<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of June 30, 2000.
Common Stock 86,459,650
<PAGE>
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of
Operations- for the Quarters and Six
Months Ended June 30, 2000 and 1999
Consolidated Balance Sheets-
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of
Cash Flows- for the Six Months Ended
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of matters to a vote of security holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C>
Sales $ 78,952 $ 66,929 $ 150,209 $ 134,318
Costs and expenses, excluding non-cash stock based
compensation, depreciation and appreciation 151,648 92,335 289,292 181,172
Non-cash stock based compensation 10,284 - 11,447 -
Depreciation and amortization 68,802 30,541 113,214 62,815
-------------- -------------- -------------- --------------
Operating (loss) (151,782) (55,947) (263,744) (109,669)
Interest income 31,020 19,090 67,340 32,492
Interest expense (55,362) (35,672) (108,699) (67,462)
Gain on the sale of subsidiary - 8,930 8,930
Other (expense) income, net (1,388) (234) (2,518) 473
-------------- -------------- -------------- --------------
(Loss) before income taxes (177,512) (63,833) (307,621) (135,236)
(Benefit) for income taxes (725) (1,520) (1,521) (2,534)
-------------- -------------- -------------- --------------
(Loss) before equity in unconsolidated
entities and minority interest (176,787) (62,313) (306,100) (132,702)
Equity in (loss) of unconsolidated entities (1,939) (6,613) (15,140) (10,516)
Minority interest in loss of
consolidated entities 5,866 5,568 10,259 12,106
-------------- -------------- -------------- --------------
Net (loss) before extraordinary item $ (172,860) $ (63,358) $ (310,981) $ (131,112)
Extraordinary item: Debt prepayment costs - (424) - (424)
-------------- -------------- -------------- --------------
Net (loss) (172,860) (63,782) (310,981) (131,536)
Preferred dividend and accretion requirements 35,170 4,083 50,632 4,083
-------------- -------------- -------------- --------------
Net (loss) to common shareholders $ (208,030) $ (67,865) $ (361,613) $ (135,619)
============== ============== ============== ==============
Basic and Diluted (loss) per average common share:
Net (loss) before extraordinary item $ (2.45) $ (0.97) $ (4.42) $ (2.00)
============== ============== ============== ==============
Extraordinary item: Debt prepayment costs $ - $ (0.01) $ - $ (0.01)
============== ============== ============== ==============
Net (loss) to common shareholders $ (2.45) $ (0.98) $ (4.42) $ (2.01)
============== ============== ============== ==============
Weighted average shares outstanding 84,877,774 69,478,473 81,900,146 67,554,148
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 469,510 $ 391,412
Short-term investments 2,090,038 1,401,877
Accounts receivable from related parties 20,979 8,015
Accounts receivable, net of reserve for
doubtful accounts of $14,544 at June 30,
2000 and $12,258 at December 31, 1999 31,023 28,434
Unbilled Revenues 2,187 2,124
Interest and dividends receivable 13,820 15,049
Material and supply inventory, at average cost 69,951 21,064
Prepayments and other 21,168 13,853
Investments restricted for debt service 12,220 23,111
------------- --------------
Total current assets 2,730,896 1,904,939
Property, plant and equipment, net of accumulated
depreciation of $299,310 at June 30, 2000 and
$230,581 at December 31, 1999 1,429,689 893,179
Investments restricted for debt service - 48
Investments 212,984 190,571
Intangible assets, net of accumulated amortization
of $203,681 at June 30, 2000 and $158,384 at
December 31, 1999 438,836 138,491
Deferred charges and other assets 83,197 64,886
-------------- --------------
Total assets $ 4,895,602 $ 3,192,114
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 654 $ 1,225
Accounts payable 77,155 92,785
Accounts payable to related parties 42,365 35,809
Advance billings and customer deposits 21,480 16,901
Deferred income taxes 1,485 1,464
Accrued expenses 138,020 101,261
-------------- --------------
Total current liabilities 281,159 249,445
Long-term debt 2,202,471 2,143,096
Other deferred credits 21,746 24,598
Minority interest 89,489 129,234
Commitments and contingencies
Preferred stock, par value $1 per share: Authorized
25,000,000 shares: Issued and outstanding 1,918,486 253,438
1,961,662 at June 30, 2000 and 263,053 at
December 31, 1999
Common shareholders' equity:
Common stock, par value $1 per share: Authorized
200,000,000 shares: Issued and outstanding
87,024,279 at June 30, 2000 and 77,724,070
at December 31, 1999 87,024 77,724
Class B Common stock, par value $1 per share:
Authorized 400,000,000 shares: none issued - -
Additional paid-in capital 1,297,668 923,340
Cumulative translation adjustments (2,274) (2,014)
Unearned compensation expense (34,126) -
Unrealized (depreciation) on investments (3,708) (6,228)
Treasury stock, 564,629 shares and 562,000 shares at cost
at June 30, 2000 and December 31, 1999, respectively (9,591) (9,391)
Accumulated deficit (952,742) (591,128)
-------------- --------------
Total common shareholders' equity 382,251 392,303
-------------- --------------
Total liabilities and shareholders' equity $ 4,895,602 $ 3,192,114
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES $ (188,903) $ (57,278)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (402,259) (196,231)
Investment and advance to unconsolidated entities (38,740) (9,455)
Short-term investments, net (688,161) (403,713)
Acquisitions (290,860) (47,131)
Other (1,534) 18,221
-------------- --------------
Net cash (used in) investing activities (1,421,554) (638,309)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt - 500,000
Redemption of long-term debt & capital lease obligation (1,050) (100,447)
Purchase of treasury stock (200) (90)
Interest paid on Senior Notes (reduction in restricted cash) 11,250 11,250
Payments made for debt financing costs (2,754) (31,562)
Contribution from minority interest partner 61,005 49,000
Proceeds from the issuance of common stock - 344,649
Proceeds from the issuance of preferred stock 1,614,416 239,979
Proceeds from the exercise of stock options 5,888 3,476
-------------- --------------
Net cash provided by financing activities 1,688,555 1,016,255
-------------- --------------
Net increase in cash and temporary
cash investments 78,098 320,668
Cash and temporary cash investments at beginning of year 391,412 120,126
-------------- --------------
Cash and temporary cash investments at June 30 $ 469,510 $ 440,794
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 30,010 $ 13,291
============== ==============
Income taxes $ 181 $ 1,457
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Amounts)
1. RCN Corporation (the "Company" or "RCN") provides a wide range of
telecommunications services through high speed, high capacity advanced fiber
optic networks. RCN currently offers individual or bundled local and long
distance telephone, video and data services, including high speed Internet
access. We provide our services primarily to residential customers in selected
markets with high levels of population density and favorable demographics.
RCN's advanced fiber optic networks have been established in selected markets
in the Boston to Washington D.C. corridor and in the San Francisco to San Diego
corridor, and the Chicago market.
2. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1999.
3. The Company adopted the recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
("SFAS No. 123") in 2000. Under SFAS No. 123, the fair value of an option
(as computed in accordance with the Black Scholes valuation model) on the date
of grant is amortized over the vesting periods of the options in accordance with
FASB Interpretation No. 28 "Accounting For Stock Appreciaiton Rights and Other
Variable Stock Option or Award Plans" ("FIN 28"). The recognition provisions
of SFAS No. 123 are applied prospectively upon adoption. As a result, the
the recognition provisions are applied to all stock awards granted in the year
of adoption and are not applied to awards granted in previous years unless those
awards are significantly modified or settled in cash after adoption of the
recognition provisions.
The Company believes that SFAS No. 123 will continue to result in material
non-cash charges to operations in 2000 and thereafter. The amount of the
non-cash charges will be dependent upon a number of factors, including the
number of grants and the fair value of each grant estimated at the time of its
award.
The Company recognized a total of $11,447 of non-cash stock based compensation
for the six months ended June 30, 2000.
Outperform Stock Option Plan
In June 2000, the Company adopted an outperform stock option ("OSO") program
that was designed so that the Company's stockholders would receive a market
return on their investment before OSO holders receive any return on their
options. The Company believes that the OSO program aligns directly management's
and stockholders' interests by basing stock option value on the Company's
ability to outperform the market in general, as measured by the Standard &
Poor's ("S&P") 500 Index. Participants in the OSO program do not realize any
value from awards unless the Common Stock price outperforms the S&P 500 Index.
When the stock price gain is greater than the corresponding gain on the S&P 500
Index, the value received for awards under the OSO plan is based on a formula
involving a multiplier related to the level by which the Common Stock
outperforms the S&P 500 Index.
OSO grants are made to participants employed on the date of the grant.
Each award vests in equal installments over five years and has a
ten-year life.
<PAGE>
The fair value recognized under SFAS No. 123 for the Incentive Stock Options
("ISO's") and OSO's, collectively "options", granted to employees for services
performed prior to June 30, 2000 was approximately $92,555. The Company
recognized $4,015 of compensation expense in the second quarter of 2000 for
options granted in 2000. As of June 30, 2000, the Company had not reflected
$88,540 of unamortized compensation expense in its financial statements for
options granted in 2000.
Restricted Stock
On March 10, 2000, the Company issued 559,257 shares of restricted stock
with a fair value, on the date, of $67.00 per share. During the performance
period the grantee may vote the shares, but the shares are subject to transfer
restrictions and are all or partially forfeited if a grantee terminates. The
restricted stock vests over three years, 1/3 after year two and the remaining
2/3 after year three. The restricted stock is considered issued and
outstanding.
The Company recorded $3,815 of non-cash compensation expense for the quarter
ended June 30, 2000 related to its restricted stock program.
As of June 30, 2000, the Company had unamortized compensation costs of $34,126,
included as a component of common shareholders' equity, which is being amortized
to expense ratably over the restriction period.
Stock Option Recap
During the second quarter of 2000, approximately 6,938,350 options were
granted, approximately 69,003 were exercised yielding cash proceeds of $559
and approximately 474,806 options were canceled. At June 30, 2000, there are
approximately 15,415,976 options outstanding at exercise prices ranging from
$1.30 to $70.50 under RCN's 1997 Plan.
4. Basic loss per share is computed based on net (loss) after preferred
stock dividend and accretion requirements divided by the weighted average
number of shares of common stock outstanding during the period.
Diluted loss per share is computed based on net (loss) after preferred
stock dividend and accretion requirements divided by the weighted average
number of shares of common stock outstanding during the period after giving
effect to convertible securities considered to be dilutive common stock
equivalents. The conversion of preferred stock and stock options during the
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of shares of preferred
stock and stock options which would have been assumed to be converted in the
quarters and six months ended June 30, 2000 and have a dilutive effect
if the Company had income from continuing operations is 28,468,752 and
38,267,504, respectively. The number of stock options which would have been
assumed to be converted in the quarter and six months ended June 30, 1999
and have a dilutive effect if the Company had income from continuing
operations is 11,626,712 and 7,968,429, respectively.
<TABLE>
Quarter Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (loss) from continuing operations $ (172,860) $ (63,358) $ (310,981) $ (131,112)
Extraordinary item: Debt prepayment costs - (424) - (424)
Preferred stock dividend and accretion
requirements 35,170 4,083 50,362 4,083
------------ ------------ ------------ ------------
Net (loss) to common shareholders $ (208,030) $ (67,865) $ (361,613) $ (135,619)
Basic loss per average common share:
Weighted average shares outstanding 84,877,774 69,478,473 81,900,146 67,554,148
Loss per average common share $ (2.45) $ (0.98) $ (4.42) $ (2.01)
Diluted loss per average common share:
Weighted average shares outstanding 84,877,774 69,478,473 81,900,146 67,554,148
Dilutive shares resulting from stock options - - - -
------------ ----------- ------------ ------------
Weighted average shares and common stock
equivalents outstanding 84,877,774 69,478,473 81,900,146 67,554,148
============ =========== ============ ============
Loss per average common share $ (2.45) $ (0.98) $ (4.42) $ (2.01)
</TABLE>
<PAGE>
5. The Company primarily has two components of comprehensive income,
cumulative translation adjustments and unrealized depreciation on investments.
The amount of other comprehensive loss for the quarter and six months ended June
30, 2000 was ($157,152) and ($308,721), respectively. The amount of other
comprehensive loss for the quarter and six months ended June 30, 1999 was
($67,930) and ($137,084), respectively.
6. On February 28, 2000, the Company and Vulcan Ventures Incorporated
("Vulcan"), the investment organization of Paul G. Allen, completed a
transaction which culminated in Vulcan acquiring a $1.65 billion investment in
the Company in the form of mandatorily convertible preferred stock (the
"Preferred Stock"), which will be converted into the Company's Common Stock,
("Common Stock"), no later than seven years after it is issued, if not
previously called or converted. Vulcan purchased 1,650,000 shares of the
Preferred Stock. The Preferred Stock has a liquidation preference of $1,000 per
share and is convertible into Common Stock at a price of $62 per share. The
Preferred Stock has a dividend rate of 7% per annum. All dividends will be paid
in additional shares of Preferred Stock. At June 30, 2000 the Company paid
dividends in the amount of $39,322 in the form of additional shares of Series B
Preferred Stock. At June 30, 2000 the number of common shares that would be
issued upon conversion of the Series B Preferred Stock was 27,247,129.
In connection with the investment, Vulcan was permitted to appoint two members
to the Company's Board of Directors. On February 28, 2000 Vulcan appointed
William D. Savoy, President of Vulcan and Edward S. Harris, Investment Analyst
with Vulcan.
7. On April 28, 2000, the Company acquired 21st Century Telecom Group, Inc.
("21st Century"). 21st Century is an integrated, facilities-based
communications company, which seeks to be the first provider of bundled voice,
video and high-speed Internet and data services in selected midwestern markets
beginning in Chicago.
The approximate consideration for the acquisition was $513,000 including out of
pocket costs of approximately $1,500 and the assumption and repayment of debt of
approximately $303,000 and RCN common stock with a fair value of approximately
$208,000 at the time of issuance. The completion of the acquisition coincided
with RCN's tender offer and consent solicitation for all of 21st Century's
outstanding 12-1/4% Senior Discount Notes due 2008 and its exchange offer and
consent solicitation for all of 21st Century's outstanding 13-3/4% Subordinated
Debentures due 2010. In those transactions, RCN received tenders and consents
from the holders of 100% of the outstanding Notes and over 99% of the
outstanding Debentures. Additionally, the Company converted approximately
1,621,000 21st Century stock options to approximately 587,000 RCN incentive
stock options in connection with the acquisition. In connection with the
acquisition of 21st Century the Company's management is conducting a study for
the purpose of allocating the purchase price paid for 21st Century. The Company
has preliminary recorded $300,000 excess cost over book value to goodwill and is
amortizing it over four years. The transaction was accounted for by the
purchase method of accounting.
8. Pursuant to an exchange agreement between NSTAR Communications Securities
Corporation ("NSTAR Securities") and RCN, NSTAR Securities has the right, from
time to time, to convert portions of its ownership interest in RCN-BECOCOM into
shares of the Company's common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Securities.
At the close of business on December 31, 1999, NSTAR Securities exchanged a
further portion of its interest for 2,989,543 shares of RCN common stock. Such
portion of the interest was valued as of May 27, 1999. Following such exchanges,
NSTAR Securities retains a 23.14% sharing ratio in the joint venture, and
the right to invest as if it owned a 49% interest. Such investment percentage
will decrease to the extent NSTAR Securities disposes of such RCN common stock.
In April 2000 NSTAR Securities gave notice of its intent to convert its
remaining ownership interest into shares of the Company's common stock as of the
date of such notice.
9. In February 2000, the Company made an additional $5,000 loan to Juniornet in
the form of a convertible bridge loan.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars, Except Per Share Data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to expected capital
expenditures, capital contributions to joint ventures by joint venture partners,
and expected trends in operating losses and cash flows associated with
investments in new markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 10-K.
GENERAL
RCN Corporation (the "Company" or "RCN") is the nation's first and largest
single-source facilities-based provider of bundled local and long distance
phone, cable television and high-speed Internet services to the densest
residential markets in the country. The Company is currently delivering
broadband services over its Megaband Network or designing and building its
network on both the East and West coasts as well as in Chicago. In addition,
the Company is a leading Internet Service Provider in its markets. RCN offers
individual or bundled service options, superior customer service and
competitive prices. The Company is also constructing its networks with
significant excess capacity in order to accommodate expanded services in the
future. The Company intends to expand the services provided to its customers
through strategic alliances and opportunistic development of complementary
products. In addition, the Company may use excess capacity in its fiber optic
networks to provide services to commercial customers located on or near its
networks.
RCN's Megaband Network is a unique broadband fiber-optic platform capable of
offering a full suite of communications services including fully featured
voice, video and high-speed Internet to residential customers. The network
employs SONET ring backbone architecture, and localized nodes built to ensure
its state-of-the-art fiber optics travel to within 900 feet of the Company's
customers, with fewer electronics and lower maintenance costs than existing
local networks. The Company's high-capacity local fiber-optic networks target
densely populated areas comprising 44% of the US residential communications
market spread over just 6% of its geography.
The Company expects that the operating and net losses from its business will
continue in the future as it expands and develops its network and customer base.
There can be no assurance that RCN will achieve or sustain profitability or
positive operating income in the future as it develops its advanced fiber
optic network.
<PAGE>
The operating losses have resulted primarily from expenditures associated with
the development of the Company's operational infrastructure, start up expenses
in new markets, and marketing expenses. The Company expects it will continue
to experience negative operating income while it continues to invest in its
networks and until such time as revenue growth is sufficient to fund operating
expenses. The Company expects to achieve positive operating margins over time
by (i) increasing the number of customers it serves, (ii) increasing the number
of connections per customer by cross marketing its services and promoting
bundled service options and therefore increasing the revenue per customer,
(iii) lowering the costs associated with new subscriber additions and (iv)
reducing the cost of providing services by capturing economies of scale. The
Company expects its operating revenues will increase in future periods through
internal growth of its current advanced fiber optic networks, increases in
penetration, and increases in the number of services per customer; however, the
Company also expects that operating losses will increase for some period of time
as the Company initiates network development in new markets and expands its
current networks. When the Company makes its initial investment in a new
market, the operating losses typically increase as the network and sales force
are expanded to facilitate growth. The Company's ability to generate positive
cash flow in the future will depend on the extent of capital expenditures in
current and additional markets, the ability of the Company to generate revenues
and cash flow, competition in the Company's markets and any potential adverse
regulatory developments. The Company will be dependent on various financing
sources to fund its growth as well as continued losses from operations. There
can be no assurance that such funding will be available, or available on terms
acceptable to the Company. See - "Liquidity and Capital Resources."
<PAGE>
Results of Operations
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
For the quarter ended June 30, 2000, sales increased 17.9% to $78,952
from $66,929 for the same period in 1999. Operating losses before
non-cash stock based compensation of $10,284, depreciation and amortization was
$(72,696) as compared to $(25,406) for the same period in 1999.
Sales
-----
Voice sales include local telephone service fees consisting primarily of monthly
line charges, local toll, special features and long-distance telephone
service fees based on minutes of traffic and tariffed rates or contracted fees.
Voice sales include both resold services and traffic over the Company's own
switches.
Video sales are comprised primarily of subscription fees for basic, premium
and pay-per-view cable television services; All of RCN's networks can support
these services. A digital tier of cable service is being deployed in selected
markets.
Data sales represent Internet access fees billed at contracted rates, as well
as related revenues including web hosting and dedicated access. The Company
offers both dial-up and high speed cable modem services.
Total sales increased $12,023, or 17.9%, to $78,952 for the quarter ended
June 30, 2000 from $66,929 for the quarter ended June 30, 1999. The
increase primarily resulted from average service connections, which increased
8.5% to approximately 973,000 for the quarter ended June 30, 2000
from approximately 896,000 for the quarter ended June 30, 1999 (including
connections of the Starpower joint venture). The increase in average service
connections resulted principally from growth in average on-net connections,
which increased 86.1% from approximately 160,000 for the quarter ended June 30,
1999 to approximately 298,000 for the quarter ended June 30, 2000. Total
advanced fiber connections increased 98.3% from 173,000 at June 30, 1999 to
344,000 at June 30, 2000. Advanced fiber units passed increased 145.7% to
1,051,174 units at June 30, 2000 from 428,000 units at June 30, 1999.
Voice sales increased $1,280, or 9.3%, to $15,029 for the quarter ended
June 30, 2000 from $13,749 for the quarter ended June 30, 1999.
Average advanced fiber voice connections increased approximately 78.9% to
approximately 80,000 for the quarter ended June 30, 2000 (including connections
of the Starpower joint venture) from approximately 45,000 for the quarter ended
June 30, 1999. Average off-net voice connections decreased approximately 25.0%
to approximately 43,000 for the quarter ended June 30, 2000 from approximately
58,000 for the quarter ended June 30, 1999. The increase in voice revenue was
due to higher average connections of approximately $1,000 and higher revenue
per connection of approximately $300. Although minutes, calls and average call
length increased, revenue per minute declined.
Video sales increased $6,122, or 19.7%, to $37,132 for the quarter ended
June 30, 2000 from $31,010 for the quarter ended June 30, 1999. The
increase was primarily due to approximately 51,100 additional average video
connections for the quarter ended June 30, 2000 as compared to the quarter
ended June 30, 1999. Average on-net video connections grew 81,179 or 77.9% to
approximately 185,000 for the quarter ended June 30, 2000 (including
connections of the Starpower joint venture) from approximately 104,000 for the
quarter ended June 30, 1999. Average off-net video connections were
approximately 139,000 and 169,000 for the quarter ended June 30, 2000 and 1999,
respectively. Overall higher service connections contributed approximately
$2,300 to the increase in video sales and higher average revenue per connection
principally contributed the remainder.
<PAGE>
Data sales increased $296, or 1.8% to $16,887 for the quarter ended
June 30, 2000 from $16,591 for the quarter ended June 30, 1999. The
increase was primarily due to approximately 5,245 additional average data
connections for the quarter ended June 30, 2000 as compared to the quarter
ended June 30, 1999. While data sales increased in the second quarter of 2000
over the same quarter in 1999 the Company experienced a decline in data revenue
and off net dial-up subscribers resulting from increased competition from free
internet and broadband services from the fourth quarter of 1999 to the second
quarter of 2000.
For the quarter ended June 30, 2000, the Company had approximately 492,000
average off-net data connections and approximately 33,000 average advanced fiber
data connections, including connections of the Starpower joint venture. For the
quarter ended June 30, 1999, the Company had approximately 508,000 average
off-net data connections and approximately 11,000 advanced fiber data
connections, including connections of the Starpower joint venture. Overall
higher average service connections contributed approximately $13,000 to the
increase in data sales, which was substantially offset by lower average revenue
per connection.
Other sales increased $4,325 or 77.5% to $9,904 for the quarter ended June 30,
2000 from $5,579 for the quarter ended June 30, 1999. The increase was due
primarily to higher reciprocal compensation.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the quarter ended June 30, 2000, the
Company's average monthly churn rate was approximately 2.3%.
Costs and expenses, excluding depreciation and amortization
-----------------------------------------------------------
Costs and expenses, excluding depreciation and amortization, are comprised of
direct costs, and operating, selling and general and administrative expenses.
Direct expenses include direct costs of providing services, primarily video
programming, franchise costs and network access fees.
Direct expenses increased $8,945, or 25.8%, to $43,501 for the quarter ended
June 30, 2000 from $34,556 for the quarter ended June 30, 1999. The
increase was principally the result of higher sales, a lower margin on
data sales due principally to higher network backbone costs offset by a higher
margin on voice sales due to a decline in resale telephony customers and an
increase in on-net voice customers.
Operating, selling, general and administrative expenses primarily include
customer service costs, advertising, sales, marketing, order processing,
telecommunications network maintenance and repair ("technical expenses")
general and administrative expenses, installation and provisioning expenses,
and other corporate overhead.
Operating, selling, general and administrative costs increased $60,652, or
104.9%, to $118,431 for the quarter ended June 30, 2000 from $57,779 for the
quarter ended June 30, 1999.
Customer services costs, including order processing, increased approximately
$11,500, or 124.5%, for the quarter ended June 30, 2000 as compared to the
quarter ended June 30, 1999. The increase is primarily personnel related to
support the increase in average connections over the comparable period in
1999 and to increase the level of service. The increases were primarily for
customer service representatives and provisioners which facilitated a "warm
call" program which contacts customers within 48 hrs after initiating services
and a corresponding decline in the number of calls per connection. Additonally,
personnel additions were made to support the Company's target of a lower ratio
of connections to customer service representatives. Higher telephone expense,
directly results from higher call volumes due to higher connections, of
approximately $1,800, principally comprised the remaining increase. Customer
service costs per average connection per month increased 111.0% in 2000 over
1999.
<PAGE>
Technical expense, including installation and provisioning, increased
approximately $15,000, or 127.0%, for the quarter ended June 30, 2000 as
compared to the quarter ended June 30, 1999. Technical expense increases of
approximately $21,500 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Employee related telephone and vehicle
expenses increased approximately $1,000 and network and equipment maintenance
costs increased approximately $3,100. Rental and utility expense, primarily for
material storage and hub sites, increased approximately $1,300. These increases
are partially offset by an increase of approximately $11,900 in technical costs
capitalized as part of the cost basis of the telecommunications network.
Sales and marketing costs increased approximately $7,500, or 86.4%, for the
quarter ended June 30, 2000 as compared to the quarter ended June 30, 1999.
The increase resulted principally from additional staff and related commissions
and benefits to cover increases in marketable homes, to increase penetration in
the Company's existing markets and to increase the number of services per
customer. Additionally, event marketing activity has increased to promote RCN
brand awareness, community involvement and new products such as the Resilink
bundled product offering.
Advertising costs decreased approximately $4,500, or 66.2%, for the quarter
ended June 30, 2000 as compared to the quarter ended June 30, 1999. The
decrease is primarily timing related as the Company reviewed its advertising
campaign during the second quarter of 2000 and intends to commence a more
aggressive ad campaign in the later quarters of 2000.
General and administrative expenses increased approximately $31,100, or 147.2%,
for the quarter ended June 30, 2000 as compared to the quarter ended June 30,
1999. Information technology expenses increased approximately $3,900. The
Company is in the process of developing information technology systems which
will provide a sophisticated customer care infrastructure as well as other
billing and administrative support systems. Such systems include a tracking and
billing system to support the Companies ResiLink bundled service package
These multiple systems are in various stages of development and implementation.
The expense increases represent staff additions to both support this effort and
maintain the systems as well as consulting expenses associated with the
planning, analysis, data conversion and training phases of these projects. The
Company expects that such charges may increase in future periods.
Employee expenses increased approximately $13,900 as a result of increased
support staff and certain charges for non-cash stock based compensation,
while recruiting and training costs increased approximately $900
Operating taxes, primarily property taxes, increased approximately $1,900 as a
result of expanded operations. Rent and utility expense increased approximately
$3,900, primarily related to additional space required to support the increase
in headcount. The remaining increase primarily represents additional
development and support expenses associated with expanding operations and new
markets.
Depreciation and amortization
-----------------------------
Depreciation and amortization was $68,802 for the quarter ended June 30, 2000
and $30,541 for the quarter ended June 30, 1999. The increase of $38,261, or
125.7%, was the result of a higher depreciable basis of plant resulting
primarily from expansion of the Company's advanced fiber network, and
amortization of intangible assets arising from the acquisitions of DNAI and
Brainstorm in later periods of 1999 and 21st Century in April of 2000. The
cost basis of property, plant and equipment at June 30, 2000 and 1999 was
$1,660,270 and $796,674, respectively. Depreciation expense as a percentage
of average gross property, plant and equipment, excluding construction in
progress, was 3.65% and 2.74% for the quarters ended June 30, 2000 and 1999,
respectively. The basis of intangible assets was $642,517 and $263,194 at
June 30, 2000 and 1999, respectively, the increase was primarily due
to the acquisition of 21st Century. Amortization expense as a percentage of
average intangible assets was 4.95% and 5.33% for the quarter ended June 30,
2000 and 1999, respectively.
<PAGE>
The Company expects that depreciation expense will increase in future periods
due to the expansion of the Company's advanced fiber optic network.
Interest income
----------------
Interest income was $31,020 and $19,090 for the quarter ended June 30, 2000
and 1999, respectively. The increase of $11,930, or 62.4%, results from higher
average cash, temporary cash investments and short-term investments as compared
to the same period in 1999. Cash, temporary cash investments and short-term
investments were approximately $2,560,000 at June 30, 2000 and $1,739,000 at
June 30, 1999. During later periods of 1999, proceeds from the following
significant financing transactions increased cash, temporary cash investments
and short-term investments: (1) the issuance of 250,000 shares of a new issue of
the Company's Series A Preferred Stock in April 1999, which yielded net proceeds
of approximately $240,000, (2) the issuance of 9,200,000 shares of the Company's
common stock, in June 1999, which yielded net proceeds of approximately $344,000
and (3) $875,000 from new borrowings, partially offset by the repayment of the
Company's $100,000 term loan. During the first quarter of 2000, net proceeds
from the investment by Vulcan Ventures Incorporated in RCN convertible preferred
stock were approximately $1,614,000. These increases were partially offset
by capital expenditures made subsequent to June 30, 1999 of approximately
$732,270 and working capital requirements.
Interest expense
----------------
For the quarter ended June 30, 2000, interest expense was $55,362 as compared
to $35,672 for the quarter ended June 30, 1999. The increase resulted primarily
from higher interest and commitment fees of $10,439 relating to the Company's
Credit Facility, which the Company entered into with Chase Manhattan Bank in
June 1999, of which $500,000 of the Term Loan B was borrowed in June 1999.
Additionally, higher interest expense of $9,492 resulted from the Company's
$375,000 Senior Notes issued in December 1999 at 10.125%. The remaining
increase is due to higher accretion on the senior discount notes of $2,741 and
to higher amortization of debt issuance costs of approximately $1,435. These
increases were partially offset primarily by lower interest of approximately
$1,113 relating to the prepayment of the $100,000 term loan and higher
capitalized interest of approximately $3,188.
Income tax
----------
The Company's effective income tax rate was a benefit of 0.4% and 2.3% for the
quarter ended June 30, 2000 and June 30, 1999, respectively. The Company's
cumulative losses have exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. As a result, generally accepted accounting principles do not permit
the recognition of such excess losses in the financial statements. This
accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers.
Minority interest
-----------------
For the quarters ended June 30, 2000 and 1999, minority interest of $5,866 and
$5,568, respectively, primarily represents the interest of NSTAR Securities
in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
---------------------------------------------
For the quarter ended June 30, 2000, equity in the loss of unconsolidated
entities primarily represents the Company's share of the (income) losses and
amortization of excess cost over net assets of; Megacable of $(4,039), Starpower
of $4,794 and JuniorNet of $1,184. For the quarter ended June 30, 1999, equity
in the loss of unconsolidated entities primarily represents the Company's share
of the losses and amortization of excess cost over net assets of; Megacable of
$89, Starpower of $2,381 and JuniorNet $4,143 (from April 28, 1999, the date of
acquisition, of its 47.5% interest).
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
For the six months ended June 30, 2000, sales increased 11.8% to $150,209
from $134,318 for the same period in 1999. Operating losses before non-cash
stock based compensation of $11,447, depreciation, amortization and acquired
in-process technology was $(139,083) as compared to $(46,854) for the same
period in 1999.
Sales
-----
Total sales increased $15,891, or 11.8% to $150,209 for the six months ended
June 30, 2000 from $134,318 for the six months ended June 30, 1999. The increase
was fueled by higher average service connections which increased 8.2% to
approximately 958,000 for the six months ended June 30, 2000 (including
connections of the Starpower joint venture) from approximately 885,000 for the
six months ended June 30, 1999. The increase in average service connections
resulted principally from growth in average advanced fiber connections, which
increased 83.0% from approximately 146,000 for the six months ended June 30,
1999 to approximately 268,000 for the six months ended June 30, 2000. Total
advanced fiber connections increased 98.3% from approximately 173,000 at
June 30, 1999 to approximately 344,000 at June 30, 2000. Advanced fiber units
passed increased 145.7% to approximately 1,051,000 units at June 30, 2000 from
approximately 428,000 units at June 30, 1999.
Voice sales increased $915, or 3.3%, to $28,622 for the six months ended
June 30, 2000 from $27,707 for the six months ended June 30, 1999.
Approximately $1,600 of the increase in voice sales is attributable to higher
average connections. Average advanced fiber voice connections increased
approximately 85.8% to approximately 73,000 for the six months ended June
30, 2000 (including connections of the Starpower joint venture) from
approximately 39,000 for the six months ended June 30, 1999. Average off-net
voice connections decreased approximately 27.5% to approximately 45,000 for
the six months ended June 30, 2000 from approximately 62,000 for the six
months ended June 30, 1999. The increase in voice sales from higher average
connections was offset by a decrease in revenue per connection of 5.0%.
Video sales increased $8,753, or 14.2% to $70,111 for the six months ended June
30, 2000 from $61,359 for the six months ended June 30, 1999. The increase was
primarily due to approximately 41,000 additional average video connections
for the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999. Average on-net video connections grew 69,000 or 70.7% to
approximately 166,000 for the six months ended June 30, 2000 (including
connections of the Starpower joint venture) from approximately 97,000 for the
six months ended June 30, 1999. Average off-net video connections were
approximately 144,000 and 172,000 for the six months ended June 30, 2000 and
1999, respectively. Overall higher service connections contributed
approximately $4,400 to the increase in video sales and higher average revenue
per connection principally contributed the remainder.
Data sales increased $1,011, or 3.1% to $33,404 for the six months ended June
30, 2000 from $32,393 for the six months ended June 30, 1999. The increase was
primarily due to approximately 16,000 additional average data connections
for the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999.
For the six months ended June 30, 2000, the Company had approximately 502,000
average off-net data connections and approximately 29,000 average advanced
fiber data connections, including connections of the Starpower joint venture.
For the six months ended June 30, 1999, the Company had approximately 505,000
average off-net data connections, including connections of the Starpower joint
venture and approximately 10,000 average advanced fiber data connections.
Overall higher average service connections contributed approximately $13,900 to
the increase in data sales which was substantially offset by lower average
revenue per connection. The decrease in off net dial-up subscribers and in
overall revenue per subscriber results from increased competition from free
internet and broadband services.
<PAGE>
Other sales increased $5,213, or 40.5% to $18,072 for the six months ended
June 30, 2000 from $12,859 for the six months ended June 30, 1999.
The increase was due primarily to higher reciprocal compensation. This increase
was partially offset by lower television production revenue of approximately
$1,500 due to the disposition of the Company's Lancit Media subsidiary in April
1999.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the six months ended June 30, 2000,
the Company's average monthly churn rate was approximately 2.3%.
Costs and expenses, excluding depreciation and amortization
-----------------------------------------------------------
Direct expenses increased $12,264, or 17.6% to $81,582 for the six months ended
June 30, 2000 from $69,318 for the six months ended June 30, 1999. The increase
was principally the result of higher sales, a lower margin on data sales due
principally to higher network backbone costs offset by a higher margin on voice
sales due to a decline in resale telephony customers and an increase in on-net
voice customers.
Operating, selling, general and administrative costs increased $107,303, or
95.9% to $219,157 for the six months ended June 30, 2000 from $111,854 for the
six months ended June 30, 1999.
Customer services costs, including order processing, increased approximately
$19,400, or 108.8%, for the six months ended June 30, 2000 as compared to the
six months ended June 30, 1999. The increase is primarily personnel related
to support the increase in average connections over the comparable
period in 1999 and to increase the level of service. The increases were
primarily for customer service representatives and provisioners which
facilitated a "warm call" program which contacts customers within 48 hrs after
initiating services and a corresponding decline in the number of calls per
connection. Additonally, personnel additions were made to support the Company's
target of a lower ratio of connections to customer service representatives.
Higher telephone expense directly results from higher call volumes due to higher
connections, of approximately $3,200, principally comprised the remaining
increase. Customer service costs per average connection per month increased
93.9% in 2000 over 1999.
Technical expense, including installation and provisioning, increased
approximately $26,600, or 120.7%, for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. Technical expense increases of
approximately $37,600 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Employee related telephone and vehicle
expenses increased approximately $1,700 and network and equipment maintenance
costs increased approximately $4,000. Rental and utility expense, primarily
for material storage and hub sites, increased approximately $2,100. These
increases were partially offset by an increase of approximately $19,800 in
technical costs capitalized as part of the cost basis of the telecommunications
network.
Sales and marketing costs increased approximately $13,900, or 86.5%, for the
six months ended June 30, 2000 as compared to the six months ended June 30,
1999. The increase resulted principally from additional staff and related
commissions and benefits, to cover increases in marketable homes, to increase
penetration in the Company's existing markets and to increase the number of
services per customer. Additionally, event marketing activity has increased to
promote RCN brand awareness, community involvement and new products such as the
ResiLink bundled product offering.
Advertising costs decreased approximately $1,000, or 7.7%, for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999. The
decrease is primarily timing related as the Company reviewed its advertising
campaign during the second quarter of 2000 and intends to commence a more
aggressive ad campaign in the later quarters of 2000.
<PAGE>
General and administrative expenses increased approximately $48,300, or 113.4%,
for the six months ended June 30, 2000 as compared to the six months ended
June 30, 1999. Information technology expenses increased approximately $7,000.
The Company is in the process of developing information technology systems which
will provide a sophisticated customer care infrastructure as well as other
billing and administrative support systems. Such systems include a tracking and
billing system to support the Companies ResiLink bundled service package
These multiple systems are in various stages of development and implementation.
The expense increases represent staff additions to both support this effort and
maintain the systems as well as consulting expenses associated with the
planning, analysis, data conversion and training phases of these projects. The
Company expects that such charges may increase in future periods.
Employee expenses increased approximately $16,600 as a result of increased
support staff and certain charges for non-cash stock based compensation,
while recruiting and training costs increased approximately $900.
Operating taxes, primarily property taxes, increased approximately $3,200 as a
result of expanded operations. Rent and utility expense increased approximately
$6,900, primarily related to additional space required to support the increase
in headcount. The remaining increase primarily represents additional
development and support expenses associated with expanding operations and new
markets.
Depreciation and amortization
-----------------------------
Depreciation and amortization was $113,214 for the six month period ending
June 30, 2000 and $62,815 for the six month period ending June 30, 1999.
The increase of $50,399, or 80.2% was the result of a higher depreciable basis
of plant resulting primarily from expansion of the Company's advanced fiber
network, and amortization of intangible assets arising from the acquisitions
of DNAI and Brainstorm in later periods of 1999 and the acquisition of 21st
Century in April of 2000 (Note 7). The cost basis of property, plant and
equipment at June 30, 2000 and 1999 was $1,660,270 and $796,674, respectively.
Depreciation expense as a percentage of average gross property, plant and
equipment, excluding construction in progress, was 3.65% and 2.74% for the six
months ended June 30, 2000 and 1999, respectively. The basis of intangible
assets was $642,517 and $263,194 at June 30, 2000 and 1999, respectively, the
increase was primarily due to the acquisition of 21st Century. Amortization
expense as a percentage of average intangible assets was 4.95% and 5.33% for
the six months ended June 30, 2000 and 1999, respectively.
Interest income
----------------
Interest income was $67,340 and $32,492 for the six month periods ended June
30, 2000 and 1999, respectively. The increase of $34,848, or 107.2%, results
from higher average cash, temporary cash investments and short-term investments
as compared to the same period in 1999. Cash, temporary cash investments and
short-term investments were approximately $2,560,000 at June 30, 2000 and
approximately $1,739,000 at June 30, 1999. During later periods of 1999,
proceeds from the following significant financing transactions increased cash,
temporary cash investments and short-term investments: (1) the issuance of
250,000 shares of a new issue of the Company's Series A Preferred Stock in April
1999, which yielded net proceeds of approximately $240,000, (2) the issuance of
9,200,000 shares of the Company's common stock, in June 1999, which yielded net
proceeds of approximately $344,000 and (3) $875,000 from new borrowings,
partially offset by the repayment of the Company's $100,000 term loan.
During the first quarter of 2000, net proceeds from the investment by Vulcan
Ventures Incorporated in RCN convertible preferred stock were approximately
$1,614,000. These increases were partially offset by capital expenditures made
subsequent to June 30, 1999 of approximately $732,270 and working capital
requirements.
<PAGE>
Interest expense
----------------
For the six months ended June 30, 2000, interest expense was $108,699 as
compared to $67,462 for the six months ended June 30, 1999. The increase
resulted primarily from higher interest and commitment fees of $24,013 relating
to the Company's Credit Facility, which the Company entered into with Chase
Manhattan Bank in June 1999, of which $500,000 of the Term Loan B was borrowed
in June 1999. Additionally, higher interest expense of $18,984 resulted from the
Company's $375,000 Senior Notes issued in December 1999 at 10.125%. The
remaining increase is due to higher accretion on the senior discount notes of
$5,404 and to higher amortization of debt issuance costs of approximately
$2,718. These increases were partially offset primarily by lower interest of
approximately $2,644 relating to the prepayment of the $100,000 term loan and
higher capitalized interest of approximately $6,805.
Income tax
----------
The Company's effective income tax rate was a benefit of 0.5% and 1.9% for the
six months ended June 30, 2000 and June 30, 1999, respectively. The primary
reason for the difference is that the tax effect of the Company's cumulative
losses has exceeded the tax effect of accelerated deductions, primarily
depreciation, which the Company has taken for federal income tax purposes.
As a result, generally accepted accounting principles do not permit the
recognition of such excess losses in the financial statements. This accounting
treatment does not impact cash flows for taxes or the amounts or expiration
periods of actual net operating loss carryovers.
Minority interest
-----------------
For the six months ended June 30, 2000 and 1999 minority interest of $10,259
and $12,106, respectively, primarily represents the interest of Boston Edison
Company ("NSTAR") in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
---------------------------------------------
For the six months ended June 30, 2000, equity in the loss of unconsolidated
entities primarily represents the Company's share of the (income) losses and
amortization of excess cost over net assets of; Megacable of $(2,468), Starpower
$8,888 and JuniorNet of $8,720. For the six months ended June 30,1999, equity
in the loss of unconsolidated entities primarily represents the Company's share
of the losses and amortization of excess cost over net assets of; Megacable of
$465 and Starpower of $5,908 and JuniorNet of $4,143.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Because our network development plan involves relatively low fixed costs, we
are able to schedule capital expenditures to meet expected subscriber growth
in each major market. Our principal fixed costs in each such market are
incurred in connection with the establishment of a video transmission and
telephone switching facility. To make each market economically viable, it is
then necessary to construct infrastructure to connect a minimum number of
subscribers to the transmission and switching facility. We phase our market
entry projects to ensure that we have sufficient cash on hand to fund this
construction.
Based on its current growth plan, the Company expects that it will require a
substantial amount of capital to expand the development of its network and
operations into new areas within its larger target markets. The Company
needs capital to fund the construction of its advanced fiber optic networks,
upgrade its Hybrid Fiber/Coaxial plant, fund operating losses and repay its
debts. The Company currently estimates that its capital requirements
for the period from January 1, 2000 through 2001 will be approximately
$3.6 billion, which include capital expenditures of approximately $1.4 billion
in 2000 and approximately $1.6 billion in 2001. These capital expenditures will
be used principally to fund additional construction to the Company's fiber
optic network in high density areas in the Boston, New York, Washington, D.C.
and San Francisco Bay markets as well as to expand into new markets including
Chicago and Philadelphia, and to develop its information technology systems.
These estimates are forward-looking statements that may change if circumstances
related to construction, timing or receipt of regulatory approvals and
opportunities to accelerate the deployment of the Company's networks do not
occur as expected. In addition to the Company's own capital requirements, its
joint venture partners are expected to contribute approximately $400 million,
of which approximately $364 million has been contributed, to the joint ventures
through 2000 in connection with development of the Boston and Washington, D.C.
markets.
The Company expects to supplement its existing available credit facilities and
operating cash flow by continuing to seek to raise capital to increase its
network coverage and pay for other capital expenditures, working capital, debt
service requirements, anticipated future operating losses and acquisitions.
The Company's current joint venture agreements reduce the amount of expenditures
required by RCN to develop the network due both to access to the joint venture
partners' existing facilities and to the anticipated joint venture partners'
equity contributions. However, the joint venture arrangements will also reduce
the potential cash flows to be realized from operation of the networks in the
markets in which the joint ventures operate and restrict the Company's access
to cash flow generated by the joint ventures (which will be paid in the form of
dividends). The Company may enter into additional joint ventures in the future
as the Company begins to develop new markets.
On February 28, 2000, the Company and Vulcan Ventures Incorporated
("Vulcan"), the investment organization of Paul G. Allen, completed a
transaction which culminated in Vulcan acquiring a $1.65 billion investment in
the Company in the form of mandatorily convertible preferred stock (the
"Preferred Stock"), which will be converted into the Company's Common Stock,
("Common Stock"), no later than seven years after it is issued, if not
previously called or converted. Vulcan purchased 1,650,000 shares of the
Preferred Stock. The Preferred Stock has a liquidation preference of $1,000
per share and is convertible into Common Stock at a price of $62 per share. The
Preferred Stock has a dividend rate of 7% per annum. All dividends will be paid
in additional shares of Preferred Stock. At June 30, 2000 the Company paid
dividends in the amount of $39,322 in the form of additional shares of Series B
Preferred Stock. At June 30, 2000 the number of common shares that would be
issued upon conversion of the Series B Preferred Stock was 27,247,113.
In connection with the investment, Vulcan was permitted to appoint two members
to the Company's Board of Directors. On February 28, 2000 Vulcan appointed
William D. Savoy, President of Vulcan and Edward S. Harris, Investment Analyst
with Vulcan.
<PAGE>
Pursuant to an exchange agreement between NSTAR Communications Securities
Corporation ("NSTAR Securities") and RCN, NSTAR Securities has the right, from
time to time, to convert portions of its ownership interest in RCN-BECOCOM into
shares of the Company's common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Securities.
At the close of business on December 31, 1999, NSTAR Securities exchanged a
further portion of its interest for 2,989,543 shares of RCN common stock. Such
portion of the interest was valued as of May 27, 1999. Following such
exchanges, NSTAR Securities retains a 23.14% sharing ratio in the joint
venture, and the right to invest as if it owned a 49% interest. Such investment
percentage will decrease to the extent NSTAR Securities disposes of such RCN
common stock. In April NSTAR Securities gave notice to us of its intent to
convert its remaining ownership interest as of the date of such notice.
Sources of funding for the Company's further financing requirements may
include vendor financing, public offerings or private placements of equity
and/or debt securities, and bank loans. There can be no assurance that
sufficient additional financing will continue to be available to the Company
or, if available, that it can be obtained on a timely basis and on acceptable
terms. Failure to obtain such financing could result in the delay or
curtailment of the Company's development and expansion plans and expenditures.
Any of these events could impair the Company's ability to meet its debt service
requirements and could have a material adverse effect on its business.
The Company has completed the following debt and equity offerings:
Date Description Proceeds Maturity
-------------- ------------------------------ ---------- -----------------
October 1997 10% Senior Notes $225,000 October 5, 2007
October 1997 11.125% Senior Discount Notes $350,000 October 5, 2007
February 1998 9.8% Senior Discount Notes $350,587 February 15, 2008
June 1998 11% Senior Discount Notes $149,999 June 1, 2008
December 1999 10.125% Senior Notes $375,000 January 15, 2010
Date Description/Price Class/Series Proceeds Number of Shares
-------------- ------------------ ------------ ---------- ------------------
June 1998 Equity Offering Common $ 112,866 6,098,355
April 1999ssave Equity Offering Common $ 239,897 250,000
save 1999 Equity Offering Preferred A $ 344,043 9,200,000
February 2000 Equity Offering Preferred B $1,614,428 1,650,000
The Indentures for the Notes referred to above all contain similar provisions.
The Chase Manhattan Bank acts as Trustee for each of the Indentures. All the
aforementioned Notes are general senior unsecured obligations of RCN. The
Senior Discount Notes do not bear cash interest for the first three years from
the offering. Thereafter, cash interest on the notes will accrue at the
respective interest rate per annum and will be payable semi-annually in arrears
every six months.
The Senior Discount Notes are not callable for five years, and are redeemable in
whole or in part, at any time on or after the fifth year, at the option of RCN.
The Senior Notes are not callable for five years, and are redeemable in whole or
in part, at any time on or after the fifth year, at the option of RCN. Both the
Senior Discount Notes and the Senior Notes may be redeemed after year five at
redemption prices starting at approximately 105% of the principal amount and
declining to 100% of the principal amount, plus any accrued and unpaid interest.
RCN may, at its option, use the net proceeds of certain offerings of RCN Common
Stock to redeem up to an aggregate of 35% of the aggregate principal amount at
maturity of the debt securities issued under the Indentures at a certain
premium. Upon the occurrence of a change of control, RCN must make an offer to
purchase all of the debt securities issued under the Indentures then outstanding
at a premium.
<PAGE>
The Indentures contain certain convenants that, among other things, limit the
ability of RCN and its subsidiaries to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, engage in transactions
with stockholders and affiliates, create liens, sell assets and engage in
mergers and consolidations.
On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks Muse Fund IV
purchased 250,000 shares of Series A Preferred Stock, par value $1 per share,
for gross proceeds of $250,000. The Series A Preferred Stock is cumulative
and has an annual dividend rate of 7% payable quarterly in cash or additional
shares of Series A Preferred Stock and has a initial conversion price of $39.00
per share. The Series A Preferred Stock is convertible into common stock at
any time. The Series A Preferred Stock is subject to a mandatory redemption
on March 31, 2014 at $1,000 per share, plus accrued and unpaid dividends, but
may be called by the Company after four years. At June 30, 2000 the
Company paid dividends in the amount of $22,340 in the form of additional
shares of Series A Preferred Stock. At June 30, 2000 the number of common
shares that would be issued upon conversion of the Series A Preferred Stock was
6,983,128.
The Company and certain of its subsidiaries together, (the "Borrowers") entered
into a $1,000,000 Senior Secured Credit Facility (the "Credit Facility") with
the Chase Manhattan Bank and certain other lenders. The collateralized
facilities are comprised of a $250,000 seven-year revolving credit facility
(the "Revolver"), a $250,000 seven-year multi-draw term loan facility (the
"Term Loan A") and a $500,000 eight-year term loan facility (the "Term Loan
B"). All three facilities are governed by a single credit agreement dated as
of June 3, 1999 (the "Credit Agreement").
The Revolver may be borrowed and repaid from time to time. Up to $150,000 of
the Revolver may be used to fund working capital needs and for general
corporate purposes. The remaining $100,000 of the Revolver as well as the
term loans may be used solely to finance telecommunications assets. The amount
of the commitments under the Revolver automatically reduces to $175,000 on June
3, 2005 and the remaining commitments are reduced quarterly in equal
installments through to maturity at June 3, 2006. The Revolver can also be
utilized for letters of credit up to a maximum of $15,000. As of June 30,
2000 approximately $228 in the form of letters of credit had been drawn
under the Revolver. As of June 30, 2000 the Company also had letters of credit
outside the Revolver of approximately $12,584.
The Term Loan A is available for drawing until December 3, 2001, at which time
any undrawn commitments expire. At June 30, 2000 there were no outstanding
loans under the Term Loan A. Any outstanding borrowings under the Term Loan
A at September 3, 2002 will be repaid in quarterly installments based on
percentage increments of the Term Loan A that start at 3.75% per quarter on
September 3, 2002 and increase in steps to a maximum of 10% per quarter on
September 3, 2005 through to maturity at June 3, 2006.
As of June 30, 2000, $500,000 of the Term Loan B was outstanding. The Term
Loan B was fully drawn at closing. Amortization of the Term Loan B starts on
September 3, 2002 with quarterly installments of $1,000 per quarter until
September 3, 2006 when the quarterly installments increase to $121,000 per
quarter through to maturity at June 3, 2007.
The interest rate on the Credit Facility is, at the election of the
Borrowers, based on either a LIBOR or an alternate base rate. For a Revolver
or Term Loan A borrowing, the interest rate will be LIBOR plus a spread of up
to 300 basis points or the base rate plus a spread of 200 basis points,
depending upon financial covenant calculations. In the case of the Revolver and
the Term Loan A, a fee of 125 basis points on the unused commitment accrues
until the Company's EBITDA has become positive and thereafter at up to 125
basis points depending upon the Company's utilization of the commitments.
For all Term Loan B borrowings the interest includes a spread that is fixed at
350 basis points over the LIBOR or 250 basis points over the alternate base
rate.
<PAGE>
The Credit Agreement contains conditions precedent to borrowing, events of
default (including change of control) and covenants customary for facilities
of this nature. The Credit Facility is secured by substantially all of the
assets of the Company and its subsidiaries.
Prepayments of the eight-year term loan require payment of a fee of 2% of the
amount of such prepayment if made on or prior to June 3, 2000 and 1% of such
prepayment if made thereafter but on or prior to June 3, 2001.
The foregoing summary of certain provisions of the Credit Agreement does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the Credit Agreement.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At June 30, 2000 the Company had an
aggregate of approximately $2,203,125 of indebtedness outstanding, and the
ability to borrow up to an additional $500,000 under the Credit Agreement.
The Company also has cash, temporary cash investments and short-term investments
aggregating approximately $2,559,548 and a current ratio of approximately
9.71:1.
As a result of the substantial indebtedness of the Company, the Company's fixed
charges are expected to exceed its earnings for the foreseeable future. Based
on its current plans, the Company will require substantial additional capital
particularly in connection with the buildout of the Company's networks and the
introduction of its telecommunications services to new markets. The leveraged
nature of the Company could limit its ability to effect future financing or may
otherwise restrict the Company's business activities.
The extent of the Company's leverage may have the following consequences: (i)
limit the ability of the Company to obtain necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) require that a substantial portion of the Company's cash flows
from operations be dedicated to the payment of principal and interest on its
indebtedness and therefore not be available for other purposes; (iii) limit the
Company's flexibility in planning for, or reacting to, changes in its business;
(iv) place the Company at a competitive disadvantage as compared with less
leveraged competitors; and (v) render the Company more vulnerable in the event
of a downturn in its business.
The objective of the Company's "other than trading portfolio" is to invest in
high quality securities, to preserve principal, meet liquidity needs,
and deliver a suitable return in relationship to these guidelines.
For the six months ended June 30, 2000, the Company's net cash used in
operating activities was $188,903 comprised primarily of a net loss of
($310,981) adjusted by non-cash depreciation and amortization of $113,214, other
non-cash items totaling $66,517 and working capital changes of $(60,511). Net
cash used in investing activities of $1,421,554 consisted primarily of additions
to property, plant and equipment of $402,259, acquisitions of $290,860,
short-term investments, net of $688,161, and investment and advances in
unconsolidated joint venture of $38,740. Net cash provided by financing
activities of $1,688,555 included proceeds from the issuance of preferred stock
of $1,614,416, contribution from minority interest partner of $61,005 and
proceeds from the exercise of stock options of $5,888.
<PAGE>
Item 3. Quantitative & qualitative disclosures about market risk.
The Company has adopted Item 305 of Regulation S-K "Quantitative & qualitative
disclosures about market risk" which is effective in financial statements for
fiscal years ending after June 15, 1998. The Company currently has no items
that relate to "trading portfolios". Under the "other than trading portfolios"
the Company does have four short-term investment portfolios categorized as
available for sale securities that are stated at cost, which approximates
market, and which are re-evaluated at each balance sheet date and one portfolio
that is categorized as held to maturity which is an escrow account against a
defined number of future interest payments related to the Company's (10% Senior
Discount Notes). These portfolios consist of Federal Agency notes, Commercial
Paper, Corporate Debt Securities, Certificates of Deposit, U.S. Treasury notes,
and Asset Backed Securities. The Company believes there is limited exposure to
market risk due primarily to the small amount of market sensitive investments
that have the potential to create material market risk. Furthermore, the
Company's internal investment policies have set maturity limits, concentration
limits, and credit quality limits to minimize risk and promote liquidity. The
Company did not include trade accounts payable and trade accounts receivable in
the "other than trading portfolio" because their carrying amounts approximate
fair value.
The objective of the company's "other than trading portfolio" is to invest in
high quality securities and seeks to preserve principal, meet liquidity needs,
and deliver a suitable return in relationship to these guidelines. RCN may from
time to time enter into interest rate protection agreements.
<PAGE>
Part II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
NONE.
Item 4. Submission of matters to a vote of security holders
The Annual Meeting of Shareholders was held on May 16, 2000. Matters
submitted to and approved by Shareholders included:
1) The election of Class III Directors to serve a term of three years
Nominee For Withheld
------- ---------- --------
David C. McCourt 95,683,069 160,104
James Q. Crowe 95,677,371 165,802
Eugene Roth 95,693,582 149,591
William D. Savoy 95,654,778 188,395
Walter Scott, Jr 95,657,227 185,946
Additional Directors whose term of office as a Director continued after
the meeting included:
Michael A. Adams Timothy J. Stoklosa
Stuart E. Graham Alfred Fasola
Micheal J. Levitt Edward S. Harris
Thomas J. May Richard R. Jaros
Thomas P. O'Neil III Michasl B. Yanney
2) The ratification of the selection of PricewaterhouseCoopers LLP as
the Company's independent auditors for the year ending December 31,
2000.
For Against Abstain
---------- ------- -------
95,718,105 89,701 35,367
3) The adoption of the Company's 2000 Employee Stock Purchase Plan.
For Against Abstain
---------- --------- -------
92,150,211 3,266,747 426,215
4) The approval of ammendments to the Company's 1997 Equity Incentive
Plan.
For Against Abstain
---------- ---------- -------
80,860,444 14,525,120 457,609
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(4) Amendment to RCN's Credit Agreement
(27) Financial Data Schedule
(99) Amendment to 1997 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
(99.1) Preferability Letter from PricewaterhouseCoopers
(b.) Reports on Form 8-K
In May the Company filed a report on Form 8-K announcing it's purchase of
21st Century Telecom Group, Inc. On December 12, 1999, RCN Corporation ("RCN")
entered into an Agreement and Plan of Merger (the "Merger Agreement"), among
RCN, 21st Holding Corp., a wholly owned subsidiary of RCN ("Sub"), and 21st
Century Telecom Group, Inc. ("21st Century") providing for the acquisition of
21st Century by RCN in a transaction structured as a Merger (the "Merger") of
Sub with and into 21st 21st Century, with 21st Century surviving the Merger and
becoming a wholly owned subsidiary of RCN. On April 28, 2000, RCN completed the
acquisition of 21st Century. The Merger Agreement provides that the issued and
outstanding shares of 21st Century's Voting and Non-Voting Common Stock, no par
value, and Class A Convertible 8% Cumulative Preferred Stock, no par value, and
outstanding warrants to acquire Company Common Stock, will be converted into
shares of RCN common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RCN Corporation
Date: August 14, 2000
/s/ Timothy J. Stoklosa
-----------------------------
Timothy J. Stoklosa
Executive Vice President and
Chief Financial Officer
