partners was $51,937.
Additionally, Starpower assumed the liability for the unearned revenue related
to the subscribers contributed to the joint venture of $26,663. A summary of
related amounts transferred to the joint venture is as follows:
Property, plant and equipment..................... $ 11,900
Customer base..................................... 9,300
Trade name........................................ 2,060
Goodwill.......................................... 55,340
Unearned revenue.................................. (26,663)
----------
Net investment in joint venture................... $ 51,937
==========
(4) Such adjustment reflects the change in depreciation and amortization
for the effect of the fair value adjustment of the net assets of Erols acquired.
RCN allocated the purchase price for Erols (see Note 2) on the basis of the fair
market value of the assets acquired and liabilities assumed.
(5) A pro forma adjustment was not assumed for income tax benefits
associated with the pro forma adjustments for the historical results of
operations of Erols because the realization of such benefit would be uncertain.
(6) Adjustment to reflect interest expense and amortization of debt
issuance costs related to the issuance of the 11% Notes aggregating $8,580 for
the year ended December 31, 1998. Pro forma adjustments were not assumed for
income tax benefits associated with the pro forma adjustments for additional
interest expense because the realization of such benefits would be uncertain.
21
<PAGE>
BUSINESS
Overview
We are building high-speed, high-capacity advanced fiber optic networks in
selected markets with high levels of population density. Our current services
include local and long distance telephone, video programming and data services,
including high speed Internet access. Our strategy is to become the leading
single-source provider of voice, video and data services to residential
customers in each of our markets by offering individual or bundled service
options, superior customer service and competitive prices. We are also
constructing our networks with significant excess capacity in order to
accommodate expanded services in the future. We intend to expand the services
provided to our customers through strategic alliances and opportunistic
development of complementary products. In addition, we will use the excess
capacity in our fiber optic networks to provide services to commercial customers
located on or near our networks. As a result of recent acquisitions and internal
growth, we are a leading regional Internet service provider in the Boston to
Washington, D.C. corridor. Our Internet businesses have recently been integrated
under the brand name "RCN.com."
Our initial advanced fiber optic networks have been established in selected
markets in the Boston to Washington, D.C. corridor, including New York City, and
the San Francisco Bay area. We are typically building the first true local
network to compete with the aging infrastructure of the incumbent service
providers in our markets. In the Boston market we operate our advanced fiber
optic network through a joint venture with Boston Edison Company. We own and
manage 51% owned of the venture and it is accounted for on a consolidated basis.
In the Washington, D.C. market, we are developing an advanced fiber optic
network through a joint venture named Starpower with Pepco Communications,
L.L.C., an indirect wholly owned subsidiary of Potomac Electric Power Company.
We own 50% of Starpower and Pepco Communications owns 50% and it is accounted
for under the equity method of accounting. We believe that these joint ventures
provide us with a number of important advantages. For example, we are able to
access rights of way of our joint venture partners and use their existing fiber
optic facilities. This allows us to enter our target markets quickly and
efficiently and to reduce our up-front costs of developing our networks. In
addition, our joint venture partners provide us with additional assets, equity
capital and established customer bases. We also benefit from our relationship
with our largest shareholder, Level 3 Communications, Inc., and from the
experience gained by certain of our key employees who participated in the
operation and development of other telephone, cable television and business
ventures, including MFS Communications Company, Inc.
Because we deliver a variety of services, we report the total number of our
various service connections purchased for local telephone, video programming and
Internet access rather than the number of customers. For example, a single
customer who purchases local telephone, video programming and Internet access
counts as three connections. See "--RCN Services--Connections." As of December
31, 1998, we had approximately 855,000 connections which were delivered through
a variety of our owned and leased facilities including hybrid fiber/coaxial
cable systems, a wireless video system and advanced fiber optic networks. As of
that date, we had approximately 123,000 total connections attributable to
customers connected to advanced fiber optic networks ("on-net" connections) and
had approximately 732,000 connections attributable to customers served through
other facilities ("off-net" connections). See "--RCN Services." Approximately
370,000 of our 497,000 Internet service connections were acquired during 1998.
See "--Recent Acquisition Transactions."
We have extensive operating experience in both the telephone and video
industries and in the design and development of telecommunications facilities.
Our experience provides us with expertise in systems operation and development,
and gives us an established infrastructure for customer service and billing for
both voice and video services and established relationships with suppliers of
equipment and video programming. In addition, our management team and board of
directors benefit from experience gained when they managed C-TEC, which prior to
September 30, 1997 owned and operated our company. C-TEC has 100 years of
experience in the telephone business and nearly 25 years of experience in the
cable television business. Both C-TEC and certain members of
22
<PAGE>
management also have extensive experience in the design and development of
advanced telecommunications facilities.
We seek to exploit competitive opportunities in selected markets where
population density, favorable demographics and the aging infrastructure of the
incumbent service providers' network facilities combine to create a particularly
attractive opportunity to develop advanced fiber optic networks. We continue to
construct network facilities within the Boston to Washington, D.C. corridor. We
believe that our experience in the Northeast will provide us with a key
strategic advantage as we enter markets in the San Francisco to San Diego
corridor.
West Coast Expansion
We recently began to develop advanced fiber optic networks in selected high
density markets outside of the Boston to Washington, D.C. corridor. Our initial
west coast network is being developed in the San Francisco Bay Area, which is
densely populated and has high per capita income and the highest per capita
Internet usage in the United States. We have received competitive local exchange
carrier ("CLEC") status in California. We have also obtained an "open video
system" ("OVS") certification from the Federal Communications Commission for the
City of San Francisco and surrounding counties and have begun to develop our
network in the San Francisco Bay Area. We expect to expand into selected markets
in or near Southern California. As is the case in our existing markets, we
intend to focus on high density markets with favorable demographics, and to
apply a subscriber-driven investment strategy. We expect to begin offering
services in the San Francisco Bay Area in 1999.
Business Strategy
Our goal is to become the leading provider of communications services to
residential customers in our target markets by pursuing the following key
strategies:
Exploit the "Last Mile" Bottleneck in Existing Local Networks: Existing
local networks are typically low capacity, single service facilities without the
bandwidth for multiple or new services and revenue streams. Investment in the
local network or "last mile" has not generally kept pace with other industry and
technological advances. In our target markets, we seek to be the first operator
of an advanced fiber optic network offering advanced communications services to
residential customers.
Continue Construction of Advanced Fiber Optic Networks: Our advanced fiber
optic networks are designed with sufficient capacity to meet the growing demand
for high speed, high capacity, voice, video and data services. Our networks also
have a significant amount of excess capacity which will be available for the
introduction of new products. We believe that our high capacity advanced fiber
optic networks provide us with certain competitive advantages such as the
ability to offer bundled services and the opportunity to amortize the cost of
our network over multiple revenue streams. In addition, our networks generally
provide superior signal quality and network reliability relative to the typical
networks of the incumbent service providers.
Leverage our Network and Customer Base: We are able to leverage our network
by delivering a broad range of communications products and by focusing on high
density residential markets. This bandwidth capacity and home density allows us
to maximize the revenue potential per mile of constructed network. We believe we
can further exploit our network capacity and customer base by exploring
opportunities to deliver new products and services in the future, including
complementary commercial and wholesale products and services.
Offer Bundled Voice, Video and Data Services with Quality Customer Service:
We offer our customers a single-source package of competitively priced voice,
video and data services, individually or on a bundled basis, with quality
customer service. By connecting customers to our own network, we improve our
operating economics and have complete control over our customers' experience
with us. We believe that the combination of bundled
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<PAGE>
communications services and quality customer care that we provide is superior to
services that are typically available from most incumbent telephone, cable or
other service providers.
Continue to Use Strategic Alliances: We have been able to enter markets
quickly and efficiently and to reduce the up-front capital investment required
to deploy our networks by entering into strategic alliances with companies such
as BECO, Pepco Communications, Level 3, Qwest and MCI/WorldCom. By establishing
relationships with these companies, we are able to take advantage of their
existing extensive fiber optic networks and other assets, and our own existing
cable television infrastructure, to expedite and reduce the cost of market entry
and business development. We will continue to evaluate other strategic alliances
in our existing markets and our developing markets.
Network Development and Financing Plan
The construction and operation of our local networks are highly
scalable. The economic viability of a market area is principally dependent
upon achieving a minimum number of homes passed in the area being served by
each switching and head end facility. We phase our market entrance or
expansion projects such that we have sufficient cash on hand to reach these
home passed minimums. Additional funding accelerates our ability to enter
new markets or further expand existing ones.
Based on our current growth plan, we expect that we will require a
substantial amount of capital to expand the development of our network and
operations into new areas within our larger target markets. We need capital to
fund the construction of our advanced fiber optic networks, upgrade our hybrid
fiber/coaxial plant and fund operating losses and repay our debts. We
currently estimate that our capital requirements for the period from
January 1, 1999 through 2000 will be approximately $1.8 billion, which
include capital expenditures of approximately $700 million in 1999 and
approximately $1 billion in 2000. These capital expenditures will be used
principally to fund additional construction of our fiber optic network in
high density areas in the Boston, New York City, Washington, D.C. and San
Francisco Bay area markets as well as to expand into new markets (including
selected markets in the western United States) and to develop our
information technology systems. These estimates are forward-looking
statements that may change if circumstances related to construction, timing
of receipt of regulatory approvals and opportunities to accelerate the
deployment of our networks do not occur as we expect. In addition to our
own capital requirements, our joint venture partners are each expected to
contribute approximately $275 million to the joint ventures through 2000 in
connection with development of the Boston and Washington, D.C. markets.
In order to continue growth beyond 2000, we will continue to require
additional capital to increase our network coverage and pay for other capital
expenditures, working capital, debt service requirements and anticipated further
operating losses. We may seek sources of funding from vendor financing, public
offerings or private placements of equity and/or debt securities, and bank
loans.
RCN Services
We provide a wide range of local and long distance telephone, video
programming and data services, both individually and in bundled service options.
We provide these services through a range of facilities including our
advanced fiber optic networks in New York City, Boston and Washington D.C., a
wireless video system in New York City, our hybrid fiber/coaxial cable systems
in the states of New York (outside New York City), New Jersey and Pennsylvania.
We also provide, on a limited basis, resale local and long distance telephony
services.
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<PAGE>
Connections. The following table summarizes the development of our
subscriber base:
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
On-Net Service Connections:
Voice............................... 1,909 3,214 4,473 11,428 20,857 30,868
Video............................... 4,870 11,784 15,599 35,196 58,324 86,349
Data................................ 326 150 267 1,588 3,661 6,176
Subtotal On-Net........................ 7,105 15,148 20,339 48,212 82,842 123,393
------- ------- ------- ------- ------- -------
Off-Net:
Voice............................... 10,953 24,900 40,447 49,052 58,093 65,022
Video............................... 229,198 227,619 227,558 214,164 196,776 175,313
Data................................ -- -- 370,271 398,560 470,466 491,633
------- ------- ------- ------- ------- -------
Subtotal Off-Net....................... 240,151 252,519 638,276 661,776 725,335 731,968
------- ------- ------- ------- ------- -------
Total Service Connections.............. 247,256 267,667 658,615 709,988 808,177 855,361
======= ======= ======= ======= ======= =======
Homes Passed........................... 26,083 44,045 63,386 122,977 213,983 304,505
Marketable Homes....................... -- -- -- 111,187 181,353 270,406
</TABLE>
Because we deliver a variety of services to our customers, we account for
our customer activity by the number of individual local telephone, video
programming or Internet access services, or "connections," purchased.
Consequently, a single customer purchasing local telephone, video programming
and Internet access counts as three connections.
We classify connections in the "Off-Net" category until the relevant
facilities are capable of providing voice, video and data services, including
local telephone service, through an RCN switch. During 1998, our Allentown,
Pennsylvania system was upgraded to provide a full range of services, and the
customers on that system were moved to the "On-Net" connections category.
"Off-Net--Voice" figures in the table above represent resold local phone
service provided to customers not connected to the advanced fiber optic
networks.
Our "Off-Net--Video" figures in the table above include approximately
31,000 wireless connections and wireline video connections serving the
University of Delaware (4,000 connections at December 31, 1998).
In areas served by our joint ventures in the Greater Boston and Washington,
D.C. areas, the subscribers are customers of the relevant joint venture.
As of September 30, 1998, we began to report marketable homes, which
represents that segment of homes passed which are being marketed our entire line
of advanced fiber optic network products. The distinction between homes passed
and marketable homes recognizes our transition from constructing our network to
providing services to customers that have ordered our services.
Set forth below is a brief description of our services:
Voice. We offer full-featured local exchange telephone service, including
standard dial tone access, enhanced 911 access, operator services and directory
assistance. We compete with the incumbent local exchange providers and CLECs. In
addition, we offer a wide range of value-added services, including call
forwarding, call waiting, conference calling, speed dial, calling card,
800-numbers and voice mail. We also provide Centrex service and associated
features. Our local telephone rates are generally competitive with the rates
charged by the incumbent providers. At December 31, 1998, we had approximately
30,900 telephone service connections on our advanced fiber optic networks and
approximately 65,000 customers for resold telephone service. We also provide
long
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<PAGE>
distance telephone services, including outbound, inbound, calling card and
operator services. These services are offered to residential and business
customers.
Video Services. We offer a diverse line-up of high quality basic, premium
and pay-per-view video programming. Depending on the system, we offer from 61 to
147 channels. Our basic video programming package provides extensive channel
selection featuring all major cable and broadcast networks. Our premium services
include HBO, Cinemax, Showtime and The Movie Channel, as well as supplementary
channels such as HBO 2, HBO 3 and Cinemax 2. StarCinema, available on our
advanced fiber optic networks, uses the latest "impulse" technology allowing
convenient impulse pay-per-view ordering of the latest hit movies and special
events instantly from the customer's remote. "Music Choice" offers 30 different
commercial-free music channels delivered to the customer's stereo in digital CD
quality sound.
As of December 31, 1998, we had approximately 86,350 subscribers for our
video programming services provided over advanced fiber optic networks. As of
such date, we also had approximately 34,900 connections attributable to the
wireless video system and approximately 140,400 connections attributable to the
hybrid fiber/coaxial cable systems.
Internet Access and Data Transmission. We operate as an Internet service
provider under the RCN.com brand name. We focus on serving individuals and
businesses through a network of our-owned points of presence ("POPs") which are
connected to our advanced fiber optic network. Our primary service offerings are
56K dial-up and high-speed cable modem access. We also sell commercially
oriented private line point-to-point data transmission services such as DS-1 and
OC-3 and a range of web page and server hosting services. Our subscribers use
their RCN accounts to communicate, retrieve information, and publish information
on the Internet. Following the recent acquisitions described below under
"--Recent Acquisition Transactions", we believe that we are the largest regional
provider of Internet services in the Northeast. As of December 31, 1998, we had
approximately 497,800 Internet subscribers.
Migration of Customers to Advanced Fiber Networks
We provide wireless video services to customers located near our advanced
fiber optic network in New York City and Internet services to acquired
subscribers. We have also provided resold telephone service in the past. Our
goal is to extend our advanced fiber optic network to service many of those
customers. As our advanced fiber optic network is extended into these areas or
buildings, customers receiving wireless video service in New York City are
switched to the advanced fiber optic network from the wireless video network.
The wireless video equipment is then used to provide service to other customers
in off-network premises. Similarly, as the advanced fiber optic network is
developed, voice and data customers are switched to the advanced fiber optic
network from resale accounts. The switch to our network allows us to gain
additional revenue and higher margins from originating and terminating access
fees and to control the related services and service quality.
Strategic Relationships and Facilities Agreements
We have entered into a number of strategic alliances and relationships
which allow us to enter into the telecommunications services market early and to
reduce the cost of entry into our markets. We expect to continue to pursue
potential opportunities from entering into strategic alliances to facilitate
network expansion and entry into new markets.
BECO Joint Venture
In 1996 RCN and the Boston Edison Company ("BECO"), through wholly owned
subsidiaries, formed a joint venture to use 126 fiber miles of BECO's fiber
optic network to deliver our comprehensive communications package in Greater
Boston. A joint venture agreement provided for the organization and operation of
RCN- BECOCOM, LLC, an unregulated entity with a term expiring in the year 2060.
RCN-BECOCOM is a
26
<PAGE>
Massachusetts limited liability company organized to own and operate an advanced
fiber optic telecommunications network and to provide, in the market in and
around Boston, Massachusetts, voice, video and data services. Through RCN
Telecom Services of Massachusetts, we own 51% of the equity interest in
RCN-BECOCOM and BECO, through a subsidiary, owns the remaining 49% interest.
This joint venture with BECO is reflected on our financial statements on a
consolidated basis.
We are presently in discussions with BECO about BECO converting a portion
of its interest in the BECO joint venture into our common stock.
We expect to benefit from our ability to use BECO's large fiber optic
network, its focus on innovative technology, its sales and marketing expertise
and its reach into the market. In the future, the venture may expand into energy
management and property monitoring services. Starting in Boston, the joint
venture partners have expanded into surrounding markets, including Arlington,
Sommerville and Newton. As a result of our access to the extensive BECO network,
our reliance on and use of MFS/WorldCom facilities in Boston has been reduced
significantly.
Starpower Joint Venture
In 1997, RCN Telecom Services, Inc., one of our subsidiaries, and Potomac
Capital Investment Corporation ("PCI"), a wholly owned subsidiary of Potomac
Electric Power Company, formed a joint venture to own and operate a
communications network to provide voice, video, data and other communications
services to residential and commercial customers in the greater Washington,
D.C., Virginia and Maryland area. Starpower, an unregulated limited liability
company with a perpetual term, was formed by RCN Telecom Services of Washington,
D.C., Inc. ("RCN Washington") and Pepco Communications. Starpower was formed to
construct, own, lease, operate and market a network for the selling of voice,
video, data and other telecommunications services to all potential commercial
and residential customers in the Washington, D.C. market covered by the joint
venture contract. Through RCN Washington, we own 50% of the equity interest in
Starpower and PCI, through Pepco Communications, owns the remaining 50%
interest. Starpower is reflected on our financial statements under the equity
method of accounting.
Miscellaneous Facilities Agreements
We have also entered into agreements which have helped us accelerate
network development, including Fiber Agreements entered into with MFS/WorldCom.
MFS/World Com owns or has the right to use certain fiber optic network
facilities in the Boston, Massachusetts and New York City markets. Under the
Fiber Agreements, MFS/WorldCom agreed to construct and provide extensions
connecting the fiber optic facilities to buildings we designated. We are also
able to use certain dedicated fibers in those facilities, except that we may not
use the facilities to deliver telephone services to commercial customers.
In June 1998, we entered into an agreement with Qwest Communications for
Qwest to provide us with capacity in its regional backbone of fiber lines to
connect to our local networks from Boston to Washington, D.C. We also recently
announced that we have entered into a letter of intent with Level 3 for Level 3
to provide us with cross-country capacity to allow our customers to connect to
major Internet connection points in the United States. This gives us the ability
to negotiate peering agreements that will allow the exchange of traffic as a
Tier I operator.
Recent Acquisition Transactions
On January 21, 1998, we entered into a merger agreement among us, Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., a British Virgin
Islands corporation, and ENET Holding, Inc., a Delaware corporation and one of
our wholly owned subsidiaries, to acquire all of the outstanding shares of
common stock of Erols. Erols is a leading regional ISP serving residential and
business subscribers in targeted markets, including New York City, Philadelphia,
Washington, D.C. and Boston. The approximate total consideration was $29.2
million in cash,
27
<PAGE>
1,730,648 shares of our common stock plus the assumption of approximately $5.1
million of debt. Additionally, we converted certain Erols stock options to RCN
stock options. The transaction was completed in February 1998. After we
completed the transaction, we contributed approximately 197,000 subscribers
located in the Washington, D.C. area, certain assets and liabilities unique to
the Starpower service area and a 65% undivided ownership interest in the common
network assets of Erols to our Starpower joint venture partners. We received in
exchange a $52 million credit to our capital account in the Starpower joint
venture. In addition, we also contributed approximately 5,000 subscribers
located in the Boston area and certain assets and liabilities unique to the
RCN-BECOCOM service area to the RCN-BECOCOM joint venture. The contribution had
a net agreed value of approximately $1 million. Our joint venture partner,
BECOCOM, contributed to RCN-BECOCOM a note of the same amount, which has been
fully paid.
On January 21, 1998, RCN, UNET Holdings, Inc. and UltraNet Communications,
Inc. entered into a merger agreement whereby we agreed to acquire all of the
outstanding shares of common stock of UltraNet, a leading ISP in the Boston area
serving residential and business customers in New England. The total
consideration for the acquisition was approximately $7 million in cash, 890,384
shares of RCN common stock, and $3 million in deferred compensation.
Additionally, we converted certain UltraNet stock options to RCN stock options.
The transaction was completed in February 1998. After we completed the
transaction, we contributed approximately 10,000 subscribers located in the
Boston area and certain assets and liabilities unique to the RCN-BECOCOM service
area to our RCN-BECOCOM joint venture. The contribution had a net agreed value
of approximately $7 million. BECOCOM contributed to RCN-BECOCOM a note of the
same amount, which has been fully paid.
On February 27, 1998, we entered into a merger agreement with Lancit Media
Entertainment Ltd. and LME Acquisition Corporation. We agreed to acquire all of
the outstanding shares of common stock of Lancit, a producer of high quality
children's programming. The total consideration for the transaction was $1 in
cash and 366,596 in shares of RCN common stock. All options to purchase Lancit
common stock were canceled. In addition, certain warrants to purchase Lancit
common stock became, by their terms, warrants to purchase RCN common stock. The
transaction was completed in June 1998.
On June 1, 1998, we entered into the Interport Merger Agreement with
Interport and INET Holding, Inc. and the individual shareholders of Interport
Communications, Corp. We agreed to acquire all of the outstanding shares of
Interport common stock. The total consideration for the transaction was $1.025
million in cash and 396,442 shares of RCN common stock. In addition, Interport
stock options were converted into options to purchase shares of RCN Common Stock
and units granting the right to deferred delivery of RCN common stock were
issued. The transaction was completed in June 1998.
On June 30, 1998, we entered into the JavaNet merger agreement with
JavaNet, Inc., David Epstein, Zachary Julius, JNET Holding Inc. and (with
respect to certain provisions only) John Halpern. We agreed to acquire all of
the outstanding shares of JavaNet, an ISP with approximately 32,000 subscribers
in Connecticut, Maine and Massachusetts at the time of the acquisition. In
connection with the transaction, we paid $2.37 million in cash and issued
approximately 569,000 shares of RCN common stock to JavaNet stockholders. All
options to purchase JavaNet common stock were canceled. The transaction was
completed on July 23, 1998. After we completed the transaction, we contributed
approximately 5,000 subscribers in Massachusetts and certain assets and
liabilities unique to the RCN-BECOCOM service area to our RCN-BECOCOM joint
venture. The contribution had a net agreed value of approximately $1 million.
BECOCOM contributed to RCN-BECOCOM cash in an equal amount.
Hybrid Fiber/Coaxial Cable Systems
The following table summarizes the development of the hybrid fiber/coaxial
cable systems over the last five years:
28
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Homes Passed........................ 118,216 119,761 282,836 283,940 290,612 186,485
Basic Subscribers................... 87,660 92,140 176,131 179,932 184,938 140,379
</TABLE>
As of December 31, 1998, approximately 110,000 homes (representing
approximately 50,000 video connections) were converted to advanced fiber
systems.
The service areas for these cable television networks enjoy favorable
customer demographics. The New York and New Jersey systems primarily serve
affluent bedroom communities in suburban New York City. The system in New York
State serves ten municipalities in Dutchess, Putnam and Westchester Counties,
approximately 45 miles north of New York City. The New Jersey system serves 31
contiguous municipalities in Hunterdon, Mercer, Morris and Somerset Counties,
approximately 50 miles west of Manhattan. The Pennsylvania system, which is the
largest competitive cable television system in the United States, serves
Pennsylvania's Lehigh Valley area including the cities of Allentown, Bethlehem
and Easton, and virtually all of Lehigh and Northampton Counties, and is located
less than 10 miles west of our New Jersey system. Certain of our Hybrid
Fiber/Coaxial Cable systems have been upgraded to enable the networks to provide
voice, video and data services, including local telephone service, through an
RCN switch. After the conversion to these services, customers served by those
networks are included within our "on-net connections" category.
International
We own a 40.0% interest in Megacable, the second largest cable television
provider in Mexico. Megacable owns 22 wireline cable systems in Mexico,
principally on the Pacific and Gulf coasts and including Guadalajara, the second
largest city in Mexico, Hermosillo, the largest city in the state of Sonora and
Veracruz, the largest city in the state of Veracruz. At December 31, 1998, their
wireline systems passed approximately 733,500 homes and served approximately
222,300 subscribers. Megacable had revenues of $37.5 million and $30.4 million
for the years ended December 31, 1998 and 1997, respectively.
Additionally, Megacable presently holds a 99% interest in Megacable
Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license from the
Mexican government to allow it to build a fiber optic network in Mexico City,
Monterrey and Guadalajara. MCM intends to use this network to provide local
voice and high-speed data service in these cities, principally to commercial
customers in Mexico City.
Competition
Overview
We compete with a wide range of service providers for each of our services.
Virtually all markets for voice and video services are extremely competitive,
and we expect that competition will intensify in the future. We face significant
competition in each of the markets in which we offer voice and video programming
services. Our competitors are often larger, better-financed incumbent local
telephone carriers and cable companies, and many have historically dominated
their local telephone and cable television markets. These incumbents presently
have numerous advantages as a result of their historic monopoly control of their
respective markets, economies of scale and scope and control of limited conduit
and pole space. They also have well-established customer and vendor
relationships. However, we believe that most existing and potential competitors
will, at least initially, offer narrower services over limited delivery
platforms compared to the wide range of voice, video and data services that we
provide over our fiber-based networks. This gives us an opportunity to achieve
important market penetration.
We compete with the incumbent LECs for local telephone services, as well as
alternative service providers including CLECs. Cable operators are also entering
the local exchange market in some locations. Other sources of competitive local
and long distance telephone services include: commercial mobile radio services
providers,
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<PAGE>
including cellular carriers (such as Bell Atlantic Mobile Services); personal
communications services carriers such as Sprint Spectrum; and enhanced
specialized mobile radio services providers (such as NexTel). However, we
believe these operators primarily use competitive access services to transport
their calls among their radio transmitter/receiver sites through networks that
largely avoid the incumbent LECs with whom they compete.
We face, and expect to continue to face, significant competition for long
distance telephone services from the inter-exchange carriers ("IXCs"), including
AT&T, Sprint and MCI WorldCom, which account for the majority of all long
distance revenue. The major long distance service providers benefit from
established market share and from established trade names through nationwide
advertising. However, we regard our long-distance service as a complementary
service rather than a principal source of revenue. Certain IXCs, including AT&T,
MCI WorldCom and Sprint, have also announced their intention to offer local
services in major U.S. markets using their existing infrastructure in
combination with resale of incumbent LEC service, lease of unbundled local loops
or other providers' services. Internet-based telephony, a potential competitor
for low cost telephone service, is also developing.
All of our video services face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment. Other sources include off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including
videotape cassette recorders. Alternative video distribution technologies
include traditional cable networks, wireless local video distribution
technologies, and home satellite dish earth stations. Home satellite systems
enable individual households to receive many of the satellite-delivered program
services formerly available only to cable subscribers. The Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Act") contains
provisions, which the FCC has implemented with regulations, to enhance the
ability of cable competitors to purchase and make available to HSD owners
certain satellite-delivered cable programming at competitive costs. We face
additional competition from private satellite master antenna television
("SMATV") systems that serve condominiums, apartment and office complexes and
private residential developments. The FCC and Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that compete, or may compete, with our various video distribution
systems. These technologies include, among others, Direct Broadcast Satellite
("DBS") service whereby signals are transmitted by satellite to receiving
facilities located on customer premises. We expect that our video programming
services will face growing competition from current and new DBS service
providers. The FCC has recently determined that DBS is the fastest-growing
competitor to franchised cable operations. We also compete with wireless program
distribution services such as Multi-Channel Multi-Point Distribution Service
which use low-power microwave frequencies to transmit video programming
over-the-air to subscribers. We are unable to predict whether wireless video
services will have a material impact on our operations.
The Internet access market is extremely competitive and highly fragmented.
Competition in this market is expected to intensify. Our current and prospective
competitors include established online services; local, regional and national
ISPs; national and international telecommunications companies including Regional
Bell Operating Companies ("RBOCs") such as Bell Atlantic; and affiliates of
incumbent cable providers. Increased competition may create downward pressure on
the pricing of and margins from Internet access services.
Other new technologies, including Internet-based services, may compete with
services that we can offer. Advances in communications technology as well as
changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect that ongoing or future
developments might have on the voice, video and data industries or on our
operations.
We believe that among the existing competitors, the incumbent LECs,
incumbent cable providers and the CLECs are most of our competitors in the
delivery of "last mile" connections for voice and video services.
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Incumbent LECs
In each of our target markets for advanced fiber optic networks, we face,
and expect to continue to face, significant competition from the incumbent LECs.
The incumbent LECs include Bell Atlantic in the Northeast Corridor, and Pacific
Bell in California, both of which currently dominate their local telephone
markets. We compete with the incumbent LECs in our markets for local exchange
services on the basis of product offerings, including the ability to offer
bundled voice and video service, reliability, state-of-the-art technology and
superior customer service, as well as price. We believe that our advanced fiber
optic networks provide superior technology for delivering high-speed,
high-capacity voice, video and data services compared to the incumbent LECs'
primarily copper wire based networks. However, the incumbent LECs have
long-standing relationships with their customers. They have also begun to expand
the amount of fiber facilities in their networks, to offer broadband digital
transmission services and retail Internet access, and to prepare to re-enter the
long distance telephone service market. The pending merger between Bell Atlantic
and GTE Corporation may enhance the combined entity's ability to compete with us
in the Northeast corridor markets. The pending merger between SBC and Ameritech
may also increase competitive pressures in the Northeast corridor if SBC, which
already owns a Connecticut incumbent LEC and several wireless franchises in this
region, continues to pursue a nationwide strategy.
Under the Telecommunications Act of 1996 (the "1996 Act"), and ensuing
federal and state regulatory initiatives, barriers to local exchange competition
are being slowly removed. The introduction of such competition, however, also
establishes the predicate for the RBOCs, such as Bell Atlantic, to provide
in-region interexchange long distance services. The RBOCs are currently allowed
to offer "incidental" long distance service in-region and to offer out-of-region
long distance service. Once the RBOCs are allowed to offer in-region long
distance services, they will also be in a position to offer single source local
and long distance service similar to what we offer and proposed by the three
largest IXCs, AT&T, MCI WorldCom and Sprint. We expect that the increased
competition made possible by regulatory reform will result in certain pricing
and margin pressures in the telecommunications services business.
We have sought, and will continue to seek, to provide a full range of local
voice services which compete with incumbent LECs in our service areas. We expect
that competition for local telephone services will be based primarily on
quality, capacity and reliability of network facilities, customer service,
response to customer needs, service features and price, and will not be based on
any proprietary technology. Our advanced fiber optic networks, dual backbone
architecture and the state-of-the-art technology used in our networks are
recently installed by comparison, therefore we may have capital cost and service
quality advantages over some currently available local networks the incumbent
LECs rely on. We may also have a competitive advantage because we are able to
deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others to provide a wide
variety of video services directly to subscribers, which we compete with.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. We cannot predict the likelihood of success of video
service ventures by LECs or the impact such competitive ventures may have on us.
Some LECs, including Bell Atlantic, also offer Internet access services that
compete with RCN.com services.
Incumbent Cable Television Service Providers
Certain of our video service businesses compete with incumbent wireline
cable companies in their respective service areas. In particular, our advanced
fiber optic networks compete for cable subscribers with the major wireline cable
operators in our markets, such as Time-Warner Cable in New York City and
Cablevision in Boston and TCI in Washington, D.C. Our wireless video service in
New York City competes primarily with Time-Warner Cable. We believe that the
expanded capacity and fiber-to-node architecture of our advanced fiber optic
networks make it better equipped to provide high-capacity communications
services than traditional coaxial cable based networks
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using "tree and branch" architecture. Our Pennsylvania hybrid fiber/coaxial
cable television system competes with an alternate service provider, Service
Electric, which also holds a franchise for the relevant service area.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis, and the 1992 Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable systems. Therefore, well-financed
businesses from outside the cable industry, such as the public utilities that
own certain of the conduits or poles which carry cable, may become competitors
for franchises or providers of competing services. Telephone companies or others
may also enter the video distribution market by becoming open video service
operators as we have done in several markets, pursuant to Section 653 of the
Communications Act. No local franchise is required for the provision of such
service.
CLECs and Other Competitors
We also face, and expect to continue to face, competition from other
potential competitors in certain of our geographic markets. Other CLECs, such as
subsidiaries of AT&T and MCI WorldCom, compete for local telephone services,
although they have to date focused primarily on the market for commercial
customers rather than residential customers. In addition, potential competitors
capable of offering private line and special access services also include other
smaller long distance carriers, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end-users, including Winstar, Dualstar and New Vision. However,
we believe that, at least initially, we are relatively unique in our markets in
offering bundled voice, video and data services primarily to customers in
residential areas over our own advanced fiber optic network.
Internet Services
The Internet access market is extremely competitive and highly fragmented.
No significant barriers to entry exist, and accordingly competition in this
market is expected to intensify. Our current and prospective competitors include
many large companies with substantially greater market presence and financial
and other resources.
RCN.com competes directly or indirectly with:
o established online services, such as America Online, the Microsoft
Network and Prodigy;
o local, regional, and national ISPs such as PSINet, EarthLink,
Mindspring and Rocky Mountain Internet;
o the Internet services of national and international telecommunications
companies, such as AT&T, GTE, MCI WorldCom and Cable & Wireless;
o Internet access offered by RBOCs such as Bell Atlantic; and
o online services offered by incumbent cable providers, such as At Home
and Roadrunner.
Bell Atlantic has recently asked the FCC to authorize it to build a
regional high-speed network, which would serve as an Internet backbone, and to
exempt this network from pricing and other regulatory restrictions. The network
would span the states from Maine to Virginia. Internet access competition is
likely to increase as large diversified telecommunications and media companies
acquire ISPs and as ISPs consolidate into larger, more competitive companies.
For example, AT&T is in the process of acquiring TCI's cable television
networks, which will give it a significant ownership interest in At Home, an
ISP. Diversified competitors may bundle other services and products with
Internet connectivity services, potentially placing us at a competitive
disadvantage. In addition, competitors may create downward pressure on the
pricing of and margins from Internet access services. Competition could also
impact our ability to participate in transit agreements and peering
arrangements, which could in turn adversely effect the speed of service that we
can provide to our customers.
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Other new technologies may become competitive with our services. A provider
of LMDS recently began offering wireless Internet and video programming services
in New York City and has announced plans to offer telephone service in the
future. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may also create significant new
competitors. We cannot predict whether competition from developing and future
technologies or from future competitors will have a material impact on our
operations.
Regulation
Our telephone and video programming transmission services are subject to
federal, state and local government regulation. The 1996 Act introduced
widespread changes in the regulation of the communications industry, including
the local telephone, long distance telephone, data services, and television
entertainment segments. The 1996 Act was intended to promote competition and
decrease regulation of these segments of the industry. The law delegates to both
the FCC and the states broad regulatory and administrative authority to
implement the 1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telephone and video programming communications businesses.
The Act also preempts many of the state barriers to local telephone service
competition that previously existed in state and local laws and regulations and
sets basic standards for relationships between telecommunications providers.
The 1996 Act removes barriers to entry in the local exchange telephone
market by preempting state and local laws that restrict competition and by
requiring LECs to provide nondiscriminatory access and interconnection to
potential competitors, such as cable operators, wireless telecommunications
providers, and long distance companies. In addition, the 1996 Act provides
relief from the earnings restrictions and price controls that have governed the
local telephone business for many years. The 1996 Act will also, once certain
thresholds are met, allow incumbent RBOCs to enter the long distance market
within their own local service regions.
Regulations promulgated by the FCC under the 1996 Act require LECs to open
their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. As a result of these changes, companies such as ours are now
able to interconnect with the incumbent LECs in order to provide local exchange
services. Numerous parties appealed certain aspects of these regulations, and
implementation of several provisions of the rules was delayed while the courts
considered these appeals. On January 25, 1999, the Supreme Court issued an
opinion confirming the FCC's authority to issue regulations implementing the
pricing and other provisions of the 1996 Act and reinstating most of the
challenged rules. However, the Supreme Court vacated a key FCC rule identifying
the network elements that incumbent LECs are required to unbundle. This decision
will likely require the FCC to conduct additional proceedings to determine new
unbundling standards. The outcome of such proceedings cannot be predicted. Also,
while the Supreme Court confirmed that the FCC has authority to issue rules
implementing the 1996 Act, particular rules still may be challenged in future
court proceedings. Future regulatory proceedings and court appeals may create
delay and uncertainty in effectuating the interconnection and local competition
provisions of the 1996 Act. While the courts were reviewing the FCC rules, we
had entered into interconnection agreements with Bell Atlantic covering all of
our target market area that are generally consistent with the FCC guidelines.
Those agreements remain in effect. We cannot assure you, however, that we will
be able to obtain or enforce future interconnection agreements, or obtain
renewal of existing agreements, on acceptable terms.
The 1996 Act establishes certain conditions before RBOCs are allowed to
offer interLATA long distance service to customers within their local service
regions. These conditions include 14 "checklist" requirements designed to open
the RBOC networks to competitors. To date, no RBOC has received FCC
authorization to provide in-region long distance service, but it is likely that
several RBOCs will seek authorization in 1999. Bell
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Atlantic is likely to seek authorization for New York and possibly other states
in its region. If an RBOC is authorized to provide in-region long distance
service in one or more states, the RBOC may be able to offer "one-stop shopping"
services that compete with our service offerings. See "Business-Competition". In
addition, the RBOC will lose the incentive it now has to rapidly implement the
interconnection provisions of the 1996 Act in order to obtain in-region
authority, although the RBOC will still be subject to a legal obligation to
comply with those provisions.
The 1996 Act also makes far-reaching changes in the regulation of video
programming transmission services. These include changes to the regulations
applicable to video operators, the elimination of restrictions on telephone
company entry into the video business, and the establishment of a new OVS
regulatory structure for telephone companies and others. Under the 1996 Act and
implementing rules adopted by the FCC, local telephone companies, including both
incumbent LECs such as Bell Atlantic, and CLECs such as RCN, may provide service
as traditional cable television operators subject to municipal cable television
franchises, or they may choose to provide their programming over non- franchised
open video systems subject to certain conditions. The conditions include making
available a portion of their channel capacity for use by unaffiliated program
distributors and satisfying certain other requirements, including providing
capacity for public, educational and government channels, and paying a gross
receipts fee equal to the franchise fee paid by the incumbent cable television
operator. We are one of the first CLECs to provide television programming over
an advanced fiber optic network under the OVS regulations implemented by the FCC
under the 1996 Act. As discussed below, we are currently providing OVS service
in the City of Boston, in the City of New York and in a number of communities
surrounding Boston. We are also negotiating similar agreements in Northern New
Jersey, Philadelphia and surrounding communities, and San Francisco and
surrounding communities. Starpower is negotiating similar agreements in
Washington and surrounding communities.
Regulation of Voice Services
Our voice business is subject to regulation by the FCC at the federal level
for interstate telephone services (i.e., those that originate in one state and
terminate in a different state). State regulatory commissions have jurisdiction
over intrastate communications (i.e., those that originate and terminate in the
same state).
State Regulation of Intrastate Local and Long Distance Telephone Services.
Our intrastate telephone services are regulated by the public service
commissions or comparable agencies of the various states in which we offer these
services. Our subsidiaries or affiliates have received authority to offer
intrastate telephone services, including local exchange service, in California,
Delaware, the District of Columbia, Maryland, Massachusetts, Nevada, New Jersey,
New York, Pennsylvania, Rhode Island, Vermont and Virginia. We have applied for
authority to offer these services in Arizona, Connecticut, Maine, and New
Hampshire. Starpower has separately obtained similar authority in Maryland,
Virginia and the District of Columbia. Our resale and interconnection agreements
have been approved, pursuant to Section 252 of the Communications Act, by state
regulatory commissions in Arizona, Delaware, the District of Columbia, Maine,
Maryland, Massachusetts, New York, New Jersey, New Hampshire, Pennsylvania,
Rhode Island, Vermont, and Virginia.
RCN Long Distance Company is authorized to offer intrastate long distance
services in Pennsylvania, New York, Massachusetts and 45 other states
nationwide. RCN Long Distance Company is permitted to resell intrastate long
distance services both to other carriers, including our local operating
subsidiaries and Starpower for resale to their end user subscribers, and to our
own end user customers.
FCC Regulation of Interstate and International Telephone Services. Through
several of our subsidiaries, including RCN Long Distance Company, we may provide
domestic interstate telephone services nationwide under tariffs on file at the
FCC. We have been authorized by the FCC under Section 214 of the 1996 Act to
offer worldwide international services as well.
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Local Regulation of Telephone Services. Municipalities also regulate
limited aspects of our voice business by, for example, imposing various zoning
requirements. In some instances, they require telecommunications licenses,
franchise agreements and/or installation permits for access to local streets and
rights-of-way. In New York City, for example, we will be required to obtain a
telephone franchise in order to provide voice services using our advanced fiber
optic network facilities located in the streets of New York City, although
services may be provided over certain leased or resold facilities while we wait
to receive a franchise.
Regulation of Video Services
Open Video Systems. At various times between February 1997 and July 1998,
our subsidiaries and affiliates have been certified by the FCC to operate OVS
networks in New York City, Boston, Washington, Philadelphia, and San Francisco,
and communities surrounding each of these cities, and in the Northern New Jersey
area. Initiation of OVS services is subject to completion of an open enrollment
period for non- affiliated video programmers to seek capacity on the systems and
after negotiation of certain agreements with local governments. The initial open
enrollment period for each of these systems has expired, except for the Northern
New Jersey system, where the open enrollment period has not yet begun. We
executed an agreement with the City of Boston on June 2, 1997, and initiated OVS
service in the City on that day. Under our agreement with the City of Boston, we
will be required to pay a fee to the City equal to 5% of video revenues. We have
entered into similar OVS agreements or are in the process of negotiating
agreements with certain other Boston-area municipalities, either to offer OVS
services or franchised cable television services. We entered into an agreement
with the City of New York on December 29, 1997 and have initiated OVS service in
the Borough of Manhattan. On July 10, 1998, we supplemented our agreement with
the City of New York to include all five boroughs. On October 26, 1998,
Starpower entered into an agreement with the District of Columbia and initiated
OVS service in the District in the last quarter of 1998. Starpower has entered
into similar agreements or is in the process of negotiating agreements with
numerous suburban communities near Washington, D.C., to offer either OVS
services or franchised cable television services.
In areas where we offer video programming services as an OVS operator, we
are required to hold a 90-day open enrollment period every three years, during
which times we must offer open capacity on our network to other VPPs. Under the
OVS regulations, we must offer at least two-thirds of our capacity to
unaffiliated parties, if demand for such capacity exists during the open
enrollment period. In certain areas, at the request of local officials, we are
in discussions to explore the feasibility of obtaining a cable franchise instead
of an OVS agreement. We will consider providing RCN video service under
franchise agreements rather than OVS certification, if franchise agreements are
preferred by the local authorities and can be obtained on acceptable terms and
conditions. We will consider the relative benefits of OVS certification versus
local franchise agreements, including the possible imposition of universal
service requirements, before making any decisions.
The U.S. Court of Appeals for the Fifth Circuit has recently released a
decision approving some portions of the FCC's OVS rules but striking down other
portions. Although a number of the Court's rulings are favorable to OVS
operators, others could have an adverse impact on our OVS operations and
planning. The Court's most significant decision was to strike down the FCC's
rule preempting local authority to franchise OVS operators. The FCC's rules had
set forth a relatively simple procedure at the FCC for rapid certification of
each OVS system on a regional basis and permitted local authorities to regulate
OVS only as to rights-of-way administration and in other minor respects. One of
the principal advantages of OVS as structured by Congress and by the FCC was to
eliminate the time, expense, and uncertainty generally required to secure a
local franchise. The Court's action allowing local governments to require
area-by-area franchising may significantly reduce the advantage of OVS operation
as compared with traditional franchising and delay achieving agreements with
local governments. We believe the Court's decision is erroneous in its
application of law and plan to seek partial reconsideration of the Court's
decision. The FCC, which is the respondent before the Fifth Circuit, has not yet
made any public response to the Court's decision. Whether the FCC will seek
reconsideration, and how it will modify its OVS policy and rules to take account
of the Court's specific rulings is not currently known. The U.S. Courts of
Appeal do not routinely grant requests to reconsider their rulings and when they
do a significant period of time is generally required for the consideration of
such requests. However, in many instances RCN, at the insistence of local
authorities, has been
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negotiating franchise agreements and agreeing to provisions in OVS right-of-way
agreements which to some extent erode the differences between the two modes of
operation. Accordingly, while the ruling is disadvantageous to us, we expect to
continue to expand our video service offerings.
The FCC's rules require OVS operators to make their facilities available to
video program providers on a non-discriminatory basis, with certain exceptions.
One exception is that competing in-region cable operators are not entitled to
become video program providers on an OVS except in certain limited
circumstances. The incumbent cable operator in Boston, Cablevision of Boston,
Inc., sought an order from the FCC compelling us to provide it with certain data
on our Boston OVS system and declaring Cablevision an eligible video programming
provider on our system. The FCC's Cable Services Bureau denied its request and
that denial has become final. Time Warner Cable Co., which operates franchised
cable systems in many suburban Boston communities included within our OVS
certification, also sought an order compelling us to release certain OVS system
data and to declare it eligible for carriage on our system. Unlike Cablevision,
Time Warner is not competing with any RCN-provided OVS service and restricted
its request to communities where it is not the franchised cable operator. Time
Warner also sought to impose fines or cancel our OVS authority. The Cable
Services Bureau partially granted the data request and partially denied it but
found too little evidence to justify further exploration of our good faith in
acquiring OVS authority. We have sought partial reconsideration of the Bureau's
order, which is currently pending. Time Warner filed a similar complaint against
us in New York City where we compete with it for video distribution business in
Manhattan. Time Warner asked for system data concerning parts of New York City
in which it does not hold a franchise for cable service. The FCC's Cable
Services Bureau partially granted Time Warner's complaint, and partially denied
it, relying on its prior decision in the Time Warner complaint in the Boston
area. We have sought partial reconsideration of that decision.
Two additional cable company complaints have been filed against Starpower,
seeking data and a determination of eligibility for carriage on the metropolitan
Washington OVS system. As in the prior complaints, they challenge our status as
an OVS operator and seek to revoke our OVS authority. These complaints were
filed by Media General Cable of Fairfax, Inc., which operates franchised cable
service within the projected service area of Starpower's OVS system, and Media
General Cable of Fredericksburg, Inc. which is an affiliate of Media General
Cable of Fairfax, Inc. and operates a cable system beyond Starpower's service
area. Both claimed to be seeking system data for areas in which they do not
provide franchised service. Starpower declined to provide system data to Media
General of Fairfax on the ground that, as an in-region competitive cable
company, it was not entitled to the data or to be carried on the system. The
request of Media General of Fredericksburg was denied on the ground that, as an
affiliate of Media General of Fairfax, it was not entitled under FCC rules to
the requested data or to be carried on the system. Starpower responded to both
Media General Complaints on December 14, 1998. Media General has also sought to
initiate discovery against Starpower.
Cable industry representatives have opposed or commented adversely on two
other RCN OVS initiatives. In respect to our application for OVS authority in
the San Francisco area, the California Cable Television Association filed an
opposition, alleging that we were misusing the OVS rules to compete unfairly
against franchised cable operators. The Pennsylvania Cable & Telecommunications
Association filed comments on our OVS application for OVS authority in the
Philadelphia region, making similar allegations but not formally opposing the
application. The Cable Services Bureau granted both of our applications,
indicating that our applications were consistent with the rules and that the
opposing parties had not provided sufficient evidence to justify initiating any
regulatory action against us. There is language in each of these Cable Bureau
determinations involving our implementation of the OVS concept which leave open
the possibility for adverse parties to challenge our status as an OVS operator.
We believe that we are operating in strict conformity with all applicable
provisions of the law and will continue to defend our OVS roll-outs against what
we believe are anti-competitive requests for data or carriage by competing
in-region cable operators. However, we cannot assure you that the FCC will
resolve the pending OVS complaints in our favor. If the FCC were to grant any
such complaints and as a result we were obliged to share system data with our
local competitors, we would be forced to reassess the desirability of continuing
to operate in certain markets as an OVS operator as compared with seeking
traditional cable franchises. We do not believe that abandoning our OVS
certifications under such circumstances would materially adversely affect our
video distribution activities.
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As in the case of traditional franchised cable systems, OVS operators must
in virtually all locations have access to public rights-of-way for their
distribution plant. In a number of jurisdictions local authorities have
attempted to impose rights-of-way fees on us which we believe are in violation
of federal law. A number of FCC and judicial decisions have addressed the issues
posed by the imposition of rights-of-way fees on CLECs and on video
distributors. To date the state of the law is uncertain and may remain so for
some time. The obligation to pay local rights-of-way fees which are excessive or
discriminatory could have adverse effects on our business activities. The
incumbent cable operator in Boston, MA, Cablevision of Boston, Inc., recently
filed suit in U.S. District Court in Boston against the City of Boston,
RCN-BECOCOM, RCN, BECOCOM and others, alleging that the City had followed a
discriminatory policy in administering access to public rights-of-way for the
installation and use of underground conduit and that the private defendants had
participated in an effort to unlawfully construct and use underground conduit.
Cablevision claimed that the defendants were in violation of the 1996 Act and
Massachusetts state law, and sought a preliminary injunction. RCN and the other
defendants denied participating in any unlawful activity. The Court has denied
the preliminary injunction and orally expressed some doubts about the underlying
merits of Cablevision's claims. We cannot assure you that Cablevision will not
further pursue the litigation nor that if it does so the outcome will be
favorable to us.
Prior to our certification as an OVS provider, we offered limited video
programming services using the VDT services offered by MFS/WorldCom in Manhattan
and the City of Boston. In February 1997, the FCC held that MFS/WorldCom's
facilities did not qualify as video dialtone facilities entitled to an extension
of time to comply with the newly adopted OVS rules. Nonetheless, the FCC did not
direct MFS/WorldCom and RCN to cease video programming distribution operations
over the MFS/WorldCom platform. One of the incumbent cable television companies
in New York City has filed a complaint with the New York Public Service
Commission challenging the former, pre-OVS, operations of RCN and WorldCom under
the VDT framework, which remains pending before that commission.
Wireless Video Services. Our 18 GHz wireless video services in New York
City are distributed using microwave facilities provided by Bartholdi Cable
under temporary authorizations issued to Bartholdi Cable by the FCC. Bartholdi
Cable has agreed to provide us with transmission services until we have either
converted the wireless video subscribers to our advanced fiber optic network
facilities or have obtained FCC authority to provide services under our own
wireless radio licenses. In addition, Bartholdi Cable has agreed to transfer to
us the transmission equipment on demand. Bartholdi Cable's obligation to provide
transmission services is subject to Bartholdi Cable having licenses from the FCC
to provide these services. The qualifications of Bartholdi Cable to hold certain
of the licenses needed to provide transmission services to us are at issue in an
FCC proceeding in which an initial decision was released on March 6, 1998. In
the initial decision, the Administrative Law Judge found Bartholdi Cable
unqualified with respect to 15 such licenses. The Administrative Law Judge
declared that the initial decision would become effective 50 days after its
release unless Bartholdi Cable filed exceptions to the initial decision within
30 days of its release or the FCC elected to review the case on its own motion.
Bartholdi Cable filed exceptions to the initial decision on April 7, 1998.
Because of the uncertainty as to Bartholdi Cable's right in the future to offer
transmission services to us, we filed our own license applications at the FCC
for all of the microwave transmission paths which are currently being used by
Bartholdi Cable to provide us with transmission services. In light of the
increased uncertainties resulting from the initial decision in the FCC
proceeding, we expect now actively to pursue our license applications. While we
expect to receive authorizations to transmit over these microwave paths, we
cannot assure you that we will be able to offer wireless video services under
our own FCC licenses or that the FCC's investigation will be resolved favorably.
Our failure to obtain these licenses or resolve these proceedings would
materially adversely affect our wireless video operations in New York City.
We cannot assure you that we will be able to obtain or retain all necessary
authorizations needed to construct advanced fiber optic network facilities, to
convert our wireless video subscribers to an advanced fiber optic network or to
offer wireless video services under our own FCC licenses.
Hybrid Fiber/Coaxial Cable. Our hybrid fiber/coaxial cable systems are
subject to regulation under the 1992 Act. The 1992 Act regulate rates for cable
services in communities that are not subject to "effective competition,"
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certain programming requirements, and broadcast signal carriage requirements
that allow local commercial television broadcast stations to require a cable
system to carry the station. Local commercial television broadcast stations may
elect once every three years to require a cable system to carry the station
("must-carry"), subject to certain exceptions, or to withhold consent and
negotiate the terms of carriage ("retransmission consent"). A cable system
generally is required to devote up to one-third of its activated channel
capacity for the carriage of local commercial television stations whether under
the mandatory carriage or retransmission consent requirements of the 1992 Act.
Local non-commercial television stations are also given mandatory carriage
rights. The FCC recently issued rules establishing standards for digital
television ("DTV"). The FCC's rules require television stations to simulcast
their existing television signals ("NTSC") and DTV signals for a period of
years. During this simulcast period, it is unclear whether must-carry rules will
apply to DTV signals. The FCC has initiated a rule making proceeding seeking
comment on the carriage of broadcast DTV signals by cable and OVS operators
during the transitional period to full digital broadcasting. The FCC's
proceeding addresses the need for the digital systems to be compatible, seeks
comment on possible changes to the mandatory carriage rules, and explores the
impact carriage of DTV signals may have on other FCC rules. The cable industry
has generally opposed many of the FCC's proposals, on the grounds that they
constitute excessively burdensome obligations on the industry. The
Communications Act permits franchising authorities to require cable operators to
set aside certain channels for public, educational and governmental access
programming. Cable systems with 36 or more channels must designate a portion of
their channel capacity for commercial leased access by third parties to provide
programming that may compete with services offered by the cable operator.
On September 8, 1997, we were notified by the FCC that it had ruled that
certain of our upper levels of service for our New Jersey systems were regulated
levels of service and that our rates for these levels of service exceeded the
rates allowed by the FCC rate regulation rules. Since that time, RCN and the FCC
have negotiated a settlement under which the FCC finds that our upper levels of
service for our New Jersey and certain New York systems are "New Product Tiers".
Our rates for 1997 and prior years for those systems are approved, except that
we will give a $5.00 per subscriber refund to all subscribers in our New Jersey
systems and a refund of $3.30 per subscriber in certain of our New York systems.
The settlement has been subject to public comment and is now awaiting final
approval by the FCC. We do not believe that the ultimate resolution of this
matter, whether the settlement is finally approved or not, will have a material
impact on our results of operations or financial condition.
Because a cable communications system uses local streets and rights-of-way,
such cable systems are generally subject to state and local regulation,
typically imposed through the franchising process. The terms and conditions of
state or local government franchises vary materially from jurisdiction to
jurisdiction. Generally, they contain provisions governing cable service rates,
franchise fees, franchise term, system construction and maintenance obligations,
customer service standards, franchise renewal, sale or transfer of the
franchise, territory of the franchisee and use and occupancy of public streets
and types of cable services provided. Local franchising authorities may award
one or more franchises within their jurisdictions and prohibit non-grandfathered
cable systems from operating without a franchise. The Communications Act also
provides that in granting or renewing franchises, local authorities may
establish requirements for cable-related facilities and equipment, but not for
video programming or information services other than in broad categories. The
Communications Act limits franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to modify the franchise requirements
through the franchise authority or judicial action changed circumstances
warranted it.
Our ability to provide franchised cable television services depends largely
on our ability to obtain and renew our franchise agreements from local
government authorities on generally acceptable terms. We currently have 91
franchise agreements relating to the hybrid fiber/coaxial cable systems in New
York (outside New York City), New Jersey and Pennsylvania. These franchises
typically contain many conditions, such as time limitations on commencement and
completion of construction, conditions of service, including the number of
channels, the provision of free service to schools and certain other public
institutions, and the maintenance of insurance and indemnity bonds. These
franchises provide for the payment of fees to the issuing authorities and
generally range from 3% to 5% of revenues. The duration of these outstanding
franchises presently varies up to the year 2011. To date, all of our cable
franchises have been renewed or extended, generally at or before their stated
expirations and
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on acceptable terms. Approximately 39 of our hybrid fiber/coaxial cable systems'
franchises are due for renewal within the next three years. We cannot assure you
that we will be able to renew our franchises on acceptable terms. No one
franchise accounts for more than 7% of our total revenue. Our five largest
franchises account for approximately 27% of our total revenue.
The hybrid fiber/coaxial cable systems are also subject to certain service
quality standards and other obligations imposed by the FCC and, where effective
competition has not been demonstrated to exist, to rate regulation by the FCC as
well. Our cable television system in Pennsylvania has been operating in a
competitive cable environment for almost 30 years, with approximately 80% of the
homes passed having access to an alternate cable operator, Service Electric
Cable TV. As a result, our Pennsylvania cable system is exempt from many FCC
cable television regulations, including rate regulation. Our other cable
television systems in New York State and New Jersey currently remain subject to
FCC rate regulation. As required by the 1996 Act, however, all cable programming
services will be deregulated if effective competition is shown to exist in the
franchise area, or by March 31, 1999, whichever date is sooner. There has been
widespread discussion in Congress about possible legislation to keep cable rate
regulation in effect longer. We cannot assure you that legislation will not be
adopted. We anticipate that the remaining provisions of the 1992 Act that do not
relate to rate regulation, including provisions relating to retransmission
consent and customer service standards, will remain in place and may reduce the
future operating margins of our hybrid fiber/coaxial cable television businesses
as video programming competition develops in our cable television service
markets.
The FCC is required to regulate the rates, terms and conditions imposed by
public utilities for cable systems' use of utility pole and conduit space unless
state authorities can demonstrate that they adequately regulate pole attachment
rates. In the absence of state regulation, the FCC administers pole attachment
rates on a formula basis. In some cases, utility companies have increased pole
attachment fees for cable systems that have installed fiber optic cables and
that are using these cables for the distribution of non-video services. The FCC
concluded that, in the absence of state regulation, it can determine whether
utility companies have justified their demand for additional rental fees and
that the Communications Act does not permit disparate rates based on the type of
service provided over the equipment attached to the utility's pole. The 1996 Act
and the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act. It immediately permits certain providers
of telecommunications services to rely upon the protections of the current law
and require that utilities provide cable systems and telecommunications carriers
with nondiscriminatory access to any pole, conduit or right-of-way, controlled
by the utility. The FCC has recently adopted new regulations to govern the
charges for pole attachments used by companies providing telecommunications
services, including cable operators. These new pole attachment rate regulations
will become effective five years after enactment of the 1996 Act, and any
increase in attachment rates resulting from the FCC's new regulations will be
phased in equal annual increments over a period of five years beginning on the
effective date of the new FCC regulations. The ultimate outcome of these
rulemakings and the ultimate impact of any revised FCC rate formula or of any
new pole attachment rate regulations on us or our businesses cannot be
determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude any satellite video
programmer affiliated with a cable company, or with a common carrier providing
video programming directly to its subscribers, from favoring an affiliated
company over competitors. These programmers are required to sell their
programming to other multichannel video distributors. These provisions limit the
ability of program suppliers affiliated with cable companies or with common
carriers providing satellite delivered video programming directly to their
subscribers to offer exclusive programming arrangements to their affiliates. The
Communications Act also includes provisions concerning horizontal and vertical
ownership of cable systems, customer service, subscriber privacy, marketing
practices, equal employment opportunity, obscene or indecent programming,
regulation of technical standards and equipment compatibility.
In addition to the FCC regulations previously discussed, there are other
FCC regulations covering areas such as:
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o equal employment opportunity;
o syndicated program exclusivity;
o network program non-duplication;
o registration of cable systems;
o maintenance of various records and public inspection files;
o microwave frequency usage;
o lockbox availability;
o sponsorship identification;
o antenna structure notification;
o tower marking and lighting;
o carriage of local sports broadcast programming;
o application of rules governing political broadcasts;
o limitations on advertising contained in non-broadcast children's
programming;
o consumer protection and customer service;
o ownership of home wiring;
o indecent programming;
o programmer access to cable systems;
o programming agreements;
o technical standards; and
o consumer electronics equipment compatibility and closed
captioning.
The FCC has the authority to enforce its regulations through imposing
substantial fines, issuing cease and desist orders and/or imposing other
administrative sanctions, such as revoking FCC licenses needed to operate
certain transmission facilities often used in connection with cable operations.
We have difficulty gaining access to the video distribution wiring in certain
multiple dwelling units in the City of Boston in which Cablevision is the
incumbent provider of video services. In some buildings the management will not
permit us to install our own distribution wiring and Cablevision has not been
willing to permit us to use the existing wiring on some equitable basis when we
wish to initiate service to an individual unit previously served by Cablevision.
We have sought a ruling from the FCC's Cable Services Bureau that existing FCC
inside wiring rules require Cablevision to cooperate with us to make such wiring
available to it. The matter is currently pending before the FCC's Cable Services
Bureau staff.
Other bills and administrative proposals pertaining to cable television
have previously been introduced in Congress or considered by other governmental
bodies over the past several years. There will likely be legislative proposals
in the future by Congress and other governmental bodies relating to the
regulation of communications services.
Cable television systems are subject to federal compulsory copyright
licensing covering the retransmission of television and radio broadcast signals.
In exchange for filing certain reports and contributing a percentage of their
basic revenues to a federal copyright royalty pool, cable operators can obtain
blanket licenses to retransmit the copyrighted material on broadcast signals.
Other Regulatory Issues. The data services business, including Internet
access, is largely unregulated at this time apart from Federal, state, and local
laws and regulations applicable to businesses in general. However, we cannot
assure you that this business will not become subject to regulatory restraints.
Some federal, state, local and foreign governmental organizations are
considering a number of legislative and regulatory proposals with respect to
Internet user privacy, infringement, pricing, quality of products and services
and intellectual property ownership. We are also unsure how existing laws will
be applied to the Internet in areas such as property ownership, copyright,
trademark, trade secret, obscenity and defamation. Additionally, some
jurisdictions have sought to impose taxes and other burdens on providers of data
services, and to regulate content provided via the Internet and other
information services. We expect that proposals of this nature will continue to
be debated in Congress and state legislatures in the future. In addition,
although the FCC has on several occasions rejected proposals to impose
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additional costs on providers of Internet access service and other data services
for the use of local exchange telephone network facilities for access to their
customers, the FCC or Congress may consider similar proposals in the future. The
adoption of new laws or the adaption of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn have a
material adverse effect on our Internet business.
We have interconnection agreements with Bell Atlantic and other incumbent
local exchange carriers that entitle us to collect reciprocal compensation
payments from them for local telephone calls that terminate on our facilities.
We make similar payments for outbound local calls we deliver to the incumbent
local exchange carriers. However, Bell Atlantic and other incumbent local
exchange carriers have claimed that these payments should not apply to calls
terminating at an Internet service provider's points of presence. They argue
that Internet traffic is inherently interstate, not local, in nature. We expect
to receive large volumes of incoming local calls that will terminate at our
Internet service provider points of presence, and believe that we should collect
reciprocal compensation payments for completing these calls. To date, over 25
state public utility commissions have issued final orders on this issue, some of
which are subject to court appeals. Every order has affirmed that local calls to
Internet service providers are subject to reciprocal compensation. In the
regions we are focusing on, the California, Massachusetts, New York,
Pennsylvania, Maryland, and Virginia public utility commissions have issued such
orders. However, the FCC has announced a plan to release a decision of
nationwide scope on this issue in early 1999. We cannot assure you that this
decision will be favorable to our interests.
In order to develop our networks, we must obtain local franchises and other
permits, as well as building access agreements and rights to use underground
conduit and pole space, private easements and other rights-of-way and fiber
capacity from entities such as incumbent local exchange carriers and other
utilities, railroads, long distance companies, state highway authorities, local
governments and transit authorities. We cannot assure you that we will be able
to maintain our existing franchises, permits and rights or to obtain and
maintain the other franchises, permits, building access agreements and rights
needed to implement our business plan on acceptable terms. Although we do not
believe that any of the existing arrangements will be canceled or will not be
renewed as needed in the near future, certain cancellation or non-renewal of
these arrangements could materially adversely affect our business. In addition,
our failure to enter into and maintain any such required arrangements for a
particular network, including a network which is already under development, may
affect our ability to acquire or develop that network.
We have summarized present and proposed federal, state, and local
regulations and legislation affecting the telephone, video programming and data
service industries. This summary is not complete. Other existing federal
regulations, copyright licensing, and, in many jurisdictions, state and local
franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the operations of communications companies. The ultimate outcome of
these proceedings, and the ultimate impact of the 1996 Act or any final
regulations adopted under the new law on us or our businesses cannot be
determined at this time.
Employees
As of December 31, 1998, we had approximately 2,350 full-time employees
including joint ventures, general office and administrative personnel. We
consider relations with our employees to be good.
Legal Proceedings
In the normal course of business, there are various legal proceedings
outstanding, including both commercial and regulatory litigation. In the opinion
of management, these proceedings will not have a material adverse effect on our
results of operations or financial condition.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is based upon our
certificate of incorporation ("Certificate of Incorporation"), our bylaws
("Bylaws") and applicable provisions of law. We have summarized certain portions
of the Certificate of Incorporation and Bylaws below. The summary is not
complete. The Certificate of Incorporation and Bylaws are incorporated by
reference to the registration statement for these securities that we have filed
with the SEC, and have been filed as exhibits to our 10-K for the year ended
December 31, 1997. You should read the Certificate of Incorporation and Bylaws
for the provisions that are important to you.
Certain provisions of the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation and the Bylaws summarized in the following
paragraphs may have an anti-takeover effect. This may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in its best
interests, including those attempts that might result in a premium over the
market price for its shares.
Authorized Capital Stock
Our Certificate of Incorporation authorizes us to issue 200 million shares
of common stock, par value $1.00 per share, 400 million shares of Class B common
stock, par value $1.00 per share, and 25 million shares of preferred stock par
value $1.00 per share.
Common Stock
Subject to the rights of the holders of any preferred stock which may be
outstanding, each holder of common stock is entitled to receive any dividends
our Board of Directors declares out of funds legally available to pay dividends.
If we liquidate our business, holders of common stock are entitled to share
equally in any distribution of our assets after we pay our liabilities and the
liquidation preference of any outstanding preferred stock. Each holder of common
stock is entitled to one vote per share, and is entitled to vote on all matters
presented to a vote of shareholders, including the election of directors.
Holders of common stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities. In addition, there are
no conversion rights or redemption or sinking fund provisions. On December 31,
1998, there were 64,290,493 shares of common stock issued and outstanding. The
common stock is admitted for trading on the Nasdaq National Market.
The Certificate of Incorporation contains no restrictions on the
alienability of the common stock. Except as disclosed in the section entitled
"Charter and Bylaw Provisions," below, there are no provision in the Certificate
of Incorporation or Bylaws and or any agreement or plan involving RCN that would
discriminate against any existing or prospective holder of common stock as a
result of a holder owning a substantial amount of common stock.
Class B Stock
The Class B common stock is virtually identical to the Common Stock except
that:
o the Class B common stock is generally non-voting,
o the common stock is convertible at the option of the holder into Class
B common stock and
o in certain mergers, distributions and other transactions in which the
holders of common stock are entitled to receive equity interests of
one or more corporations (including RCN), the equity interests
distributed to holders of common stock and the Class B common stock
may have rights and privileges that are substantially equivalent to
the current rights and privileges of the common stock and the Class B
common stock, respectively.
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As of January 28, 1999, there are no outstanding shares of Class B common
stock and we do not have any current plan or intention to issue any Class B
common stock.
Preferred Stock
This prospectus describes certain general terms and provisions of our
preferred stock. When we offer to sell a particular series of preferred stock,
we will describe the specific terms of the securities in a supplement to this
prospectus. The prospectus supplement will also indicate whether the general
terms and provisions described in this prospectus apply to the particular series
of preferred stock. The preferred stock will be issued under a certificate of
designations relating to each series of preferred stock, and is also subject to
our Certificate of Incorporation.
We have summarized certain terms of the certificate of designations below.
The summary is not complete. The certificate of designations will be filed with
the SEC in connection with an offering of preferred stock.
Under the Certificate of Incorporation, our Board of Directors has the
authority to
o create one or more series of preferred stock,
o issue shares of preferred stock in any series up to the maximum
number of shares of preferred stock authorized, and
o determine the preferences, rights, privileges and restrictions of any
series.
Our Board may issue authorized shares of preferred stock, as well as
authorized but unissued shares of common stock, without further shareholder
action, unless shareholder action is required by applicable law or by the rules
of a stock exchange or quotation system on which any series of our stock may be
listed or quoted.
The prospectus supplement will describe the terms of any preferred stock
being offered, including:
o the number of shares and designation or title of the shares;
o any liquidation preference per share;
o any date of maturity;
o any redemption, repayment or sinking fund provisions;
o any dividend rate or rates and the dates of payment (or the method
for determining the dividend rates or dates of payment);
o any voting rights;
o if other than the currency of the United States, the currency or
currencies including composite currencies in which the preferred
stock is denominated and/or in which payments will or may be payable;
o the method by which amounts in respect of the preferred stock may be
calculated and any commodities, currencies or indices, or value, rate
or price, relevant to such calculation;
o whether the preferred stock is convertible or exchangeable and, if
so, the securities or rights into which the preferred stock is
convertible or exchangeable, and the terms and conditions of
conversion or exchange;
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o the place or places where dividends and other payments on the
preferred stock will be payable; and
o any additional voting, dividend, liquidation, redemption and other
rights, preferences, privileges, limitations and restrictions.
All shares of preferred stock offered will be fully paid and
non-assessable. Any shares of preferred stock that are issued will have priority
over the common stock with respect to dividend or liquidation rights or both.
Our Board of Directors could create and issue a series of preferred stock
with rights, privileges or restrictions which effectively discriminates against
an existing or prospective holder of preferred stock as a result of the holder
beneficially owning or commencing a tender offer for a substantial amount of
common stock. One of the effects of authorized but unissued and unreserved
shares of capital stock may be to make it more difficult or discourage an
attempt by a potential acquirer to obtain control of our company by means of a
merger, tender offer, proxy contest or otherwise. This protects the continuity
of our management. The issuance of these shares of capital stock may defer or
prevent a change in control of our company without any further shareholder
action.
The transfer agent for each series of preferred stock will be described in
the prospectus supplement.
Charter and Bylaw Provisions
Classified Board of Directors; Removal of Directors. Our Board of Directors
are divided into three classes. The term of office of the first class expires at
the 2001 annual meeting, the term of office of the second class expires at the
1999 annual meeting, and the term of office of the third class expires at the
2000 annual meeting. At each annual meeting, beginning with the 1999 annual
meeting, a class of directors will be elected to replace the class whose term
has just expired. As a result, approximately one-third of the members of our
Board of Directors will be elected each year and generally, each of the
directors serves a staggered three-year term. Moreover, as the DGCL permits in
the case of a corporation having a classified board, our directors may be
removed only for cause.
These provisions could prevent a shareholder or a group of shareholders
having majority voting power from obtaining control of our Board of Directors
until the second annual meeting following the date the shareholder obtains
majority voting power. Accordingly, these provisions could have the effect of
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
Shareholder Action by Written Consent; Special Meetings. No action required
or permitted to be taken at an annual or special meeting of shareholders may be
taken without a meeting. No action may be taken by the written consent of
shareholders instead of a meeting. Only our Board, our Chairman of the Board or
our Chief Executive Officer may call a special meeting of shareholders. These
provisions may make it more difficult for shareholders to take action opposed by
our Board.
Advance Notice Provisions. Shareholders seeking to nominate candidates to
be elected as directors at an annual meeting or to bring business before an
annual meeting must comply with an advanced written procedure. Only persons who
are nominated by or at the direction of our Board, or by a shareholder who has
given timely written notice to our Secretary before the meeting to elect
directors, will be eligible as directors. At any shareholders' meeting the
business to be conducted is limited to business brought before the meeting by or
at the direction of the Board of Directors, or a shareholder who has given
timely written notice to our Secretary of its intention to bring business before
an annual meeting. A shareholder must give notice which is received at our
principal executive offices in writing between 60 to 90 days before the meeting.
If, however, we gave less than 70 days' notice or prior public disclosure of the
meeting date, we must receive the shareholder's notice no later than the close
of business on the 10th day following the day we gave the notice or public
disclosure of the meeting date. A shareholder's notice must also contain certain
information specified in the Bylaws. These provisions may preclude or deter some
shareholders from bringing matters before, or making nominations for directors
at, an annual meeting.
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Amendment of Certain Charter and Bylaw Provisions. Our Board may adopt,
amend or repeal any provision of the Bylaws. Bylaw provisions may be adopted,
amended or repealed by the affirmative vote of shareholders holding at least 66
2/3% of the total number of votes entitled to be cast in the election of
directors.
Any amendment, modification or repeal of the provisions of the Certificate
of Incorporation relating to
o the election and removal of directors,
o the right to call special meetings,
o the prohibition on action by written consent,
o amendment of the Bylaws and
o the limitation of liability and indemnification of officers and
directors
will require approval by the affirmative vote of shareholders holding at
least 66 2/3% of the total number of votes entitled to vote in the election of
directors.
Delaware Takeover Statute
We are subject to Section 203 of the DGCL ("Section 203"). In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested shareholder" for a period of three
years following the date that the shareholder became an interested shareholder,
unless:
(a) before such date either the business combination or the transaction
which resulted in the shareholder becoming an interested shareholder
is approved by the board of directors of the corporation,
(b) upon consummation of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owns at
least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding for purposes of determining
the number of shares outstanding, shares owned by
(1) persons who are both directors and officers and
(2) employee stock plans in certain circumstances), or
(c) on or after such date the business combination is approved by the
board and authorized at an annual or special meeting of shareholders,
and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the
interested shareholder.
A "business combination" includes a merger, consolidation, asset sale, or
other transaction resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
The restrictions imposed by Section 203 will not apply to a corporation if,
among other things:
(a) the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203 or
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(b) 12 months have passed after the corporation, by action of its
shareholders holding a majority of the outstanding stock, adopts an
amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203.
The restrictions imposed by Section 203 will apply to us since we have not
elected not to be governed by that section. Our Board of Directors approved of
Level 3 becoming an interested shareholder and, consequently, Section 203 would
not apply to any business combination with Level 3.
Liability and Indemnification of Directors and Officers
Certain provisions of the DGCL and the Certificate of Incorporation and the
Bylaws relate to the limitation of liability and indemnification of our
directors and officers. These various provisions are described below.
Our Certificate of Incorporation provides that our directors are not
personally liable to us or our shareholders for monetary damages for breach of
their fiduciary duties as a director to the fullest extent permitted by the
DGCL. Under the DGCL, directors would not be personally liable to us or our
shareholders for monetary damages for breach of their fiduciary duties as a
director, except for
(a) any breach of the director's duty of loyalty to us or our
shareholders,
(b) acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law,
(c) any transaction from which the director derived improper personal
benefit or
(d) the unlawful payment of dividends or unlawful stock repurchases or
redemptions.
This exculpation provision may have the effect of reducing the likelihood
of derivative litigation against directors and may discourage or deter
shareholders or us from bringing a lawsuit against our directors for breach of
their fiduciary duties as directors. However, the provision does not affect
equitable remedies such as an injunction or rescission from being available.
We will indemnify and hold harmless to the fullest extent permitted by the
DGCL each person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or proceeding. These include civil,
criminal, administrative or investigative proceedings, if that person is or was
a director or officer of RCN or is or was serving at our request as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise. We will also pay the expenses incurred in connection with these
proceedings before its final disposition to the fullest extent authorized by the
DGCL. This right to indemnification is a contract right. By action of our Board
of Directors, we provide indemnification to our employees and agents to the
extent our Board determines to be appropriate and authorized by the DGCL.
We purchase and maintains insurance on behalf of any person who is or was a
director, officer, employee or agent of RCN, or is or was serving at our request
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, or arising out of his or her status, whether or not we would have the
power or the obligation to indemnify him or her against the liability under the
Certificate of Incorporation.
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DESCRIPTION OF DEBT SECURITIES
This prospectus describes certain general terms and provisions of the debt
securities. When we offer to sell a particular series of debt securities, we
will describe the specific terms for the securities in a supplement to this
prospectus. The prospectus supplement will also indicate whether the general
terms and provisions described in this prospectus apply to a particular series
of debt securities. The debt securities will be issued under an indenture
between us and The Chase Manhattan Bank, as trustee.
We have summarized certain terms and provisions of the indenture. The
summary is not complete. The indenture has been incorporated by reference as an
exhibit to the registration statement for these securities that we have filed
with the SEC. You should read the indenture for the provisions which may be
important to you. Capitalized terms used in this summary have the meanings
specified in the indenture. The indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended.
General
The indenture will not limit the amount of debt securities which we may
issue. We may issued debt securities up to an aggregate principal amount as we
may authorize from time to time. The prospectus supplement will describe the
terms of any debt securities being offered, including:
o the designation, aggregate principal amount and authorized
denominations;
o the maturity date;
o the interest rate, if any, and the method for calculating the
interest rate;
o the interest payment dates and the record dates for the interest
payments;
o any mandatory or optional redemption terms or prepayment, conversion,
sinking fund or exchangeability or convertability provisions;
o the place where we will pay principal and interest;
o if other than denominations of $1,000 or multiples of $1,000, the
denominations the debt securities will be issued in;
o whether the debt securities will be issued in the form of global
securities or certificates;
o additional provisions, if any, relating to the defeasance of the debt
securities;
o the currency or currencies, if other than the currency of the United
States, in which principal and interest will be paid;
o whether the debt securities will be issuable in registered form or
bearer form or both and, if bearer securities are issuable, any
restrictions which apply to the exchange of one form for another and
the offer, sale and delivery of bearer securities;
o any United States federal income tax consequences;
o the dates on which premium, if any, will be paid;
o our right, if any, to defer payment interest and the maximum length
of this deferral period;
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o any listing on a securities exchange;
o the initial public offering price; and
o other specific terms, including any additional events of default or
covenants.
As described in each prospectus supplement relating to any particular
series of debt securities we offer, the indenture may contain covenants
limiting:
o the incurrence of additional debt by us and certain of our
subsidiaries and affiliates;
o the making of certain payments by us and certain of our subsidiaries
and affiliates;
o business activities of us and certain of our subsidiaries and
affiliates;
o the issuance of preferred stock of certain of our subsidiaries and
affiliates;
o certain asset dispositions;
o certain transactions with affiliates;
o restrictions on dividend payments by certain subsidiaries and
affiliates;
o a change of control of our company;
o issuance of certain guarantees;
o liens; and
o mergers and consolidations involving our company.
Book-Entry System
Unless we specify otherwise in a prospectus supplement, debt securities of
any series may be issued under a book-entry system in the form of one or more
global securities (each, a "Global Security"). Each Global Security will be
deposited with, or on behalf of, a depositary, which will be The Depository
Trust Company, New York, New York (the "Depositary"). The Global Securities will
be registered in the name of the Depositary or its nominee.
The Depositary has advised us that the Depositary is a limited purpose
trust company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York banking law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations, some of which (and/or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others, such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
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When a Global Security in issued in registered form, the Depositary will
credit, on its book-entry registration and transfer system, the respective
principal amounts of the debt securities represented by each Global Security to
the participants' accounts. The underwriters, dealers, or agents, if any, will
designate the accounts to be credited. If debt securities are offered and sold
directly by us, we will designate the accounts to be credited. Only participants
or persons that may hold interests through participants will be able to own
beneficial interest in the Global Security. Ownership of beneficial interests by
participants in the Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, the participants' records. The
laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of securities in definitive form, which may impair the
ability to transfer beneficial interests in a Global Security.
So long as the Depositary or its nominee is the owner of record of a Global
Security, we consider the Depositary or its nominee the sole owner or holder of
the debt securities represented by the Global Security. Generally, owners of
beneficial interests in a Global Security will not (a) be entitled to have the
debt security represented by a Global Security registered in their names, (b)
receive or be entitled to receive physical delivery of debt securities in
definitive form and (c) be considered the owners or holders of the debt
securities. Accordingly, each person owning a beneficial interest in a Global
Security must rely on the Depositary's procedures. Persons who are not
participants must rely on the procedures of the participant through which it
owns its interest. We understand that under existing industry practices, if we
request any action of holders or if any owner of a beneficial interest in a
Global Security desires to give or take any action which a holder is entitled to
give or take under the indenture, the Depositary would authorize the
participants holding the relevant beneficial interests to give or take the
action. The participants would in turn authorize beneficial owners owning
through them to give or take action or would otherwise act upon the instruction
of beneficial owners holding through them.
Payments of principal, premium, if any, and interest on debt securities
represented by a Global Security registered in the name of the Depositary or its
nominee will be made to the Depositary or nominee as the registered owner. None
of RCN, the Trustee or any other agent of RCN or agent of the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising, or reviewing any records relating to
such beneficial ownership interests.
We have been advised by the Depositary that the Depositary will credit
participants' accounts with payments of principal, premium, if any, or interest
on the payment dates in amounts which are proportionate to their respective
beneficial interests in the principal amount of the Global Security as shown on
the Depositary's records. We expect that payments by participants to owners of
beneficial interests in the Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in "street name,"
and will be the responsibility of the participants.
A Global Security may not be transferred except as a whole:
o by the Depositary to a nominee or successor of the Depositary or
o by a nominee of the Depositary to another nominee of the Depositary.
A Global Security representing all but not part of an offering of debt
securities is exchangeable for debt securities in definitive form of like tenor
and terms if:
o the Depositary notifies us that it is unwilling or unable to continue
as depositary for the Global Security or if at any time the Depositary
is no longer eligible to be or in good standing as a clearing agency
registered under the Exchange Act, and we do not appoint a successor
depositary within 90 days after we receive notice or
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o RCN in our sole discretion at any time decides not to have all of the
debt securities represented in an by a Global Security and notifies
the Trustee.
If a Global Security is exchangeable, then it is exchangeable for debt
securities registered in the names and in authorized denominations as the
Depositary directs.
Payments of Principal and Interest
The payment of principal premium, if any, and interest on the debt
securities will rank equally with all of our unsecured and unsubordinated debt.
Events of Default
When we use the term "Event of Default" in the indenture, here are some
examples of what we mean:
(1) default in the paying interest on the debt securities when it
becomes due and the default continues for a period of 30 days or
more;
(2) default in paying principal, or premium, if any, on the debt
securities when due;
(3) default in the performance, or breach, of certain covenants;
(4) default in the performance, or breach, of any covenant in the
indenture (other than defaults specified in clause (1), (2) or
(3) above) and the default or breach continues for a period of 30
days or more after we receive written notice from the Trustee or
the Trustee receives notice from the holders of at least 25% in
aggregate principal amount of the outstanding debt securities of
all series issued under the indenture;
(5) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate
principal amount of $10 million or more under which RCN or a
Material Restricted Subsidiary is obligated, and either (a) the
Indebtedness is already due and payable in full or (b) the
failure results in the acceleration of the maturity of the
Indebtedness;
(6) any holder of at least $10 million in aggregate principal amount
of Indebtedness of RCN or any Material Restricted Subsidiary
commenced judicial proceedings or took any other action to
foreclose upon, or dispose of, assets of RCN or any Material
Restricted Subsidiary having an aggregate Fair Market Value,
individually or in the aggregate, of $10 million or more has
exercised any right under applicable law or applicable security
documents to take ownership of any such assets in lieu of
foreclosure. In any such case, RCN or any Material Restricted
Subsidiary has not obtained, prior to any foreclosure or
disposition of assets, a stay of all actions that remains in
effect;
(7) one or more final non-appealable judgments, orders or decrees for
the payment of money of $10 million or more, either individually
or in the aggregate, entered against RCN or any Material
Restricted Subsidiary or any of their respective properties which
are not discharged and there has been a period of 60 days or more
during which a stay of enforcement of such judgment or order, by
reason of pending appeal or otherwise, is not be in effect;
(8) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to RCN or any
Material Restricted Subsidiary has occurred; or
(9) any other Events of Default set forth in the prospectus
supplement.
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If an Event of Default (other than an Event of Default specified in clause
(8) with respect to RCN) under the indenture occurs with respect to the debt
securities of any series and is continuing, then the Trustee or the holders of
at least 25% in principal amount of the outstanding debt securities of that
series may by written notice, and the Trustee at the request of the holders of
not less than 25% in principal amount of the outstanding debt securities of such
series will, require us to repay immediately the Default Amount of the
outstanding debt securities of that series, together with all accrued and unpaid
interest and premium, if any.
If an Event of Default under the indenture specified in clause (8) with
respect to RCN occurs and is continuing, then the Default Amount will
automatically become due immediately and payable without any declaration or
other act on the part of the Trustee or any holder.
After a declaration of acceleration or any automatic acceleration under
clause (8) described above, the holders of a majority in principal amount of
outstanding debt securities of any series may rescind this accelerated payment
requirement if all existing Events of Default, except for nonpayment of the
principal and interest, on the debt securities of that series that has become
due solely as a result of the accelerated payment requirement, have been cured
or waived and if the rescission of acceleration would not conflict with any
judgment or decree. The holders of a majority in principal amount of the
outstanding debt securities of any series also have the right to waive past
defaults, except a default in paying principal or interest on any outstanding
debt security, or in respect of a covenant or a provision that cannot be
modified or amended without the consent of all holders of the debt securities of
that series.
Holders of at least 25% in principal amount of the outstanding debt
securities of a series may seek to institute a proceeding only after they have
made written request, and offered reasonable indemnity, to the Trustee to
institute a proceeding and the Trustee has failed to do so within 60 days after
it received this notice. In addition, within this 60-day period the Trustee must
not received directions inconsistent with this written request by holders of a
majority in principal amount of the outstanding debt securities of that series.
These limitations do not apply, however, to a suit instituted by a holder of a
debt security for the enforcement of the payment of principal, interest or any
premium on or after the due dates for such payment.
During the existence of an Event of Default, the Trustee is required to
exercise the rights and powers vested in it under the indenture and use the same
degree of care and skill in its exercise as a prudent person would under the
circumstances in the conduct of that person's own affairs. If an Event of
Default has occurred and is continuing, the Trustee is not under any obligation
to exercise any of its rights or powers at the request or direction of any of
the holders unless the holders have offered to the Trustee reasonable security
or indemnity. Subject to certain provisions, the holders of a majority in
principal amount of the outstanding debt securities of any series have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust, or power conferred on the
Trustee.
The Trustee will, within 45 days after any Default occurs, give notice of
the Default to the holders of the debt securities of that series, unless the
Default was already cured or waived. Unless there is a default in paying
principal, interest or any premium when due, or in the case of any Default
arising from a Change of Control, the Trustee can withhold giving notice to the
holders if it determines in good faith that the withholding of notice is in the
interest of the holders.
We are required to furnish to the Trustee an annual statement as to
compliance with all conditions and covenants under the indenture.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Any Asset Sale pursuant to the terms
of the deadlock event "buy-sell" arrangements in Section 7.8 of the Amended and
Restated Operating Agreement of RCN- BECOCOM, LLC, as in effect on the Issue
Date, or Section 7.15 of the Amended and Restated Operating
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Agreement of Starpower Communications, LLC, as in effect on the Issue Date,
shall be deemed to have been made for Fair Market Value. Unless otherwise
specified in the indenture, Fair Market Value shall be determined by the Board
acting in good faith and shall be evidenced by a Board Resolution.
"Material Restricted Subsidiary" means any Restricted Subsidiary of RCN,
which, at any date of determination, is a "Significant Subsidiary" (as that term
is defined in Regulation S-X issued under the Securities Act), but shall, in any
event, include (x) any Guarantor or (y) any Restricted Subsidiary of RCN which,
at any date of determination, is an obligor under any Indebtedness in an
aggregate principal amount equal to or exceeding $10 million.
Modification and Waiver
The indenture may be amended or modified without the consent of any holder
of debt securities in order to:
o cure ambiguities, defects or inconsistencies,
o provide for the assumption of our obligations in the case of a merger
or consolidation,
o make any change that would provide any additional rights or benefits
to the holders of the debt securities of a series,
o add Guarantors with respect to the debt securities of a series,
o secure the debt securities of a series,
o maintain the qualification of the indenture under the Trust Indenture
Act or
o make any change that does not adversely affect the rights of any
holder.
Other amendments and modifications of the indenture or the debt securities
issued may be made with the consent of the holders of not less than a majority
of the aggregate principal amount of the outstanding debt securities of each
series affected by the amendment or modification (each series voting as a
separate class). However, no modification or amendment may, without the consent
of the holder of each outstanding debt security affected:
(1) reduce the principal amount, or extend the fixed maturity, of the
debt securities, alter or waive the redemption provisions of the
debt securities (other than, subject to clause (7) below,
provisions relating to repurchase of debt securities upon an
Asset Sale or a Change of Control occurring);
(2) change the currency in which principal, any premium or interest
is paid;
(3) reduce the percentage in principal amount outstanding of debt
securities of any series which must consent to an amendment,
supplement or waiver or consent to take any action;
(4) impair the right to institute suit for the enforcement of any
payment on the debt securities;
(5) waive a payment default with respect to the debt securities or
any Guarantee;
(6) reduce the interest rate or extend the time for payment of
interest on the debt securities;
(7) following an Asset Sale or a Change of Control, alter the
obligation to purchase the debt securities of any series as a
result or waive any default in the performance of the covenants;
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(8) adversely affect the ranking of the debt securities of any
series;
(9) release any Guarantor from any of its obligations under its
Guarantee or the indenture, except in compliance with the terms
of the indenture.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
RCN or a Restricted Subsidiary, in one transaction or a series of related
transactions, of:
(1) any Capital Stock of any Restricted Subsidiary (other than
customary stock option programs) or any Restricted Affiliate;
(2) any assets of RCN or any Restricted Subsidiary or any Restricted
Affiliate which constitute substantially all of an operating unit
or line of business of RCN and the Restricted Subsidiaries and
the Restricted Affiliates; or
(3) any other property or asset of RCN or any Restricted Subsidiary
or any Restricted Affiliates outside of the ordinary course of
business.
For the purposes of this definition, the term "Asset Sale" does not
include:
(1) any disposition of properties and assets of RCN and/or the
Restricted Subsidiaries that is governed under "--Consolidation,
Merger, Sale of Assets, Etc.";
(2) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection
with the business of RCN or any Restricted Subsidiary or
Restricted Affiliate, as the case may be; and
(3) for purposes of a covenant "Disposition of Proceeds of Asset
Sales," any sale, conveyance, transfer, lease or other
disposition of any property or asset, whether in one transaction
or a series of related transactions occurring within one year,
either (x) involving assets with a Fair Market Value not in
excess of $500,000 or (y) which constitutes the incurrence of a
Capitalized Lease Obligation.
Consolidation, Merger, Sale of Assets, Etc.
We will not (1) consolidate or combine with or merge with or into or,
directly or indirectly, sell, assign, convey, lease, transfer or otherwise
dispose of all or substantially all of our properties and assets to any person
or persons in a single transaction or through a series of transactions, or (2)
permit any of the Restricted Subsidiaries to enter into any transaction or
series of transactions if it would result in the disposition of all or
substantially all of the properties or assets of RCN and the Restricted
Subsidiaries on a consolidated basis, unless, in the case of either (1) or (2):
(a) RCN shall be the continuing person or, if RCN is not the
continuing person, the resulting, surviving or transferee person
(the "surviving entity") is a company organized and existing
under the laws of the United States or any State or territory;
(b) the surviving entity will expressly assume all of our obligations
under the debt securities and the indenture, and will, if
required by law to effectuate the assumption, execute a
supplemental indenture which will be delivered to the Trustee and
will be in form and substance reasonably satisfactory to the
Trustee;
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(c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of
transactions), RCN or the surviving entity would be able to incur
$1.00 of Indebtedness under clause (1)(a) of the proviso of the
covenant "Limitation on Additional Indebtedness";
(d) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of
transactions), no Default has occurred and is continuing; and
(e) RCN or the surviving entity will have delivered to the Trustee an
Officers' Certificate stating that the transaction or series of
transactions and a supplemental indenture, if any, complies with
this covenant and that all conditions precedent in the indenture
relating to the transaction or series of transactions have been
satisfied.
If any consolidation or merger or any sale, assignment, conveyance, lease,
transfer or other disposition of all or substantially all of our assets occurs
in accordance with the indenture, the successor corporation will succeed to, and
be substituted for, and may exercise every right and power of, RCN or such
Restricted Subsidiary, as the case may be, under the indenture with the same
effect as if such successor corporation had been named as RCN or the Restricted
Subsidiary. Expect for (1) any lease or (2) any sale, assignment, conveyance,
transfer, lease or other disposition to a Restricted Subsidiary of RCN, we will
be discharged from all obligations and covenants under the indenture and the
debt securities.
The indenture provides that for all purposes of the indenture and the debt
securities (including the provision of this covenant and the covenants
"Limitation on Additional Indebtedness," "Limitation on Restricted Payments" and
"Limitation on Liens"), Subsidiaries of any surviving entity will, upon such
transaction or series of related transactions, become Restricted Subsidiaries or
Unrestricted Subsidiaries as provided pursuant to the covenant "Limitation on
Designations of Unrestricted Subsidiaries" and all Indebtedness, and all Liens
on property or assets, of RCN and the Restricted Subsidiaries in existence
immediately prior to such transaction or series of related transactions will be
deemed to have been incurred upon such transaction or series of related
transactions.
Satisfaction and Discharge of the Indenture; Defeasance
We may terminate our obligations under the indenture, when (1) either:
(A) all debt securities of any series issued that have
been authenticated and delivered have been delivered to the Trustee
for cancellation, or
(B) all the debt securities of any series issued that
have not been delivered to the Trustee for cancellation will become
due and payable (a "Discharge") under irrevocable arrangements
satisfactory to the Trustee for the giving of notice of redemption by
such Trustee in our name, and at our expense and we have irrevocably
deposited or caused to be deposited with the Trustee sufficient funds
to pay and discharge the entire indebtedness on the series of debt
securities to pay principal, interest and any premium.
(2) We have paid or caused to be paid all other sums
then due and payable under the indenture; and
(3) We have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent under the indenture relating to the satisfaction
and discharge of the indenture have been complied with.
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We may elect to have our obligations under the indenture discharged with
respect to the outstanding debt securities of any series ("legal defeasance").
Legal defeasance means that we will be deemed to have paid and discharged the
entire indebtedness represented by the outstanding debt securities of such
series under the indenture, except for:
(1) the rights of holders of the debt securities to receive
principal, interest and any premium when due;
(2) our obligations with respect to the debt securities concerning
issuing temporary debt securities, registration of transfer of
debt securities, mutilated, destroyed, lost or stolen debt
securities and the maintenance of an office or agency for payment
and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee;
and
(4) the defeasance provisions of the indenture.
In addition, we may elect to have our obligations released with respect to
certain covenants in the indenture, including covenants relating to Asset Sales
and Changes of Control ("covenant defeasance"). Any omission to comply with
these obligation will not constitute a Default or an Event of Default with
respect to the debt securities of any series. In the event covenant defeasance
occurs, certain events, not including non-payment, bankruptcy and insolvency
events, described under "Events of Default" will no longer constitute an Event
of Default for that series.
In order to exercise either legal defeasance or covenant defeasance with
respect to outstanding debt securities of any series:
(1) we must irrevocably have deposited or caused to be deposited with
the Trustee as trust funds for the purpose of making the
following payments, specifically pledged as security for, and
dedicated solely to the benefits of the holders of the debt
securities of a series:
(A) money in an amount; or
(B) U.S. Government Obligations; or
(C) a combination of money and U.S. Government Obligations, in
each case sufficient without reinvestment, in the written
opinion of an internationally recognized firm of independent
public accountants to pay and discharge, and which shall be
applied by the Trustee to pay and discharge, all of the
principal, interest and any premium at due date or maturity
or if we have made irrevocable arrangements satisfactory to
the Trustee for the giving of notice of redemption by the
Trustee in our name and at our expense, the redemption date;
(2) in the case of legal defeasance, we have delivered to the Trustee
an opinion of counsel stating that, under then applicable Federal
income tax law, the holders of the debt securities of that series
will not recognize gain or loss for federal income tax purposes
as a result of the deposit, defeasance and discharge to be
effected and will be subject to the same federal income tax as
would be the case if the deposit, defeasance and discharge did
not occur;
(3) in the case of covenant defeasance, we have delivered to the
Trustee an opinion of counsel to the effect that the holders of
the debt securities of that series will not recognize gain or
loss for U.S. federal income tax purposes as a result of the
deposit and covenant defeasance to be effected and will be
subject to the same federal income tax as would be the case if
the deposit and covenant defeasance did not occur;
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(4) no Default with respect to the outstanding debt securities of
that series has occurred and is continuing at the time of such
deposit after giving effect to the deposit or, in the case of
legal defeasance, no Default relating to bankruptcy or insolvency
has occurred and is continuing at any time on or before the 91st
day after the date of such deposit, it being understood that this
condition is not deemed satisfied until after the 91st day;
(5) the legal defeasance or covenant defeasance will not cause the
Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act, assuming all debt securities of a series
were in default within the meaning of such Act;
(6) the defeasance or covenant defeasance will not result in a breach
or violation of, or constitute a default under, any other
agreement or instrument to which we are a party;
(7) the legal defeasance or covenant defeasance will not result in
the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940,
as amended, unless the trust is registered under such Act or
exempt from registration; and
(8) we have delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent with
respect to the defeasance or covenant defeasance have been
complied with.
PLAN OF DISTRIBUTION
We may sell the securities in any of three ways (or in any combination):
(a) through underwriters or dealers; (b) directly to a limited number of
purchasers or to a single purchaser; or (c) through agents. The prospectus
supplement will set forth the terms of the offering of such securities,
including
(a) the name or names of any underwriters, dealers or agents and the
amounts of securities underwritten or purchased by each of them,
(b) the initial public offering price of the securities and the
proceeds to us and any discounts, commissions or concessions
allowed or reallowed or paid to dealers, and
(c) any securities exchanges on which the securities may be listed.
Any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, the securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. The securities may be either offered to the public through underwriting
syndicates represented by managing underwriters, or directly by underwriters.
Generally, the underwriters' obligations to purchase the securities will be
subject to certain conditions precedent. The underwriters will be obligated to
purchase all of the securities if they purchase any of the securities.
We may sell the securities or through agents from time to time. The
prospectus supplement will name any agent involved in the offer or sale of the
securities and any commissions we pay to them. Generally, any agent will be
acting on a best efforts basis for the period of its appointment.
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We may authorize underwriters, dealers or agents to solicit offers by
certain purchasers to purchase the securities from at the public offering price
set forth in the prospectus supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. The
contracts will be subject only to those conditions set forth in the prospectus
supplement, and the prospectus supplement will set forth any commissions we pay
for solicitation of these contracts.
Agents and underwriters may be entitled to indemnification by us against
certain civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents and underwriters may be customers
of, engage in transactions with, or perform services for us in the ordinary
course of business.
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LEGAL MATTERS
The validity of the securities in respect of which this prospectus is being
delivered will be passed on for us by Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of RCN Corporation as of December 31,
1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996,
appearing in the RCN 8-K dated March o, 1999 and incorporated by reference into
this registration statement have been audited by PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon incorporated by
reference herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Erols Internet, Inc. at December 31, 1996 and
1997 and for the period from August 1, 1995 (inception) to December 31, 1995 and
for the years ended December 31, 1996 and 1997, appearing in the RCN 8-K dated
May 8, 1998 and incorporated by reference into the registration statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon incorporated by reference herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the securities being registered
hereby. All amounts are estimates except the registration fee.
<TABLE>
<CAPTION>
Amount to be
Paid
------------
<S> <C>
Registration fee................................................ $ 278,000
Printing........................................................ *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Miscellaneous................................................... *
---------
TOTAL........................................................ *
=========
<FN>
- -------------------
* To be filed supplementally
</FN>
</TABLE>
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law, which enables a corporation in its original certificate of incorporation or
an amendment thereto to eliminate or limit the personal liability of a director
for violations of the director's fiduciary duty, except (i) for any breach of
the director's duty of loyalty to the corporation or it stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law (providing for liability of directors for the unlawful payment
of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law empowers RCN to
indemnify, subject to the standards set forth therein, any person in connection
with any action, suit or proceeding brought before or threatened by reason of
the fact that the person was a director, officer, employee or agent of such
company, or is or was serving as such with respect to another entity at the
request of such company. The Delaware General Corporation Law also provides that
RCN may purchase insurance on behalf of any such director, officer, employee or
agent.
RCN's Amended and Restated Articles of Incorporation provides in effect for
the elimination of the personal liability of RCN directors for breaches of
fiduciary duty and for the indemnification by RCN of each director and officer
of RCN, in each case, to the fullest extent permitted by applicable law.
RCN purchases and maintains insurance on behalf of any person who is or was
a director, officer, employee or agent of RCN, or is or was serving at the
request of RCN as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or her and incurred by him or her in
any such capacity, or arising out of his or her status as such, whether or not
RCN would have the power or the obligation to indemnify him or her against such
liability under the provisions of the RCN Certificate of Incorporation.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
1.1 Form of Underwriting Agreement*
2.1 Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and RCN
Corporation (incorporated by reference to Exhibit 2.1 to
Amendment No. 2 to RCN's Information Statement on Form 10/A
("Form 10") filed on September 5, 1997)
2.2 Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc. and the
Registrant (incorporated by reference to Exhibit 10.1 to RCN's Form 10)
2.3 Agreement and Plan of Merger dated as of January 21, 1998 among Erols Internet, Inc., Erol
Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc. (incorporated
by reference to Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998 8-K") filed on
March 6, 1998)
2.4 Amendment No. 1 to Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding,
Inc. (incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1 Indenture dated as of February 6, 1998 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 9.80% Senior Discount Notes due 2008 (incorporated by
reference to Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission File No.
333-48487) ("1998 Form S-4") filed on March 23, 1998)
4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 to RCN's 1998 Form S-4)
4.3 Indenture dated as of October 17, 1997 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission File No. 333-41081)
("Form S-4") filed on November 26, 1997)
4.4 Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to RCN's Form S-4)
4.5 Indenture dated as of October 17, 1997 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to RCN's Form S-4)
4.6 Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to RCN's Form S-4)
4.7 Indenture dated June 24, 1998 between RCN, as Issuer, and The Chase Manhattan Bank, as
Trustee, with respect to the 11% Senior Discount Notes due 2008 (incorporated by Reference to
Exhibit 4.8 to RCN's Registration Statement on Form S-1 (Commission File No. 333-55673))
<FN>
- --------
*To be filed supplementally.
</FN>
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
4.8 Form of 11% Senior Discount Note due 2008 (included in
Exhibit 4.8) (incorporated by reference to Exhibit 4.8 to
RCN's Registration Statement on Form S-1 (Commission File
No. 333-55673))
4.9 Escrow Agreement dated as of October 17, 1997 among The Chase Manhattan Bank, as escrow
agent, The Chase Manhattan Bank, as Trustee under the Indenture (as defined therein), and
RCN (incorporated by reference to Exhibit 4.6 to RCN's Form S-4)
4.10 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems, Inc., ComVideo
Systems, Inc., C-TEC Cable Systems of New York, Inc. and First Union National Bank, as
agent (incorporated by reference to Exhibit 4.1 to RCN's Form 10)**
4.11 Registration Rights Agreement dated as of June 12, 1998 among certain shareholders of
Interport Communications Corp. and RCN Corporation (incorporated by reference to Exhibit
4.12 to the 1998 Form S-1)
4.12 Form of Indenture relating to Debt Securities issued hereunder*
5.1 Opinion of Davis Polk & Wardwell*
11.1 Statement regarding Computation of Per Share Earnings (included in the Notes to the
Consolidated Financial Statements)
12.1 Statement re computation of ratios*
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to Erols Internet, Inc.*
24.1 Power of Attorney (included on the signature page of the Registration Statement)
25.1 Statement of Eligibility of Trustee*
<FN>
- --------
*To be filed supplementally.
**Exhibits and schedules which have not been filed with Exhibit 4.10 will be
provided to the Commission by the registrant upon request.
</FN>
</TABLE>
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of
II-3
<PAGE>
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) under the
Securities Act of 1933 if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that the undertakings set forth in paragraph (i)
and (ii) above do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby understands that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrants pursuant to the foregoing
provisions, or otherwise, the registrants have been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment No.1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Princeton, State of New Jersey, on
March 4, 1999
RCN CORPORATION
By: /s/ Bruce C. Godfrey
----------------------------------
BRUCE C. GODFREY
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David C. McCourt* Director, Chairman and Chief March 4, 1999
- ------------------------------------------ Executive Officer
David C. McCourt
/s/ Michael J. Mahoney* Director, President and Chief March 4, 1999
- ------------------------------------------ Operating Officer
Michael J. Mahoney
/s/ Bruce Godfrey Director, Executive Vice President March 4, 1999
- ----------------------------------------- and Chief Financial Officer
Bruce C. Godfrey
/s/ James Q. Crowe* Director March 4, 1999
- -----------------------------------------
James Q. Crowe
/s/ Alfred Fasola* Director March 4, 1999
- -----------------------------------------
Alfred Fasola
/s/ Stuart E. Graham* Director March 4, 1999
- -----------------------------------------
Stuart E. Graham
/s/ Richard R. Jaros* Director March 4, 1999
- -----------------------------------------
Richard R. Jaros
/s/ Thomas May* Director March 4, 1999
- -----------------------------------------
Thomas May
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas P. O'Neill, III* Director March 4, 1999
- -----------------------------------------
Thomas P. O'Neill, III
/s/ Eugene Roth* Director March 4, 1999
- -----------------------------------------
Eugene Roth
/s/ Walter Scott, Jr.* Director March 4, 1999
- -----------------------------------------
Walter Scott, Jr.
/s/ Michael B. Yanney* Director March 4, 1999
- -----------------------------------------
Michael B. Yanney
/s/ Ralph S. Hromisin* Senior Vice President and March 4, 1999
- ----------------------------------------- Chief Accounting Officer
Ralph S. Hromisin
<FN>
*By: /s/ Bruce C. Godfrey
-----------------------------
Bruce C. Godfrey
Attorney-in-fact
</FN>
</TABLE>
II-6
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
1.1 Form of Underwriting Agreement*
2.1 Form of Distribution Agreement among C-TEC Corporation, Cable Michigan, Inc. and RCN
Corporation (incorporated by reference to Exhibit 2.1 to
Amendment No. 2 to RCN's Information Statement on Form 10/A
("Form 10") filed on September 5, 1997)
2.2 Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc. and the
Registrant (incorporated by reference to Exhibit 10.1 to RCN's Form 10)
2.3 Agreement and Plan of Merger dated as of January 21, 1998 among Erols Internet, Inc., Erol
Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding, Inc. (incorporated
by reference to Exhibit 2.1 to RCN's Current Report on Form 8-K ("March 1998 8-K") filed on
March 6, 1998)
2.4 Amendment No. 1 to Agreement and Plan of Merger dated as of January 21, 1998 among Erols
Internet, Inc., Erol Onaran, Gold & Appel Transfer, S.A., RCN Corporation and ENET Holding,
Inc. (incorporated by reference to Exhibit 2.2 to RCN's March 1998 8-K)
4.1 Indenture dated as of February 6, 1998 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 9.80% Senior Discount Notes due 2008 (incorporated by
reference to Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission File No.
333-48487) ("1998 Form S-4") filed on March 23, 1998)
4.2 Form of the 9.80% Senior Discount Notes due 2008, Series B (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 to RCN's 1998 Form S-4)
4.3 Indenture dated as of October 17, 1997 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 10% Senior Notes due 2007 (incorporated by reference to
Exhibit 4.1 to RCN's Registration Statement on Form S-4 (Commission File No. 333-41081)
("Form S-4") filed on November 26, 1997)
4.4 Form of the 10% Senior Exchange Notes due 2007 (included in Exhibit 4.4) (incorporated by
reference to Exhibit 4.2 to RCN's Form S-4)
4.5 Indenture dated as of October 17, 1997 between RCN, as Issuer, and The Chase Manhattan
Bank, as Trustee, with respect to the 11 1/8% Senior Discount Notes due 2007 (incorporated by
reference to Exhibit 4.3 to RCN's Form S-4)
4.6 Form of the 11 1/8% Senior Discount Exchange Notes due 2007 (included in Exhibit 4.6)
(incorporated by reference to Exhibit 4.4 to RCN's Form S-4)
4.7 Indenture dated June 24, 1998 between RCN, as Issuer, and The Chase Manhattan Bank, as
Trustee, with respect to the 11% Senior Discount Notes due 2008 (incorporated by Reference to
Exhibit 4.8 to RCN's Registration Statement on Form S-1 (Commission File No. 333-55673))
4.8 Form of 11% Senior Discount Note due 2008 (included in Exhibit 4.8) (incorporated by reference
to Exhibit 4.8 to RCN's Registration Statement on Form S-1 (Commission File
No. 333-55673))
<FN>
- --------
*To be filed supplementally.
</FN>
</TABLE>
II-7
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit No. Document
- ----------- --------
<S> <C>
4.9 Escrow Agreement dated as of October 17, 1997 among The Chase Manhattan Bank, as escrow
agent, The Chase Manhattan Bank, as Trustee under the Indenture (as defined therein), and
RCN (incorporated by reference to Exhibit 4.6 to RCN's Form S-4)
4.10 Credit Agreement dated as of July 1, 1997 among C-TEC Cable Systems, Inc., ComVideo
Systems, Inc., C-TEC Cable Systems of New York, Inc. and First Union National Bank, as
agent (incorporated by reference to Exhibit 4.1 to RCN's Form 10)**
4.11 Registration Rights Agreement dated as of June 12, 1998 among certain shareholders of
Interport Communications Corp. and RCN Corporation (incorporated by reference to Exhibit
4.12 to the 1998 Form S-1)
4.12 Form of Indenture relating to Debt Securities issued hereunder*
5.1 Opinion of Davis Polk & Wardwell*
11.1 Statement regarding Computation of Per Share Earnings (included in the Notes to the
Consolidated Financial Statements)
12.1 Statement re computation of ratios*
23.1 Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors, with respect to Erols Internet, Inc.*
24.1 Power of Attorney (included on the signature page of the Registration Statement)
25.1 Statement of Eligibility of Trustee*
<FN>
- --------
* To be filed supplementally
**Exhibits and schedules which have not been filed with 4.10 will be provided to the Commission by the
registrant upon request.
</FN>
</TABLE>
II-8
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
of RCN Corporation on Form S-3 and the related Prospectus, of our report dated
March 13, 1998, except Note 2, as to which the date is May 20, 1998, on our
audits of the consolidated financial statements of RCN Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995. We also consent to the reference of our Firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 5, 1999
II-9
<PAGE>
