FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
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
requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 29, 2000
78,114,901 Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 29, 2000 computed by reference to closing price as reported by NASDAQ
for Common Stock ($59.88 per share)
$2,811,922,404 Common Stock
Documents Incorporated by Reference
1. Proxy Statement for 2000 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K.
<PAGE>
PART I
Some of the statements made by RCN in this 10-K are forward looking in nature.
Actual results may differ materially from those projected in forward-looking
statements as a result of a number of factors. We believe that the primary
factors 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, inventory and programming,
our ability to develop and penetrate existing and new markets, technological
developments and changes in the competitive environment in which we operate.
Additional information concerning these and other important factors can be found
in our filings with the Securities and Exchange Commission. Statements in this
release should be evaluated in light of these important factors.
Item 1. BUSINESS
Overview
We are 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. We are
currently delivering broadband services over our Megaband(tm) Network and
designing and building our network on both the East and West coasts as well as
in Chicago. In addition, we are a leading Internet Service Provider ("ISP") in
our markets. We offer 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 intend to use the excess capacity in our fiber optic networks
to provide services to commercial customers located on or near our networks.
Our Megaband(tm) 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
that our state-of-the-art fiber optics travel to within 900 feet of our
customers, with fewer electronics and lower maintenance costs than existing
local networks. Our 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. Additional information can be found at
www.RCN.com.
Our initial fiber optic networks have been established in selected
markets in the Boston to Washington, D.C. corridor, including New York City,
and also in the San Francisco Bay area. In addition, we have recently entered
into agreements that will allow us to establish and expand our advanced fiber
optic networks in the Los Angeles and Chicago areas. 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 NSTAR
Communications, Inc. or "NSTAR" or "Boston Edison Company" or "BECO". Currently,
we own 76.86% interest in and manage the joint venture. Prior to the close of
business on December 31, 1999, we owned 53.88%. The joint venture 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.,("PEPCO") 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 the
up-front costs of developing our networks. In addition, our joint venture
partners provide us with access to additional assets, equity capital and
established customer bases.
<PAGE> 1
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. Since we view long distance
as a complementary product we do not currently include customers of our long
distance as connections. See "Connections." As of December 31, 1999, we had
approximately 947,000 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 223,000 total connections attributable to customers
connected to advanced fiber optic networks ("on-net" connections) and had
approximately 724,000 connections attributable to customers served through
other facilities ("off-net" connections).
We have extensive operating experience in both the telephone
and video industries and in the design, development and construction 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 Corporation ("C-TEC"), which, prior to September
30, 1997, owned and operated our company. C-TEC has over 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 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 and in Chicago.
Business Strategy
Our goal is to become the leading provider of communications
services to residential customers in our target markets by pursuing the
following key strategies:
Exploit the "Last Mile" Bottleneck in Existing Local Networks:
Existing local networks are typically low capacity, single service facilities
without the bandwidth for multiple or new services and revenue streams.
Investment in the local network or "last mile" has not generally kept pace
with other industry and technological advances. In our target markets, we
seek to be the first operator of an advanced fiber optic network offering
advanced communications services to residential customers.
Continue Construction of Advanced Fiber Optic Networks: Our
advanced fiber optic networks are designed with sufficient capacity to meet
the growing demand for high speed, high capacity, voice, video and data
services. Our networks also have a significant amount of excess capacity
at relatively low incremental cost which will be available for the
introduction of new products. We believe that our high capacity advanced fiber
optic networks provide us with certain competitive advantages such as the
ability to offer bundled services and the opportunity to recover the cost of
our network through multiple revenue streams. In addition, our networks
generally provide superior signal quality and network reliability relative to
the typical networks of the incumbent service providers.
<PAGE> 2
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
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 Boston Edison Company, Pepco Communications, Level 3,
Qwest, MCI/WorldCom and Southern California Edison. By establishing
relationships with these companies, we are able to take advantage of their
existing extensive fiber optic networks and other assets, and our own existing
cable television infrastructure, to expedite and reduce the cost of market entry
and business development. We will continue to evaluate other strategic
alliances in our existing markets and our developing markets.
Network Development and Financing Plan
Because our network development plan involves relatively low fixed
costs, we are able to schedule capital expenditures to meet expected
subscriber growth in each major market. Our principal fixed costs in each
such market are incurred in connection with the establishment of a video
transmission and telephone switching facility. To make each market
economically viable, it is then necessary to construct infrastructure to
connect a minimum number of subscribers to the transmission and switching
facility. We phase our market entry projects to ensure that we have
sufficient cash on hand to fund this construction.
Based on our current growth plan, we expect that we will
require 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, 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 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 expected to contribute approximately $350 million,
of which approximately $265 million has been contributed, to the joint
ventures through 2001 in connection with development of the Boston and
Washington, D.C. markets.
<PAGE> 3
In order to facilitate growth beyond 2000, we expect to supplement
our existing available credit facilities and operating cash flow by continuing
to seek to raise 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. areas, California, a wireless video system in the 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.
Connections. The following table summarizes the development of
our subscriber base:
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------
12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
On-Net Service Connections:
Voice.......................... 30,868 40,215 49,539 56,209 62,733
Video.......................... 86,349 99,098 110,565 120,353 138,577
Data........................... 6,167 9,922 13,024 17,985 21,654
------- ------- ------- ------- -------
Subtotal On-Net................. 123,393 149,235 173,128 194,547 222,964
------- ------- ------- ------- -------
Off-Net:
Voice.......................... 65,022 60,004 54,917 49,271 46,986
Video.......................... 175,313 170,323 165,523 164,859 153,627
Data........................... 491,633 506,180 508,992 535,107 523,728
------- ------- ------- ------- -------
Subtotal Off-Net................ 731,968 736,507 729,432 749,237 724,341
Total Service Connections....... 855,361 885,742 902,560 943,784 947,305
======= ======= ======= ======= =======
Homes Passed.................... 304,505 350,733 427,843 550,771 713,823
Marketable Homes................ 270,406 301,546 361,015 440,112 551,006
</TABLE>
Because we deliver a variety of services to our customers, we
quantify 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.
"Off-Net-Voice" figures in the table above represent resold
local phone service provided to customers not connected to the advanced fiber
optic networks.
"Off-Net-Video" figures in the table above include at December 31, 1999
approximately 32,000 wireless connections and approximately 4,000 wireline video
connections serving the University of Delaware.
<PAGE> 4
As of December 31, 1999 we had approximately 135,000 homes passed and
approximately 122,000 basic subscribers connected to our hybrid fiber/coaxial
cable system in the New York, New Jersey and Lehigh Valley service areas.
In areas served by our joint ventures in the Greater Boston and
Washington, D.C. areas, the subscribers are customers of the relevant joint
venture and are fully included in the connections reflected in the table above.
We report marketable homes, which represent that segment of homes
passed to which are marketing our entire line of advanced fiber optic network
products. The distinction between homes passed and marketable homes recognizes
our transition from constructing our network in initial markets to providing
services to customers that have ordered our services.
Set forth below is a brief description of our services:
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 competitive local exchange carriers ("CLECs"). In addition, we
offer a wide range of value-added-vertical 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, 1999, we had approximately 63,000 telephone
service connections on our advanced fiber optic networks and approximately
47,000 customers for resold telephone service. We also provide competitively
priced long distance telephone services, including outbound, inbound, calling
card and operator services. These services are offered to residential and
business customers.
Video Services. We offer a diverse line-up of high quality
basic, premium and pay-per-view video programming. Depending on the system, we
offer from 60 to 150 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 Plus, HBO Signature and Moremax.
In Demand PPV, 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 31-45 different commercial-free music channels delivered
to the customer's stereo in digital CD quality sound.
As of December 31, 1999, we had approximately 139,000 subscribers for
our video programming services provided over advanced fiber optic networks. As
of such date, we also had approximately 32,000 connections attributable to the
wireless video system and approximately 122,000 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
and publish information on the Internet. We believe that we are the largest
regional provider of Internet services in the Northeast United States. As of
December 31, 1999, we had approximately 545,000 Internet subscribers.
<PAGE> 5
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 dial-up Internet services
to acquired subscribers. We have also actively marketed resold telephone
service in the past. Our goal is to extend our advanced fiber optic network to
service many of those customers. As our advanced fiber optic network is extended
into these areas or buildings, customers receiving wireless video service in New
York City are switched to the advanced fiber optic network from the wireless
video network. The wireless video equipment is then used to provide services 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 and dial-up 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 penetrate 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.
Southern California Edison
We have an agreement with Southern California Edison ("SCE") that will
help us utilize SCE's existing fiber backbone and construction expertise to
expedite our entry and expansion into the greater Los Angeles area. The
agreement will enable us to reach 1.5 million households in an area with a
density of more than 200 homes-per-mile of plant.
The general agreement calls for SCE to install communications cable
for us in areas where we secure municipal franchises. In addition, Edison
Carrier Solutions, SCE's division that provides wholesale telecommunications
services, will provide transport for our telecommunications traffic over the
Edison Carrier Solutions' high-speed network.
BECO Joint Venture
In 1996 RCN and the Boston Edison Company, through
wholly-owned subsidiaries, formed a joint venture to use 126 fiber miles of
BECO's fiber optic network to deliver our comprehensive communications package
in Greater Boston. A joint venture agreement provided for the organization
and operation of RCN-BECOCOM, LLC, an unregulated entity with a term
expiring in the year 2060. RCN-BECOCOM is a Massachusetts limited liability
company organized to own and operate an advanced fiber optic telecommunications
network and to provide, in the market in and around Boston, Massachusetts,
voice, video and data services. Prior to the close of business at December 31,
1999 we owned 53.88% of the equity interest in RCN-BECOCOM and BECO owned the
remaining 46.12% interest. This joint venture with BECO is reflected in our
financial statements on a consolidated basis.
Pursuant to an exchange agreement between BECO and RCN, BECO has the
right, from time to time, to convert portions of its ownership interest in
RCN-BECOCOM into shares of our common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Communications
Securities Corporation ("NSTAR Securities"). In 1999, BECO and the Company
entered into two exchange transactions pursuant to which BECO converted a
portion of its ownership interest into RCN common stock which was issued to
NSTAR Securities. Prior to such exchange transactions, BECO owned a 49% interest
in the joint venture. On February 19, 1999, BECO exchanged a portion of its
interest for 1,107,539 shares of RCN common stock. Such portion of the interest
was valued as of January 15, 1998. On December 31, 1999, BECO 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, BECO 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.
<PAGE> 6
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 Boston 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 the cities of Arlington, Somerville and Newton, Massachusetts. 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 construct, own,
lease, operate and market a communications network to provide voice, video, data
and other communications services to residential and commercial customers in the
greater Washington, D.C., Virginia and Maryland area. Starpower is an
unregulated limited liability company with a perpetual term. We own 50% of the
equity interest in Starpower and Pepco Communications owns the remaining 50%
interest. Starpower is reflected in 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/WorldCom owns or has the right to use certain fiber optic
network facilities in the Boston, Massachusetts and New York City markets.
Under the fiber agreements, 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.
We have also entered into joint construction agreements with Level 3.
The agreements will allow us to deploy additional networks in Boston and New
York faster and at a lower cost. We also have entered into a letter of intent
with Level 3 for Level 3 to provide us with cross-country capacity to allow our
customers to connect to major Internet connection points in the United States.
This gives us the ability to negotiate peering agreements that will allow the
exchange of traffic as a Tier I operator.
In June 1998, we entered into an agreement with Qwest
Communications for Qwest to provide us with capacity in its regional backbone
of fiber lines to connect to our local networks from Boston to Washington, D.C.
In December 1999 we announced the approval of an agreement with SKANSKA
USA, Inc. ("SKANSKA"). Under the contract SKANSKA will initially provide
management services to include construction oversight for the installation of
the cable television, telephony and data communications' infrastructure in many
of our current and targeted markets. Stuart E. Graham, President of SKANSKA,
is a member of the Board of Directors of RCN. A competitive bidding process was
conducted prior to such agreement. We believe that the agreement has been
reached on terms no less favorable than could have been obtained in any arms
length negotiation.
<PAGE> 7
Recent Transactions
In August 1999, we acquired Direct Network Access, Ltd.("DNAI"),one
of the Bay Area's largest independent ISP. We acquired DNAI for approximately
$3.4 million in cash and shares of our common stock with a fair value at the
time of issuance of approximately $6.8 million.
In July 1999, we acquired Brainstorm Networks, Inc.("Brainstorm"),
a leading independent ISP that provides dedicated and DSL services. We
purchased Brainstorm for approximately $2.9 million in cash and shares of our
common stock with a fair value at the time of issuance of approximately $11.6
million.
In April 1999, we acquired a 47.5% ownership interest in JuniorNet
Corporation ("JuniorNet"). We purchased the ownership interest for
approximately $47 million in cash. Concurrent with that transaction, JuniorNet
purchased our Lancit Media subsidiary ("Lancit") for approximately $25 million
in cash. We acquired Lancit in June 1998 for approximately $0.4 million in cash
and shares of our common stock with a fair value at the time of issuance of
approximately $7.4 million. In February 2000, We made a $5 million loan to
Juniornet in the form of a convertible bridge loan.
We have entered into a definitive agreement with respect to the
acquisition of 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.
Significant Private Investments
In October 1999, Vulcan Ventures Incorporated ("Vulcan"), the
investment organization of Paul G. Allen, agreed to make a $1.65 billion
investment in our company. The investment, which was completed on February 28,
2000, is in the form of mandatorily convertible cumulative preferred stock (the
"Preferred Stock"), which will be converted into Common Stock, par value $1.00
per share ("Common Stock"), no later than seven years after it is issued.
Vulcan has 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.
In connection with the investment, Vulcan will generally be authorized
to appoint two members to our Board of Directors. On February 28, Vulcan
appointed William D. Savoy, President of Vulcan and Edward S. Harris, Investment
Analyst with Vulcan. The Preferred Stock will automatically be converted to
Common Stock or Class B Stock seven years after the transaction closes, if not
previously called or converted. The Preferred Stock has a dividend rate of 7%
per annum. All dividends will be paid in additional shares of Preferred Stock.
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 December 31, 1999 we
paid dividends in the amount of $13,053 in the form of additional shares of
Series A Preferred Stock. At December 31, 1999 the number of common shares that
would be issued upon conversion of the Series A Preferred Stock was 6,744,949.
We incurred $10,000 of issuance cost in connection with the sale of the Series
A Preferred Stock.
<PAGE> 8
International
As of July 31, 1999, we executed on a pledge of an 8.96% equity interest in
Megacable, the second largest cable television provider in Mexico,
made by Mazon Corporativo, S.A. de. C.V. ("Mazon") to collateralize
Mazon's indebtedness to us. As a result, the indebtedness was cancelled, and
our ownership interest in Megacable increased to 48.96%. Megacable owns 26
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, 1999, their wireline systems passed approximately
902,000 homes and served approximately 299,000 subscribers. Megacable had
revenues of $52.2 million and $37.5 million for the years ended December 31,
1999 and 1998, respectively.
Additionally, Megacable presently holds a 99% interest in
Megacable Comunicaciones de Mexico S.A. ("MCM"). MCM has received a license
from the Mexican government to allow it to build a fiber optic network in
Mexico City, Monterrey and Guadalajara. MCM intends to use this network to
provide local voice and high-speed data service in these cities, principally
to commercial customers in Mexico City.
Competition
Overview
- --------
We compete with a wide range of service providers for each of
our services. Virtually all markets for voice and video services are extremely
competitive, and we expect that competition will intensify in the future. We
face significant competition in each of the markets in which we offer voice
and video programming services. Our competitors are often larger,
better-financed incumbent local telephone carriers and cable companies with
better access to capital resources, and many have historically dominated their
local telephone and cable television markets. These incumbents presently have
numerous advantages as a result of their historic monopolistic control of their
respective markets, economies of scale and scope and control of limited
conduit and pole space. They also have well-established customer and vendor
relationships. However, we believe that most existing and potential competitors
will, at least initially, offer narrower services over limited delivery
platforms compared to the wide range of voice, video and data services that we
provide over our fiber-based networks. This gives us an opportunity to
achieve important market penetration.
We compete with the incumbent Local exchange carriers ("LEC's") for
the provision of local telephone services, as well as with alternative service
providers including CLECs. Cable operators are also entering the local exchange
market in some locations. Other sources of competitive local and long distance
telephone services include: Commercial mobile radio services providers,
including cellular carriers (such as Bell Atlantic Mobile Services); personal
communications services carriers such as Sprint PCS; and enhanced specialized
mobile radio services providers (such as NexTel).
We face, and expect to continue to face, significant
competition for long distance telephone services from the inter-exchange
carriers ("IXCs"), including AT&T, Sprint and MCI WorldCom, which account for
the majority of all U.S. long distance revenue. The major long distance service
providers benefit from established market share and from established trade
names through nationwide advertising. However, we regard our long-distance
service as a complementary service rather than a principal source of revenue.
Certain IXCs, including AT&T, MCI WorldCom and Sprint, have also announced
their intention to offer local services in major U.S. markets using their
existing infrastructure in combination with resale of incumbent LEC service,
lease of unbundled local loops or other providers' services. Internet-based
telephony, a potential competitor for low cost telephone service, is also
developing and the Company is also pursuing this technology.
<PAGE> 9
All of our video services face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment. Other sources include off-air
television broadcast programming, newspapers, movie theaters, live sporting
events, interactive online computer services and home video products,
including videotape cassette recorders. Alternative video distribution
technologies include traditional cable networks, wireless local video
distribution technologies, and home satellite dish ("HSD") earth stations.
Home satellite systems enable individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. The Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Act") contains provisions, which the FCC has implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to HSD owners certain satellite-delivered cable programming at
competitive costs. We face additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The FCC and
Congress have adopted policies providing a more favorable operating
environment for new and existing technologies that compete, or may compete,
with our various video distribution systems. These technologies include, among
others, Direct Broadcast Satellite ("DBS") service whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
We expect that our video programming services will face growing competition
from current and new DBS service providers. The FCC has recently determined
that DBS is the fastest-growing competitor to franchised cable operations. We
also compete with wireless program distribution services such as Multi-Channel
Multi-Point Distribution Service which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers.
The Internet access market is extremely competitive and highly
fragmented. Competition in this market is expected to intensify. Our current
and prospective competitors include established online services; local,
regional and national ISPs; national and international telecommunications
companies including Regional Bell Operating Companies ("RBOCs") such as Bell
Atlantic; and affiliates of incumbent cable providers. Increased competition
may create downward pressure on the pricing of and margins from Internet
access services.
We also compete with companies offering a combination of the services
above, such as companies that would result from the merger of Time Warner and
America On-line and the merger of AT&T and Media One.
Other new technologies, including Internet-based services, may
compete with services that we can offer. Advances in communications technology
as well as changes in the marketplace and the regulatory and legislative
environment are constantly occurring. Thus, we cannot predict the effect that
ongoing or future developments might have on the voice, video and data
industries or on our operations or financial condition.
We believe that among the existing competitors, the incumbent
LECs, incumbent cable providers and the CLECs are most of our competitors in
the delivery of "last mile" connections for voice and video services.
<PAGE> 10
Voice and Video Services
- ------------------------
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, offer broadband digital transmission services and retail Internet
access, and 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 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 what is proposed by the three largest IXCs: AT&T, MCI WorldCom and Sprint.
We expect that the increased competition made possible by regulatory reform will
result in certain pricing and margin pressures in the telecommunications
services business.
We have sought, and will continue to seek, to provide a full
range of local voice services which compete with incumbent LECs in our service
areas. We expect that competition for local telephone services will be based
primarily on quality, capacity and reliability of network facilities, customer
service, response to customer needs, service features and price, and will not
be based on any proprietary technology. Our new fiber optic networks, employ
dual backbone architecture and advanced technology; therefore, we may have
capital cost and service quality advantages over some of the networks of the
incumbent LECs. We may also have a competitive advantage because we are able
to deliver a bundled voice and video service.
The 1996 Act permits the incumbent LECs and others with which we
compete to provide a wide variety of video services directly to subscribers.
Various LECs currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. We cannot predict the likelihood of success of video
service ventures by LECs or the impact such competitive ventures may have on us.
Some LECs, including Bell Atlantic, also offer Internet access services that
compete with RCN.com services.
<PAGE> 11
Incumbent Cable Television Service Providers
Certain of our video service businesses compete with incumbent
wireline cable companies in their respective service areas. In particular, our
advanced fiber optic networks compete for cable subscribers with the major
wireline cable operators in our markets, such as Time-Warner Cable in New York
City, Cablevision in Boston and TCI in Washington, D.C. and San Francisco.
Our wireless video service in New York City competes primarily with Time-Warner
Cable. We believe that the expanded capacity and fiber-to-node architecture of
our advanced fiber optic networks make us better equipped to provide high-
capacity communications services than traditional coaxial cable based networks
using "tree and branch" architecture. Our Lehigh Valley, Pennsylvania hybrid
fiber/coaxial cable 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, but see regulation
of Video services below.
CLECs and Other Competitors
We also face, and expect to continue to face, competition from
other potential competitors in certain of our geographic markets. Other CLECs,
such as subsidiaries of AT&T and MCI WorldCom, compete for local telephone
services, although they have, to date, focused primarily on the market for
commercial customers rather than residential customers. In addition, potential
competitors capable of offering private line and special access services also
include other smaller long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators
and private networks built by large end-users, including Winstar, Dualstar and
New Vision. However, we believe that, at least initially, we are relatively
unique in our markets in offering bundled voice, video and data services
primarily to customers in residential areas over our own advanced fiber optic
network.
Internet Services
- -----------------
The Internet access market is extremely competitive and highly
fragmented. No significant barriers to entry exist and, accordingly,
competition in this market is expected to intensify. Our current and
prospective competitors include many large companies with substantially
greater market presence and financial and other resources. 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 (including high speed digital subscriber line
service) offered by RBOCs such as Bell Atlantic; and
o online services offered by incumbent cable providers, such as
At Home and Roadrunner.
<PAGE> 12
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 has completed
the acquisitions of TCI's cable television networks, which gives it a
significant ownership interest in At Home, an ISP. Diversified competitors may
bundle other services and products with Internet connectivity services,
potentially placing us at a competitive disadvantage. In addition, competitors
may create downward pressure on the pricing of and margins from Internet access
services. Competition could also impact our ability to participate in transit
agreements and peering arrangements, which could, in turn, adversely effect the
speed of service that we can provide to our customers.
Other new technologies may become competitive with our services. A
provider of Limited Multi Distribution Systems ("LMDS") recently began offering
wireless Internet and video programming services in New York City and has
announced plans to offer telephone service in the future. Advances in
communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. In addition, a
continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors. We
cannot predict the effect that competition from developing and future
technologies or from future competitors will have on our operations or financial
condition.
Regulation
Our telephone and video programming transmission services are
subject to federal, state and local government regulation. The 1996 Act
introduced widespread changes in the regulation of the communications
industry, including the local telephone, long distance telephone, data
services, and television entertainment segments. The 1996 Act was
intended to promote competition and decrease regulation of these
segments of the industry. The law delegates to both the FCC and the
states broad regulatory and administrative authority to implement the
1996 Act.
Telecommunications Act of 1996
The 1996 Act eliminates many of the pre-existing legal barriers
to competition in the telephone and video programming communications
businesses. The Act also preempts many of the state barriers to local
telephone service competition that previously existed in state and local
laws and regulations and sets basic standards for relationships between
telecommunications providers.
The 1996 Act removes barriers to entry in the local exchange
telephone market by preempting state and local laws that restrict
competition and by requiring LECs to provide nondiscriminatory access
and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers, and long distance companies. In
addition, the 1996 Act provides relief from the earnings restrictions
and price controls that have governed the local telephone business for
many years. The 1996 Act will also, once certain thresholds are met,
allow incumbent RBOCs to enter the long distance market within their own
local service regions.
<PAGE> 13
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. 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. Recent decisions by the FCC, including a proceeding resulting
from the Supreme Court decision described above, have reaffirmed the
incumbent LECs' obligation to unbundle most elements of their networks,
and have expanded these obligations in some respects. Because we are
building our own networks rather than relying on the incumbent LECs'
facilities, these rulings may benefit us less than they do some of our
competitors. However, we do require interconnection with the incumbent
LECs for a variety of purposes, and regulatory actions have generally
facilitated this interconnection.
We have entered into interconnection agreements with
Bell Atlantic, Pacific Bell and other incumbent LECs serving our target
market areas. Some of these agreements have expired or will expire
shortly. As a general matter, our agreements provide for service to
continue without interruption while a new agreement is negotiated. Most
of the agreements also provide for amendments in the event of changes in
the law, such as the regulatory and court decisions described above. 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.
<PAGE> 14
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,
the only RBOC that has received FCC authorization to provide in-region
long distance service is Bell Atlantic for New York, although other
applications may be approved in the future. 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 open
video systems. Although OVS operators are not required to secure local
franchises by federal law, local franchising authorities may legally
require such a franchise. To date, however, none have done so. OVS
operators must make available a portion of their channel capacity for
use by unaffiliated program distributors and must satisfy 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 certain suburbs of Boston, in the City of New
York, Washington, D.C. and in a limited number of smaller communities. We are
also negotiating similar agreements in Northern New Jersey, Philadelphia and
surrounding communities, and communities surrounding San Francisco. Starpower
is negotiating similar OVS agreements and local franchises in communities
surrounding Washington D.C.
Regulation of Voice Services
Our voice business is subject to regulation by the FCC at the
federal level for interstate telephone services (i.e., those that
originate in one state and terminate in a different state). State
regulatory commissions have jurisdiction over intrastate communications
(i.e., those that originate and terminate in the same state).
State Regulation of Intrastate Local and Long Distance
Telephone Services. Our intrastate telephone services are regulated by
the public service commissions or comparable agencies of the various
states in which we offer these services. Our subsidiaries or affiliates
have received authority to offer intrastate telephone services,
including local exchange service, in substantially all of the states in
our target market areas, and have applications for such authorization
pending in several additional states. We also have authority to provide
in-state long distance services in all states except Alaska and Hawaii.
To date, none of our applications for state authorizations has been
rejected.
FCC Regulation of Interstate and International Telephone
Services. We 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.
<PAGE> 15
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 December 1999, our subsidiaries and affiliates have been certified by
the FCC to operate OVS networks in New York City, Boston, Washington, D.C.,
Philadelphia, Los Angeles, Phoenix, Portland, Seattle, and San
Francisco, and communities surrounding each of these cities, Cook
County, Illinois 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, Philadelphia, Los Angeles, Portland,
Seattle, Cook County and Phoenix 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 were 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. In July of 1999 the OVS Agreement
with Boston was terminated by mutual consent and a franchise agreement
was substituted therefore. We entered into an agreement with the City of
New York on December 29, 1997 and have initiated OVS service in the
Borough of Manhattan. RCN also provides video distribution service in
Manhattan and a portion of the Bronx using microwave facilities and
antennas; located at multiple dwelling units. On July 10, 1998, we
supplemented our agreement with the City of New York to include all five
boroughs. On October 26, 1998, Starpower entered into an agreement with
the District of Columbia and initiated OVS service in the District in
the last quarter of 1998. Starpower has entered into similar agreements
or is in the process of negotiating agreements with numerous suburban
communities near Washington, D.C., to offer either OVS services or
franchised cable television services.
<PAGE> 16
In areas where we offer video programming services as an OVS
operator, we are required to make any "open capacity" on the system
available to unaffiliated Video Program Providers ("VPPs"). The
commissions rules permit us to retain up to one-third of the system
capacity for our own (or affiliate's) use. Under the OVS regulations,
during the initial open enrollment period we must offer at least two-
thirds of our capacity to unaffiliated parties, if demand for such
capacity exists during the open enrollment period. In certain areas, at
the request of local officials, we are in discussions to explore the
feasibility of obtaining a cable franchise instead of an OVS agreement.
We will consider providing RCN video service under franchise agreements
rather than OVS certification, if franchise agreements are preferred by
the local authorities and can be obtained on acceptable terms and
conditions. We will consider the relative benefits of OVS certification
versus local franchise agreements, including the possible imposition of
build out requirements, before making any decisions.
In a decision released in January of 1999, the U.S. Court
of Appeals for the Fifth Circuit approved some portions of the FCC's OVS
rules but struck 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. To date,
however, no local franchising authority has insisted on franchising OVS
systems, although some have considered doing so. However, in many
instances RCN, at the insistence of local authorities, has been
negotiating franchise agreements in lieu of OVS 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. Time Warner
Cable Co., which then operated franchised cable systems in many suburban
Boston communities included within our OVS certification, also
petitioned the FCC for an order compelling us to release certain OVS
system data so that it allegedly could analyze the possibility of being
a VPP on RCN's OVS. Time Warner was not then competing with any RCN-provided
OVS service and restricted its request to communities where it is not the
franchised cable operator. RCN denied the request on the ground that the Time
Warner should be considered ineligible under the FCC's rules. Time Warner filed
an OVS complaint against RCN and also sought FCC action to impose fines or
cancel our OVS authority. The Cable Services Bureau ruled that Time Warner was
an eligible user in areas where no service overlap existed or was imminent,
partially granted the data request, and partially denied it, but found too
little evidence to justify further exploration of our good faith in implementing
OVS authority. We sought partial reconsideration of the Bureau's order. Time
Warner filed a similar complaint against us in New York City where we compete
with it for video distribution business in Manhattan. 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 sought partial reconsideration of both decisions.
<PAGE> 17
The FCC issued a consolidated opinion in which it rejected the analysis
underlying the Cable Services Bureau's conclusions with respect to Time Warner's
eligibility to use the OVS system and in lieu thereof reinterpreted the relevant
rule by substituting a newly-formulated test of eligibility based on whether the
in-region cable competitor is franchised within the "technically integrated
service area" of the OVS certificate holder. The Commission also confirmed the
Cable Services Bureau's rulings on the scope of the OVS data which must
be disclosed to Time Warner, and directed RCN to file supplemental
data with the Cable Services Bureau concerning the Commission's new
interpretation of the relevant rule. The Commission indicated that upon
the submission of such data the Cable Services Bureau was to determine
whether Time Warner was eligible for the OVS data it had been seeking
from RCN.
RCN is seeking review of the FCC's decision in the U.S. Court of
Appeals for the D.C. Circuit, alleging that the Commission's
interpretation of the rule governing the eligibility of an in-region
competitor to be a VPP was contrary to law. Time Warner sought
reconsideration of the decision at the FCC. Time Warner also sought
intervention in the Court of Appeals and the FCC has asked the Court to
hold the case in abeyance pending the resolution of Time Warner's
request for reconsideration. The Court granted both motions. RCN filed
the supplemental service area data with the Cable Services Bureau as
required by the Commission's decision for the Boston and New York
markets but sought a stay of the obligation to make such filings in
other markets where RCN has been certificated and has already filed
certain so-called "notices of intent." The Cable Services Bureau denied
RCN's request for stay, and RCN thereupon filed the supplemental data
for all relevant OVS markets. RCN has sought confidential treatment from
the Commission of those portions of the supplemental data which were not
publicly available already, contending that it would be seriously
damaged competitively if it were required to provide such data to its
in-region competitor. RCN contended also that the provision of such data
to Time Warner (or any in-region cable competitor in other markets)
prior to the Court's consideration of RCN's appeal would deny RCN its
due process rights to have the necessity for such disclosure of
competitively sensitive data adjudicated by the Court of Appeals. The
Commission has not yet ruled on these requests for confidential
treatment.
On February 10, 2000 Time Warner renewed its request for OVS data
from RCN for certain suburban communities in the Boston metropolitan
area, alleging that it had sold its cable properties within RCN's
certified OVS area to MediaOne and hence was no longer an in-region
cable competitor. RCN declined to provide such data, noting that Time
Warner had certain affiliations with MediaOne through the proposed
acquisition of MediaOne by AT&T and that Time Warner had not indicated
whether it had any residual contractual rights, or data sharing
obligations with MediaOne or AT&T. On March 14, 2000, Time Warner filed
an "Emergency Petition to Enforce Commission Order and Impose
Forfeiture" renewing earlier allegations that RCN was not adhering to
certain of the OVS rules and was not operating a truly "open" OVS
system. Time Warner sought an order compelling RCN to provide the OVS
data to Time Warner, and for the imposition of forfeitures on RCN for
allegedly failing to comply with Commission orders. RCN is opposing the
Emergency Petition and the Commission has not yet acted on it.
<PAGE> 18
Two additional cable company OVS access complaints have been filed
against Starpower, seeking data and a determination of eligibility for
carriage on the metropolitan Washington, D.C. 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., and Media General Cable of Fredericksburg, Inc.
Both claimed to be seeking system data for areas in which they do not provide
franchised service. Starpower declined to provide system data to either
complaintant. Media General has also sought to initiate discovery against
Starpower. The Cable Services Bureau, citing its prior decision in Boston and
New York, granted the Media General request. Starpower sought reconsideration
which is still pending. The complaining Media General companies have since been
acquired by Cox Cable, Inc.
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 or
the Court of Appeals will resolve the pending OVS complaints in our
favor. If the FCC were to grant any such complaints and as a result we
were obliged to share system data with our local competitors, we would
be forced to reassess the desirability of continuing to operate in
certain markets as an OVS operator as compared with seeking traditional
cable franchises. We do not believe that abandoning our OVS
certifications under such circumstances would materially adversely
affect our video distribution activities.
As in the case of traditional franchised cable systems,
OVS operators must in virtually all locations have access to public
rights-of-way for their distribution plant. In a number of jurisdictions
local authorities have attempted to impose rights-of-way fees on us
which we believe are in violation of federal law. A number of FCC and
judicial decisions have addressed the issues posed by the imposition of
rights-of-way fees on CLECs and on video distributors. To date the
state of the law is uncertain and may remain so for some time. The
obligation to pay local rights-of-way fees which are excessive or
discriminatory could have adverse effects on our business activities.
See "Legal proceedings" below. The incumbent cable operator in Boston,
MA, Cablevision of Boston, Inc., filed suit in 1999 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 denied the preliminary injunction. The
First Circuit Court of Appeals affirmed and thereafter Cablevision
withdrew the suit.
<PAGE> 19
Access issues have also arisen in a proceeding before
the Massachusetts Department of Telecommunications and Energy (the
"MDTE"). In 1997, the MDTE opened an investigation into Boston Edison
Company's compliance with a MDTE order in 1993 that permitted Boston
Edison to invest up to $45 million in its unregulated subsidiary Boston
Edison Technology Group for three limited purposes. RCN-BECOCOM
intervened in the current proceeding, as did Cablevision Systems
Corporation and the New England Cable Television Association, Inc.,
along with the Massachusetts Attorney General's office. Hearings began in
December 1998 and are still proceeding. The intervenors, in particular
Cablevision, have advocated that if the MDTE finds that Boston Edison's
investment in RCN-BECOCOMM violated the 1993 Order then Boston Edison should
be forced to divest itself of its interest in RCN-BECOCOM, RCN-BECOCOM
should be subject to the same terms and conditions as other cable television
providers who seek to attach their facilities to Boston Edison facilities, and
installed RCN-BECOCOM cable and fiber-optic facilities should be relocated.
Boston Edison is vigorously defending the propriety of its compliance with the
MDTE's 1993 Order, and its investment in RCN-BECOCOM. RCN cannot assure you
that the MDTE will not determine that Boston Edison violated the MDTE's 1993
Order nor can RCN assure you as to the nature of any remedy that the MDTE may
determine to be appropriate including those proposed remedies which are
equitable in nature. RCN is participating in the proceeding and plans to take
such action as it deems appropriate to protect its rights.
Wireless Video Services. Our 18 GHz wireless video services
in New York City are distributed using microwave facilities. We are
currently using one microwave path on the basis of a conditional license. We
anticipate our pending application for this path will be granted soon by the
FCC. However, our failure to obtain this license might 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.
<PAGE> 20
Hybrid Fiber/Coaxial Cable. Our hybrid fiber/coaxial cable
systems are subject to regulation under the 1992 Act. The 1992 Act
regulates rates for cable services in communities that are not subject
to "effective competition," certain programming requirements, and
broadcast signal carriage requirements that allow local commercial
television broadcast stations to require a cable system to carry the
station. Local commercial television broadcast stations may elect once
every three years to require a cable system to carry the station ("must-
carry"), subject to certain exceptions, or to withhold consent and
negotiate the terms of carriage ("retransmission consent"). A cable
system generally is required to devote up to one-third of its activated
channel capacity for the carriage of local commercial television
stations whether under the mandatory carriage or retransmission consent
requirements of the 1992 Act. Local non-commercial television stations
are also given mandatory carriage rights. The FCC recently issued rules
establishing standards for digital television ("DTV"). The FCC's rules
require television stations to simulcast their existing television
signals ("NTSC") and DTV signals for a period of years. During this
simulcast period, it is unclear whether must-carry rules will apply to
DTV signals. The FCC has initiated a rule making proceeding seeking
comment on the carriage of broadcast DTV signals by cable and OVS
operators during the transitional period to full digital broadcasting.
The FCC's proceeding addresses the need for the digital systems to be
compatible, seeks comment on possible changes to the mandatory carriage
rules, and explores the impact carriage of DTV signals may have on other
FCC rules. The cable industry has generally opposed many of the FCC's
proposals, on the grounds that they constitute excessively burdensome
obligations on the industry. The Communications Act permits franchising
authorities to require cable operators to set aside certain channels for
public, educational and governmental access programming. Cable systems
with 36 or more channels must designate a portion of their channel
capacity for commercial leased access by third parties to provide
programming that may compete with services offered by the cable
operator.
Because a cable communications system uses local streets and
rights-of-way, such cable systems are generally subject to state and
local regulation, typically imposed through the franchising process. The
terms and conditions of state or local government franchises vary
materially from jurisdiction to jurisdiction. Generally, they contain
provisions governing cable service rates, franchise fees, franchise
term, system construction and maintenance obligations, customer service
standards, franchise renewal, sale or transfer of the franchise,
territory of the franchisee and use and occupancy of public streets and
types of cable services provided. Local franchising authorities may
award one or more franchises within their jurisdictions and prohibit
non-grandfathered cable systems from operating without a franchise. The
Communications Act also provides that in granting or renewing
franchises, local authorities may establish requirements for cable-
related facilities and equipment, but not for video programming or
information services other than in broad categories. The Communications
Act limits franchise fees to 5% of revenues derived from cable
operations and permits the cable operator to seek modification of if
franchise requirements through the franchise authority or by judicial
action changed circumstances
warrant.
<PAGE> 21
Our ability to provide franchised cable television
services depends largely on our ability to obtain and renew our
franchise agreements from local government authorities on generally
acceptable terms. We currently have 91 franchise agreements relating to
the hybrid fiber/coaxial cable systems in New York (outside New York
City), New Jersey and Pennsylvania. These franchises typically contain
many conditions, such as time limitations on commencement and completion
of construction, conditions of service, including the number of
channels, the provision of free service to schools and certain other
public institutions, and the maintenance of insurance and indemnity
bonds. These franchises provide for the payment of fees to the issuing
authorities and generally range from 3% to 5% of revenues. The duration
of these outstanding franchises presently varies up to the year 2011. To
date, all of our cable franchises have been renewed or extended,
generally at or before their stated expirations and on acceptable terms.
Approximately 39 of our hybrid fiber/coaxial cable systems' franchises
are due for renewal within the next three years. We cannot assure you
that we will be able to renew our franchises on acceptable terms. No one
franchise accounts for more than 7% of our total revenue. Our five
largest franchises account for approximately 27% of our total revenue.
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,
had been subject 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 had
been subject to FCC rate regulation. As required by the 1996 Act,
however, all cable programming services were deregulated on March 31,
1999. There has been discussion in Congress about possible legislation
to reimpose cable rate regulation. 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.
<PAGE> 22
The FCC is required to regulate the rates, terms and
conditions imposed by utilities, ILEC's and CLEC's for cable systems'
and telecommunications providers 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 modified the prior pole attachment provisions of the
Communications Act. It permits providers of telecommunications services
to rely upon the protections of the current law and requires that
utilities provide cable systems and telecommunications carriers with
nondiscriminatory access to any pole, conduit or right-of-way, owned or
controlled by the utility if the facility is carrying wires already. The
FCC adopted new regulations to govern the charges for pole attachments
used by companies providing telecommunications services, including cable
operators. These 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 in equal
annual increments over a period of five years beginning on the effective
date of the new FCC regulations. The ultimate outcome of these
rulemakings and the ultimate impact of any revised FCC rate formula or
of any new pole attachment rate regulations on us or our businesses
cannot be determined at this time.
The 1992 Act, the 1996 Act and FCC regulations preclude
any cable operator or satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors. In certain circumstances, these programmers are required
to sell their programming to other multichannel video distributors. The
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 FCC's Cable Service Bureau,
however, has ruled that, except in limited circumstances, these
statutory and regulatory limitations do not apply to programming which
is distributed other than by satellite. We are experiencing difficulty
in securing access to certain local sports programming in the New York
City market, which we consider important to successful competition in
that market. RCN brought a formal program access complaint against
Cablevision Systems, Inc. over its refusal to provide such programming
to RCN. The Cable Services Bureau sustained its traditional view,
however, that programming distributed by fiber optic cable was not
covered by the program access provisions of the Communications Act, and
denied RCN's complaint. RCN believes that the Cable Services Bureau is
misreading the law and has sought review by the full Commission of this
ruling. 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.
<PAGE> 23
In addition to the FCC regulations previously discussed,
there are other FCC regulations covering areas such as:
o equal employment opportunity;
o syndicated program exclusivity;
o network program non-duplication;
o registration of cable systems;
o maintenance of various records and public inspection
files;
o microwave frequency usage;
o lockbox availability;
o sponsorship identification;
o antenna structure notification;
o tower marking and lighting;
o carriage of local sports broadcast programming;
o application of rules governing political broadcasts;
o limitations on advertising contained in non-broadcast
children's programming;
o consumer protection and customer service;
o ownership and access to cable home wiring and home
wiring in multiple dwelling units;
o indecent programming;
o programmer access to cable systems;
o programming agreements;
o technical standards; and
o consumer electronics equipment compatibility and
closed captioning.
The FCC has the authority to enforce its regulations
through imposing substantial fines, issuing cease and desist orders
and/or imposing other administrative sanctions, such as revoking FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations. We have had 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.
However, because RCN status in the city of Boston has changed from OVS
operator to franchisee, we will be able to use the Massachusetts
Mandatory Access law if it is necessary to do so to gain access to these
MDUs.
<PAGE> 24
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. Numerous jurisdictions
have imposed so-called "open access" requirements for the grant or
transfer of a cable franchise and many more are considering doing so.
RCN believes its business interests may be served by such open access
but is opposed to further regulations or government intervention in
regard to such matters.
Responding to pressure principally from direct broadcast
satellite ("DBS") companies, Congress passed the Satellite Home Viewer
Improvement Act in late fall of 1999. The principal purpose of this
legislation, known as "SHVIA" was to amend the copyright law to permit
the DBS companies to carry more local broadcast programming in their
programming packages (so-called "local-into-local"). At the same time the
legislation directed the FCC to develop new regulations concerning
retransmission consent and mandatory access. The retransmission consent
provision of SHVIA covers all multiple video program distributors as
well as DBS providers. The Commission has adopted its retransmission
consent rules as required in SHVIA. These new regulations establish an
obligation on the part of broadcasters to bargain in good faith and
define good faith by reference to certain prohibited bargaining tactics
or positions. The regulations also bar exclusive retransmission
agreements but do permit broadcasters to enter into varying terms with
MVPDs carrying their signal based on normal competitive criteria. To the
extent RCN will need to negotiate such retransmission consent agreements
in the future these regulations should help to strength our negotiating
position.
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 additional costs on
providers of Internet access service and other data services for the use
of local exchange telephone network facilities for access to their
customers, the FCC or Congress may consider similar proposals in the
future. The adoption of new laws or the adaptation of existing laws to
the Internet may decrease the growth in the use of the Internet, which
could in turn have a material adverse effect on our Internet business.
<PAGE> 25
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 ILECs around the country have been
contesting whether the obligation to pay reciprocal compensation to
CLECs should apply to local telephone calls from ILECs customers to
Internet service providers served by CLECs. The ILECs claim that this
traffic is interstate in nature and therefore should be exempt from
compensation arrangements applicable to local, intrastate calls. CLECs
have contended that the interconnection agreements provide no exception
for local calls to Internet service providers and reciprocal
compensation is therefore applicable.
On February 26, 1999, the FCC released a Declaratory Ruling
determining that ISP traffic is interstate for jurisdictional purposes,
but that its current rules neither require nor prohibit the payment of
reciprocal compensation for such calls. In the absence of a federal
rule, the FCC determined that state commissions have authority to
interpret and enforce the reciprocal compensation provisions of existing
interconnection agreements, and to determine the appropriate treatment
of ISP traffic in arbitrating new agreements. The FCC also requested
comment on alternative federal rules to govern compensation for such
calls in the future. The FCC order has been appealed by several parties.
Oral argument was heard on November 22, 1999.
In light of the FCC's order, state commissions, which previously
addressed this issue and required reciprocal compensation to be paid for
ISP traffic, may reconsider and modify their prior rulings. Several
incumbent LECs, including Bell Atlantic, are seeking to overturn prior
orders that they claim are inconsistent with the FCC ruling. Of the 26
state commissions that have considered the issue since the FCC's
February 26, 1999 order, 22 have upheld the requirement to pay
reciprocal compensation for ISP-bound traffic. Only Massachusetts, New
Jersey, Louisiana and South Carolina are not requiring reciprocal
compensation for this traffic, at least pending negotiations or a
further FCC decision. The New York Public Service Commission ("NYPSC")
determined that in certain circumstances, Bell Atlantic can pay a lower
reciprocal compensation rate for calls terminated by a competitive LEC
in excess of a ratio of three terminating minutes to each originating
minute.
We provide dial-up access lines to our affiliated ISPs as well as
other ISP customers, so adverse decisions in state proceedings could
have a material impact on our revenues and earnings in those states.
Starpower currently has pending complaints against Bell Atlantic in the
District of Columbia and Virginia, and against GTE in Virginia, based on
these companies' refusal to pay reciprocal compensation.
<PAGE> 26
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, 1999, we had approximately 3,450 full-time
employees including employees of the joint ventures, general office and
administrative personnel and approximately 168 part-time employees. The Company
has a collective bargaining agreement that covers approximately 110 employees,
which is valid through January 14, 2001. We consider relations with our
employees to be good.
<PAGE> 27
ITEM 2. PROPERTIES
Overview of Advanced Fiber Optic Networks
RCN's advanced fiber optic networks are designed to support voice, video and
data services via a fiber-rich network architecture. The Company's multi-
service network is presently operating in Boston, MA; New York City; Lehigh
Valley, PA; Washington, D.C.; San Francisco, CA; Queens, NY; and Philadelphia,
PA. The advanced fiber optic network consists of fiber optic transport
facilities; local and long distance digital telephony switches; video head-ends;
voice, video and data transmission and distribution equipment; Internet routing
and WAN equipment and the associated network wiring and network termination
equipment. The Company's telephone switching network utilizes the Lucent 5ESS-
2000 switching platform as the local switching element and the network is
designed to provide highly reliable life-line telephony service. In each of the
seven existing markets, a Lucent 5ESS-2000 switch is installed and fully
operational. The Company is also entering the Chicago market through its
agreement to acquire 21st Century Telecom Group, Inc., a facility-based bundled
service provider. The acquisition is expected to close in the second quarter
of 2000.
The networks' common backbone signal transport medium for both digital signals
(voice, video and data) and analog signals (video) is exclusively fiber optic
cable, either RCN-owned, or leased from other providers such as MCI WorldCom,
Qwest or Level 3. The digital fiber optic backbone transport network
utilizes a Synchronous Optical Network ("SONET") self-healing ring architecture
to provide high speed, redundant connections for the delivery of RCN's voice,
video and data services. Facility connections from the backbone network to
individual buildings or residential and commercial service areas are typically
provided via RCN-owned fiber optic facilities. RCN's advanced fiber optic
network contains over 2,068 route miles of fiber cable (backbone and
distribution fiber) and 3,646 total network route miles (fiber and distribution
coax).
Presently, RCN owns and operates seven local telephony switches, two long
distance switches, and seven video head-ends within the seven existing markets.
As of December 31, 1999, RCN has passed 713,823 homes with its advanced fiber
optic network and has connected 968 buildings directly to its fiber optic
facilities in metropolitan areas.
We believe that all of our properties are in good operating condition.
The majority of RCN's network infrastructure is built using fiber optic cable as
the predominant transport medium. Fiber optic systems are suitable for
transmission of digitized voice, video and data information, or a combination of
these types of signals. The main benefits resulting from the deployment of
fiber optic cable in the backbone and local distribution portions of the
network, in place of traditional coaxial cable or copper wire, are greater
network capacity, increased functionality, smaller size service areas and
decreased requirements for periodic amplification of the signal. These factors
contribute to lower installation and maintenance costs and increases the variety
and quality of the service offerings. The inherent bandwidth limitations of
twisted pair copper wire historically used in telephone networks present a
substantial obstacle to the use of existing telephone networks to provide video
programming services. Although coaxial cable provides substantially greater
bandwidth than twisted pair copper wire, fiber optic cable provides
substantially greater bandwidth than coaxial cable. Consequently, newly
constructed fiber networks, such as RCN's, provide a superior platform for
delivering high speed, high capacity voice, video and data services, when
compared to traditional systems based largely on copper wire or coaxial cable.
<PAGE> 28
The fiber optic cable utilized by RCN's network has the increased capacity
necessary for the transport and delivery of today's high-bandwidth data and
video transmission requirements. The fiber optic cable typically used contains
between 12 and 288 fiber strands; however, larger sizes up to 864 strands have
been used in certain applications. Each individual strand of fiber is capable
of providing a large number of telecommunications channels or "circuits".
Depending on the transmission electronics used, a single pair of glass fibers on
RCN's network currently can transmit tens of thousands of simultaneous voice
conversations, whereas, a typical pair of copper wires can carry a maximum of 24
simultaneous conversations using standard TDM multiplexing systems. Although
the LECs commonly use copper wire in their networks, they are currently
deploying fiber optic cable to upgrade portions of their copper based network,
particularly in areas served by RCN. RCN expects that continued developments
and enhancements in communications equipment will increase the capacity of each
optical fiber, thereby providing even more capacity at relatively low
incremental cost.
As the Company's network is further developed, it will be dependent on certain
strategic alliances and other arrangements in order to provide the full range of
its telecommunication service offerings. These relationships include RCN's
arrangements with MCI WorldCom to lease portions of MCI WorldCom's fiber optic
network in New York City and, to a lesser extent, RCN's joint venture with
Boston Edison in Boston, the Starpower joint venture in Washington and RCN's
arrangements to lease unbundled local loop and T-1 facilities from the serving
LEC. See "Strategic Relationships and Facilities Agreement" above and "Voice
Services Advanced Fiber Optic Networks" immediately following. Any disruption
of these arrangements and relationships could have a material adverse effect on
the Company.
Voice Services
Advanced Fiber Optic Networks. The Company's advanced fiber optic networks in
all existing markets utilize a voice network that supports both switched and
non-switched (private line) services. In metropolitan areas, individual
buildings are connected to the network backbone via fiber extensions that are
generally terminated in SONET equipment, which provides redundant and fail-safe
interconnection between the building and the RCN central switch location. In
situations where fiber extensions are not yet available, interim facility
connections can be provided by leasing special access facilities through an
arrangement with MCI WorldCom or the incumbent LEC. In this regard, RCN has in
place agreements which allow it to lease certain facilities owned by the
incumbent LECs (unbundled local loops and T-1 facilities) to provide voice
services. This enables RCN to provide voice services to subscribers who are not
directly connected to RCN's advanced fiber optic network. As RCN's network
expands to reach more areas within a target market, subscribers served by these
temporary connections will be migrated to RCN's advanced fiber optic network.
Within large MDU buildings in metropolitan areas, a voice service hub is
established by installing Integrated Digital Loop Carrier ("IDLC") equipment,
which acts as the point of interface between the SONET backbone facility and the
intra-building wiring. Each IDLC is installed with a standby power system and
is capable of serving between 672 and 2048 lines, depending on the specific type
of equipment utilized. The IDLC is capable of supporting a wide range of both
non-switched services (DS-1, digital data) and switched voice services and
features including ISDN, Centrex, Custom Calling and CLASS features. At the
time of initial wiring, RCN generally installs wiring in excess of its initial
requirements, in order to meet future subscriber demand.
<PAGE> 29
In residential overbuild situations, RCN provides a fiber-rich local
distribution architecture for the delivery of voice services to the residential
or commercial subscriber. Fiber optic backbone facilities using SONET transport
electronics provide interconnection from the telephony distribution electronics
to the RCN 5ESS-2000 local telephony switch. Fiber optic facilities are
utilized to transport the telephony signals to a residential service area node,
a point typically within 900 feet from the furthest subscriber, typically
serving 150 homes. The distribution facilities between the node and the
subscriber are either coaxial cable or fiber optic cable.
Video Programming
Advanced Fiber Optic Networks. There are presently seven video head-end
locations within RCN's advanced fiber optic networks (i.e., New York City;
Boston, MA; Lehigh Valley, PA; Washington, D.C.; Philadelphia, PA; Queens, NY;
and San Francisco, CA). The video head-ends consist of optical transmitters,
optical receivers, satellite receivers, signal processors, modulators, encoding
equipment, digital video transport equipment and network status monitoring and
automated tape distribution equipment. From the head-end, the video signals are
transported to secondary hub sites in either digital or analog signal format.
Once the signal is received at the secondary hub site, the signal is
conditioned, processed and interconnected to the local fiber optic transport
facilities for distribution to the video subscribers. The video signals are
distributed to individual fiber nodes or receivers via the same fiber optic
cable used to deliver the voice and data service. The fiber cable terminates in
a fiber optic receiver within an individual building or video service area.
From the fiber node, coaxial cable and related distribution equipment is used to
distribute the video signals to the customer premises. The bandwidth of the
video distribution is a minimum of 860 MHz, which is capable of supporting
between 90 and 110 analog video channels and a substantial number of digital
video channels. This distribution plant is specifically designed to be
predominantly fiber-based, which increases the reliability and improves the
quality of the services delivered as compared to traditional cable television
distribution architectures.
Wireless Video. RCN also owns and operates a "wireless video" television system
(which was formerly operated as Liberty Cable Television of New York and
acquired by RCN in 1996) using point-to-point 18GHz microwave technology. RCN
is utilizing this system in New York City as an alternate platform for
delivering television programming to buildings that are not yet connected to the
advanced fiber optic network. RCN expects that the majority of the buildings
currently served by the wireless service will ultimately be connected to the
network to the extent that connection is feasible. As buildings are connected
to the RCN network, RCN will reuse the microwave equipment to provide service to
other customers in off-network premises.
Hybrid Fiber/Coaxial Cable Systems. RCN owns and operates Hybrid Fiber Coaxial
cable television networks in Pennsylvania, New Jersey and New York State
(outside of New York City). These networks offer expanded bandwidth and a
platform for two-way services, and have an aggregate of 696 route miles of fiber
optic cable. The network in Pennsylvania includes a separate high capacity
fiber optic ring with a minimum 84 fibers (covering approximately 100 route
miles), which is designed and constructed to support a competitive telephony
network. The Pennsylvania system consists of 1,865 miles of coaxial cable and
340 route miles of fiber cable. The Pennsylvania system serves 150 nodes from
one headend, and operates at 550 - 750 MHz with approximately 80 active
channels. The New York system includes 211 route miles of fiber optic cable
serving approximately 128 nodes from one head-end. Approximately 70% of the New
York system is two-way active 750 MHz plant and is equipped to support both
telephony and cable modem services. The New Jersey system includes 145 route
miles of fiber optic cable and the bandwidth of the plant is 400/450 MHz. The
New Jersey system is planned to be upgraded to 750 MHz and will provide an
expanded channel line-up and digital video service by the end of year 2000.
All of the Company's Hybrid Fiber Coax cable systems are 100% one-way
addressable.
<PAGE> 30
Data Services. RCN's Internet access and data transmission services are
currently provided over the advanced fiber optic network via dial-up modems
facilitated through the RCN voice network in on-net subscriber applications. In
off-net situations, subscribers use conventional dial-up modems through the
incumbent LEC network to access RCN's Internet transmission network. RCN also
offers Internet and data transmission services via cable modems over the
advanced fiber network. Cable modems, which utilize the broadband coaxial
plant, offer higher speed access for data transmission than the speeds achieved
by conventional telephone dial-up technology.
RCN is presently developing a long haul, high-bandwidth fiber optic transport
facility that will traverse from Boston to Washington D.C. This facility will
utilize fiber that RCN recently acquired in an arrangement with Qwest and be
used to provide high-speed connectivity between each of RCN's points of presence
along the Northeast Corridor. It will initially provide long distance telephone
and Internet connectivity along this corridor for RCN's customers.
RCN provides high quality Internet access services to businesses by utilizing
high-speed access via ISDN, frame relay, fractional T-1, T-1 and T-3 circuits.
RCN's network infrastructure currently supports modems with dial-access speeds
of up to 56 KBPS. RCN provides new dial-access subscribers with an easy-to-
install proprietary access software package, which incorporates a telephone
dialer, an e-mail platform, a Web browser (Microsoft Corp.'s Microsoft Internet
Explorer) and SurfWatchTM software for parental control over Internet content
access. This software package permits simplified access to the Internet through
a "point and click" graphical user interface. After installation, the
subscriber has a direct connection to the Internet using Point-to-Point Protocol
and access to all of the Internet's resources, including e-mail, the World Wide
Web, Usenet News service and Internet Relay Chat. Access software automatically
displays the RCN World Wide Web site each time a subscriber logs on, providing
RCN with the opportunity to communicate with its subscribers at the start of
each session. RCN maintains "24 x 7" subscriber and technical support 365 days a
year.
RCN services currently rely on the widespread commercial use of Transmission
Control Protocol/Internet Protocol ("TCP/IP"). Alternative open and proprietary
protocol standards that compete with TCP/IP, including proprietary protocols
developed by International Business Machines Corporation ("IBM") and Novell,
Inc. have been or are being developed. The adoption of such new industry
standards could render the Company's existing services obsolete and unmarketable
or require reduction in the fees charged therefore.
RCN relies on a combination of copyright, trademark and trade secret laws and
contractual restrictions to establish and protect its proprietary technology.
However, there can be no assurance that RCN's technology will not be
misappropriated or that equivalent or superior technologies will not be
developed. In addition, there can be no assurance that third parties will not
assert that RCN's services or its users' content infringe their proprietary
rights. The Company has obtained authorization, typically in the form of a
license, to distribute third-party software incorporated in the RCN access
software product for Windows 3.1, Windows 95, Windows NT and Macintosh
platforms. The Company plans to maintain or negotiate renewals of existing
software licenses and authorizations. The Company may desire or need to license
other applications in the future.
We own various corporate office facilities in Dallas, PA and technical sites
used for storage of hub and headend facilities.
We also lease corporate office facilities in Princeton, NJ and in all of our
major markets under various noncancelable leases with terms ranging from 1
to 15 years.
We believe that all of our owned and leased facilities are in good condition
<PAGE> 31
ITEM 3. LEGAL PROCEEDINGS
RCN has filed suit in the U.S. Court of Appeals for the
D.C. Circuit seeking the Court's review of a decision of the FCC which
requires RCN, where it operates as an OVS provider, to share certain OVS
system and corporate data with in-region cable competitors if such
competitors are not franchised within RCN's technically integrated
service area. RCN believes the FCC's decision, as well as two related
decisions of the Cable Services Bureau, are contrary to law, arbitrary
and capricious. The FCC has asked the Court to hold the case in abeyance
pending its resolution of a petition for reconsideration filed by Time
Warner. RCN has not opposed this request and the Court has granted the
Motion.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the results of operations or financial condition of
the Company.
<PAGE> 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Registrant
during the fourth quarter of the Registrant's 1999 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to Section 14(A) of the Securities Exchange Act of 1934 (the "1934 Act").
Executive Officers of the Registrant
David C. McCourt, 43 has been President and Chief Executive Officer of
the Company as well as a Director since September 1997. Mr. McCourt has
served as a Director and Chairman and Chief Executive Officer of Cable
Michigan from September, 1997 to November 1998. In addition, he is a
Director and Chairman of Commonwealth Telephone Enterprises, Inc.
("CTE"), positions he has held since October 1993. Mr. McCourt was
Chief Executive Officer of CTE from October 1993 to November 1998. Mr.
McCourt has also been President and Chief Executive Officer, as well as
a Director of Level 3 Telecom Holdings, Inc. formerly Kiewit Telecom
Holdings, Inc. He was also Chairman and Chief Executive Officer as well
as a Director of Mercom, S.A. de C.V. from October 1993 to November
1998. He was a Director of MFS Communications Company, Inc. from July,
1990 to December, 1996, President and a Director of Metropolitan Fiber
Systems/McCourt, Inc. a subsidiary of MFS Telecom, Inc., since 1988,
and has been a Director of Cable Satellite Public Affairs Network
("C-SPAN") since June, 1995. He was a Director of WorldCom, Inc. from
December 1996 to March 1998 and has been a Director of Level 3 since
March 1998.
Michael A. Adams, 42 has been President and Chief Operating Officer of
the Company since October, 1999. Previously, he was President of the
Technology and Network Development Group since 1997. Prior to that he
served as Vice President of Technology with C-TEC Corporation from
November, 1996 to September, 1997. Prior to that he served as Executive
Vice President of Commonwealth Communications, Inc. from August, 1996
to November, 1996.
Timothy J. Stoklosa, 39 has been Executive Vice President and Chief
Financial Officer of the Company since January, 2000. Previously, he
was Senior Vice President and Treasurer of the Company, since
September 1997. Prior to that he served as Executive Vice President and
Chief Financial Officer and was a Director of Mercom, Inc. from 1997 to
1998. Mr. Stoklosa was Treasurer of CTE from 1994 to 1997, and has been
a Director of CTE since December 1999.
John J. Jones, 33, has been Executive Vice President, General Counsel
and Corporate Secretary of the Company and CTE since July 1998.
Mr. Jones served as Vice President, General Counsel and Corporate
Secretary of Designer Holdings, Ltd. from January 1996 to December
1997. Prior to that time, Mr. Jones was engaged in the private
practice of law at the law firm of Skadden, Arps, Slate, Meagher &
Flom beginning in September 1991 to August 1995.
<PAGE> 33
Ralph S. Hromisin, CPA, 39, has been Senior Vice President and Chief
Accounting Officer of the Company since August 1998. He was Vice
President and Chief Accounting Officer from September 1997 to August
1998. He was Vice President and Chief Accounting Officer of CTE from
September 1997 to January 1998. He served as Vice President and
Corporate Controller of CTE from August 1994 to September 1997. Mr.
Hromisin was Director of Corporate Accounting for CTE from March 1992
to August 1994.
<PAGE> 34
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The Company's Common Stock is traded on the NASDAQ stock exchange.
There were approximately 2,705 holders of Registrant's Common Stock on
February 29, 1999. The Company maintains a no cash dividend policy. The
Company does not intend to alter this policy in the foreseeable future. Other
information required under Item 5 of Part II is set forth in Note 18 to the
consolidated financial statements included in Part IV Item 14(a)(1) of this Form
10-K.
Item 6. Selected Financial Data
Information required under Item 6 of Part II is set forth in Part IV
Item 14(a)(1) of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information required under Item 7 of Part II is set forth in Part IV
Item 14(a)(1) of this Form 10-K.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Information required under Item 7 of Part II is set forth in Part IV
Item 14(a)(1) of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required
under Item 8 of Part II are set forth in Part IV Item 14(a)(1) of this
Form 10-K.
Item 9. Disagreements on Accounting and Financial Disclosure.
During the two years preceding December 31, 1999, there has been
neither a change of accountants of the Registrant nor any
disagreement on any matter of accounting principles, practices or
financial statement disclosure.
<PAGE> 35
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under Item 10 of Part III with respect to the
Directors of Registrant is set forth in the definitive proxy statement relating
to Registrant's Annual Meeting of Shareholders to be filed by the Registrant
with the Commission pursuant to Section 14(a) of the 1934 Act and is hereby
specifically incorporated herein by reference thereto.
The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I hereof.
Item 11. Executive Compensation
The information required under Item 11 of Part III is set forth in the
definitive Proxy Statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14(a) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under Item 12 of Part III is included in the
definitive Proxy Statement relating to Registrant's Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to Section
14(a) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
Item 13. Certain Relationships and Related Transactions
The information required under Item 13 of Part III is included in the
definitive Proxy Statement relating to Registrant's Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to Section
14 (a) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
<PAGE> 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on form 8-K.
Item 14 (a)(1) Financial Statements:
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Cash Flows for Years Ended December 31, 1999,
1998 and 1997.
Consolidated Balance Sheets - December 31, 1999 and 1998.
Consolidated Statements of Changes in Common Shareholders' Equity for
Years Ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements
Report of Independent Accountants
Item 14 (a)(2) Financial Statement Schedules:
Description
Condensed Financial Information of Registrant for the Year Ended
December 31, 1999. (Schedule I)
Valuation and Qualifying Accounts and Reserves for the Years Ended
December 31, 1999, 1998 and 1997 (Schedule II)
All other financial statement schedules not listed have been omitted
since the required information is included in the consolidated financial
statements or the notes thereto, or are not applicable or required.
Item 14 (a)(3) Exhibits:
Exhibits marked with an asterisk are filed herewith and are listed in the
index to exhibits of this Form 10-K. The remainder of the exhibits have been
filed with the Commission and are incorporated herein by reference.
(2) Plan of acquisition, reorganization, arrangement and Report on Form 8-K
(a) Form of Distribution Agreement among C-TEC Corporation, Cable Michigan,
Inc. and the Registrant is incorporated herein by reference to Exhibit 2.1
to the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(3) Articles of Incorporation and By-laws
(a) Form of Amended and Restated Articles of Incorporation of the Registrant
are incorporated herein by reference to Exhibit 3.1 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(b) Certificate of Amendment to the amended and restated Articles of
Incorporration Certificate of Amendment to the amended and restated of the
Registrant are incorporated herein by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 filed on August 11, 1998.
(Commission File No. 333-61223.)
(c) Certificate of Designations, Preferences and Rights of
Series A 7% Senior Convertible Preferred Stock dated April
7, 1999 (incorporated herein by reference to Exhibit 3.1 to
RCN's Registration Statement on Form S-3 (filed February 1,
1999) (Commission File No. 333-71525) ("1999 Form S-3"))
(d) Certificate of Designations, Preferences, and Rights of Series B 7%
Senior Convertible Preferred Stock (incorporated by reference to
Exhibit A of Exhibit 10.01 to RCN's current report on Form 8-K
(filed October 1,1999) (Commission File No. 0-22825))
(e) Form of Amended and Restated Bylaws of the Registrant are incorporated
herein by reference to Exhibit 3.2 to the Company's Amendment No. 2 to
Form 10/A filed September 5, 1997 (Commission File No. 0-22825.)
<PAGE> 37
(4) Instruments defining the rights of security holders, including indentures
(a) Credit Agreement dated as of June 3, 1999 among RCN, the
borrowers named therein, the lenders party thereto, The
Chase Manhattan Bank, as Agent, Chase Securities Inc., as
Lead Arranger and Book Manager, and Deutsche Bank A.G.,
Merrill Lynch Capital Corp. and Morgan Stanley Senior
Funding, as Documentation Agents (incorporated herein by
reference to Exhibit 10.01 to RCN's Current Report on Form
8-K dated August 17, 1999 (filed August 17, 1999)
(Commission File No. 000-22825)
(b) Form of Indenture between RCN, as Issuer, and The Chase
Manhattan Bank, as Trustee, with respect to the 10 1/8%
Senior Notes due 2010 (incorporated herein by reference to
Exhibit 4.11 to RCN's 1999 Form S-3)
(c) 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 herein by
reference to Exhibit 4.8 to RCN's Registration Statement on
Form S-1 (filed June 1, 1998) (Commission File No.
333-55673) ("1998 Form S-1"))
(d) Form of 11% Senior Discount Note due 2008 (included in
Exhibit 4.3) (incorporated herein by reference to Exhibit
4.9 to RCN's 1998 Form S-1)
(e) 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 herein by reference to Exhibit 4.1 to RCN's
Registration Statement on Form S-4 (filed March 23, 1998)
(Commission File No. 333-48487) ("1998 Form S-4"))
(f) Form of the 9.80% Senior Discount Notes due 2008, Series B
(included in Exhibit 4.5) (incorporated herein by reference
to Exhibit 4.2 to RCN's 1998 Form S-4)
(g) 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
herein by reference to Exhibit 4.1 to RCN's Registration
Statement on Form S-4 (filed November 26, 1997) (Commission
File No. 333-41081) ("1997 Form S-4"))
(h) Form of the 10% Senior Exchange Notes due 2007 (included in
Exhibit 4.7) (incorporated herein by reference to Exhibit
4.2 to RCN's 1997 Form S-4)
(i) 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 herein by reference to Exhibit 4.3 to RCN's
1997 Form S-4)
(j) Form of the 11 1/8% Senior Discount Exchange Notes due 2007
(included in Exhibit 4.9) (incorporated herein by reference
to Exhibit 4.4 to RCN's 1997 Form S-4)
(k) 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 herein by reference to Exhibit 4.6 to
RCN's 1997 Form S-4)
(l) 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 herein by reference to Exhibit 4.1 to RCN's
Information Statement on Form 10/A (filed July 10, 1997)
(Commission File No. 000-22825))
* (m) First amendment, dated as of December 3, 1999, to the Credit
Agreement, dated as of June 3, 1999 among RCN, the borrowers named
therein, the lenders party thereto, The Chase Manhattan Bank, as
Agent, Chase Securities Inc., as Lead Arranger and Book Manager, and
Deutsche Bank A.G., Merrill Lynch Capital Corp. and Morgan Stanley
Senior Funding, as Documentation Agents (incorporated herein by
reference to Exhibit 10.01 to RCN's Current Report on Form
8-K dated August 17, 1999 (filed August 17, 1999)
(Commission File No. 000-22825)
(n) Indenture, dated as of December 22, 1999, between RCN, as Issuer,
and The Chase Manhatten Bank, as Trustee, with respect to the
10 1/8% Senior Discount Notes due 2010. (incorporated herein by
reference to Exhibit 4.11 to RCN's Registration Statement on Form
S-3/A (filed October 6, 1999)(Commission File No. 333-71525)
("1999 Form S-3/A")
(o) Form of the 10 1/8% Senior Discount Notes due 2010 (included in
Exhibit 4.11 (incorporated herein by reference to exhibit 4.11 to
RCN's 1999 Form S-3/A.
(p) Stock Purchase Agreement dated as of October 1, 1999 between Vulcan
Ventures Incorporated (incorporated by reference to RCN's Form 8-K
dated October 1, 1999, Commission file No. 0-22825).
(q) Voting Agreement dated as of OCtober 1, 1999 among RCN, Vulcan
Ventures Incorporated and Level 3 Telecom Holdings, Inc.
(incorporated by reference to RCN's Form 8-K dated October 1, 1999,
Commission File No. 0-22825)
<PAGE> 38
(10) Material Contracts
(a) Tax Sharing Agreement by and among C-TEC Corporation, Cable Michigan, Inc.
and the Registrant is incorporated herein by reference to Exhibit 10.1 to
the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(b) Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber
Systems/McCourt, Inc. and RCN Telecom Services of Massachusetts, Inc. is
incorporated herein by reference to Exhibit 10.2 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(c) Dark Fiber IRU Agreement dated as of May 8, 1997 among Metropolitan Fiber
Systems of New York, Inc. and RCN Telecom Services of New York, Inc. is
incorporated herein by reference to Exhibit 10.3 to the Company's
Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission File No.
0-22825.)
(d) Joint Venture Agreement dated as of December 23, 1996 between RCN Telecom
Services, Inc. and Boston Energy Technology Group, Inc. is incorporated
herein reference by Exhibit 10.7 to the Company's Amendment No. 2 to Form
10/A filed September 5, 1997 (Commission File No. 0-22825.)
(e) Amended and Restated Operating Agreement of RCN-BecoCom, LLC dated as of
June 17, 1997 is incorporated herein by reference to Exhibit 10.8 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
File No. 0-22825.)
(f) Management Agreement dated as of June 17, 1997 among RCN Operating
Services, Inc. and BecoCom, Inc. is incorporated herein by reference to
Exhibit 10.9 to the Company's Amendment No.2 to Form 10/A filed September
5, 1997 (Commission File No. 0-22825.)
(g) Construction and Indefeasible Right of Use Agreement dated as of June 17,
1997 between BecoCom, Inc. and RCN-BecoCom, LLC is incorporated herein by
reference to Exhibit 10.10 to the Company's Amendment No. 2 to Form 10/A
filed September 5, 1997 (Commission File No. 0-22825.)
(h) License Agreement dated as of June 17, 1997 between Boston Edison Company
and BecoCom, Inc. is incorporated herein by reference to Exhibit 10.11 to
the Company's Amendment No. 2 to Form 10/A filed September 5, 1997
(Commission File No. 0-22825.)
(i) Joint Investment and Non-Competition Agreement dated as of June 17, 1997
among RCN Telecom Services of Massachusetts, Inc., BecoCom, Inc. and RCN-
BecoCom, LLC is incorporated herein by reference to Exhibit 10.12 to the
Company's Amendment No. 2 to Form 10/A filed September 5, 1997 (Commission
File No. 0-22825.)
(j) Amended and restated Operating Agreement of Starpower Communications,
L.L.C. by and between Pepco Communications, L.L.C. and RCN Telecom
Services of Washington, D.C. Inc. dated October 28, 1997 is incorporated
herein by reference to Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (Commission File No.
0-22825.)
21* Subsidiaries of Registrant
23* Consent of PricewaterhouseCoopers LLP with respect to RCN Corporation
24* Power of Attorney
27* Financial Data Schedule
99 (b) Report on Form 11-k with respect to the RCN Savings and Stock
Ownership Plan will be filed as an amendment to this Report on Form 10-K.
Item 14.(b) Reports on Form 8-K
On December 17, 1999, The Company announced that it has entered into a
definitive agreement with respect to the acquisition of 21st Century Telecom
Group, Inc. Pro forma financial statements of RCN Corporation and financial
statements for 21st Century Telecom Group, Inc. are filed as Exhibit 99.1
hereto.
On December 12, 1999, The Company entered into an Agreement and Plan of
Merger with 21st Century Telecom Group, Inc. providing for the acquisition
of 21st Century by the Company.
On October 4, 1999, the Company announced that Vulcan Ventures
Incorporated ("Vulcan"), the investment organization of Paul G. Allen, has
agreed to make a $1.65 billion investment in the Company. The investment is
in the form of mandatorily convertible preferred stock (the "Preferred Stock"),
which will be converted into the Registrant's Common Stock, par value $1.00 per
share ("Common Stock"), no later than seven years after it is issued. Vulcan
has agreed to purchase 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.
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 2000 RCN Corporation
By: \s\ David C. McCourt
-------------------------
David C. McCourt
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
\s\ David C. McCourt Chairman and Chief March 30, 2000
- -------------------------- Executive Officer
David C. McCourt
\s\ Michael A. Adams President and Chief March 30, 2000
- -------------------------- Operating Officer
Michael A. Adams
\s\ Timothy J. Stoklosa Executive Vice President March 30, 2000
- -------------------------- and Chief Financial Officer
Timothy J. Stoklosa
\s\ Ralph S. Hromisin Senior Vice President and March 30, 2000
- -------------------------- Chief Accounting Officer
Ralph S. Hromisin
<PAGE> 40
DIRECTORS:
\s\ David C. McCourt March 30, 2000
- -------------------------
David C. McCourt
\s\ James Q. Crowe March 30, 2000
- -------------------------
James Q. Crowe
\s\ Walter E. Scott, Jr. March 30, 2000
- -------------------------
Walter E. Scott, Jr.
\s\ Richard R. Jaros March 30, 2000
- -------------------------
Richard R. Jaros
\s\ Thomas May March 30, 2000
- -------------------------
Thomas May
\s\ Alfred Fasola March 30, 2000
- -------------------------
Alfred Fasola
\s\ Thomas P. O'Neill, III March 30, 2000
- -------------------------
Thomas P. O'Neill, III
\s\ Eugene Roth March 30, 2000
- -------------------------
Eugene Roth
\s\ Stuart E. Graham March 30, 2000
- -------------------------
Stuart E. Graham
\s\ Michael B. Yanney March 30, 2000
- -------------------------
Michael B. Yanney
\s\ Edward S. Harris March 30, 2000
- -------------------------
Edward S. Harris
\s\ Michael J. Levitt March 30, 2000
- -------------------------
Michael J. Levitt
\s\ William D. Savoy March 30, 2000
- -------------------------
William D. Savoy
\s\ Michael A. Adams March 30, 2000
- -------------------------
Michael A. Adams
\s\ Timothy J. Stoklosa March 30, 2000
- -------------------------
Timothy J. Stoklosa
<PAGE> 41
SCHEDULE I
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales $ 13 $ 177
Other income (expense) 7,795 (18,293)
Costs and expenses 23 177
---------- ----------
Operating income (loss) 7,785 (18,293)
Interest income 3,103 2,834
Interest expense (161,466) (106,161)
---------- ----------
(Loss) before income taxes (150,578) (121,620)
(Benefit) for income taxes (59,592) (36,164)
Equity in (loss) of
consolidated entities (264,042) (119,989)
---------- ----------
Net (loss) (355,028) (205,442)
Preferred stock dividend and accretion requirements 13,542 -
---------- ----------
Net (loss) to common shareholders $ (368,570) $ (205,442)
========== ==========
(Loss) per average common share:
Net (loss) $ (5.12) $ (3.36)
Weighted average common shares outstanding 71,966,301 61,187,354
</TABLE>
<PAGE> 42
SCHEDULE I
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments $ 3,703 $ 15
Accounts receivable from related parties - 99
Accounts receivable from affiliates 409,514 13,172
Accounts receivable 6 4
Prepayments & other 93,912 25,120
Investments restricted for debt service 22,128 22,500
----------- -----------
Total current assets 529,263 60,910
Investments restricted for debt service - 19,869
Investments in subsidiaries 2,273,075 1,444,450
Unamortized debt issuance cost 60,639 26,640
Deferred charges and other assets 25,844 9,525
----------- -----------
Total assets $ 2,888,821 $ 1,561,394
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable to affiliates 87,797 20,368
Accrued interest 12,928 4,813
Accrued expenses 838 152
----------- -----------
Total current liabilities 101,563 25,333
Long-term debt 2,141,516 1,164,615
Preferred Stock 253,438
Shareholders' Equity
Common stock 77,724 65,477
Deficit (591,128) (222,558)
Additional paid in capital 923,341 539,770
Cumulative translation adjustment (2,014) (3,055)
Unrealized appreciation on investments (6,228) 1,113
Treasury stock (9,391) (9,301)
----------- -----------
Total common shareholders' equity 392,304 371,446
Total liabilities and shareholders' equity $ 2,888,821 $ 1,561,394
=========== ===========
</TABLE>
<PAGE> 43
SCHEDULE I
RCN CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
For the years Ended December 31,
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(355,028) $ (205,442)
Realized (gain)/loss on disposal of Lancit (8,621) -
Deferred income taxes and investment tax credits (15,175) (7,728)
Working capital (390,852) (19,009)
Equity in loss of consolidated entity 244,045 119,986
Equity in loss of unconsolidated entity 19,997 -
Noncash accretion of discounted senior notes 101,901 80,925
Amortization of financing costs 5,492 2,733
Noncash unrealized appreciation/depreciation on TCI (7,341) -
Noncash write-off of acquired R&D - 18,293
Other (1,145) 1,080
--------- ----------
Net cash (used in) operating activities (406,727) (9,162)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (53,322) (47,028)
Other (990,843) (562,106)
--------- ----------
Net cash (used in) investing activities (1,044,165) (609,134)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 344,342 112,866
Proceeds from the issuance of preferred stock 239,897 -
Issuance of long-term debt 875,000 500,587
Interest paid on Senior Notes 22,500 22,375
Financing costs (39,491) (10,185)
Proceeds from the exercise of stock options 12,422 1,969
Purchase of treasury stock (90) (9,301)
--------- ----------
Net cash provided by financing activities 1,454,580 618,311
--------- ----------
Net increase/(decrease) in cash and temporary cash investments 3,688 15
Beginning cash & temporary cash investments 15 0
--------- ----------
Ending cash & temporary cash investments $ 3,703 $ 15
========= ==========
</TABLE>
<PAGE> 44
SCHEDULE II
RCN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ---------- ---------- ----------
ADDITION
----------------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------ ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS-
DEDUCTED FROM ACCOUNTS RECEIVABLE
IN THE CONSOLIDATED BALANCE SHEETS
1999 $5,766 $7,691 $ 510 $1,709 $12,258
1998 $2,134 $4,096 $1,215 $1,679 $ 5,766
1997 $ 861 $2,732 $ 997 $2,456 $ 2,134
ALLOWANCE FOR DEFERRED TAX ASSETS-
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS
1999 $82,068 $163,144 $ 363 $10,200 $235,375
1998 $ 8,404 $ 64,498 $12,963 $ 3,797 $ 82,068
1997 $ 3,691 $ 5,777 $ - $ 1,064 $ 8,404
</TABLE>
<PAGE> 45
RCN CORPORATION
SELECTED FINANCIAL DATA
Thousands of Dollars Except Per Share Amounts
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 275,993 $ 210,940 $ 127,297 $ 104,910 $ 91,997
(Loss) income before extraordinary charge and
cumulative effect of change in accounting
principle $ (354,604) $ (204,801) $ (49,181) $ (5,989) $ 2,114
Basic and diluted (loss) income per average
common share before extraordinary charge
and cumulative effect of change in
accounting principle $ (5.11) $ (3.35) $ (0.89) $ (0.11) $ 0.04
Dividends per share - - - - -
Total assets $3,192,114 $1,907,615 $1,150,992 $ 628,085 $ 649,610
Long-term debt, net of current maturities $2,143,096 $1,263,036 $ 686,103 $ 131,250 $ 135,250
Redeemable preferred stock $ 253,438 - - - -
</TABLE>
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Certain statements contained in this annual report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective. Such forward-looking statements include, in
particular, statements made as to plans to develop networks and upgrade
facilities, the market opportunity presented by markets targeted by the Company,
the Company's intention to connect certain wireless video resale telephone and
Internet service customers to its advanced fiber optic networks, the development
of the Company's businesses, the markets for the Company's services and
products, the Company's anticipated capital expenditures, the Company's
anticipated sources of capital and effects of regulatory reform and competitive
and technological developments. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Such
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements.
The following discussion should be read in conjunction with the Company's
historical Consolidated Financial Statements and Notes thereto:
GENERAL
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 our 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 will use the 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. Additional information can be found
at www.RCN.com.
The Company expects that the operating and net losses from its business will
rise in the future as it expands and develops its network and customer base.
There can be no assurance that RCN will achieve or sustain profitability or
positive operating income in the future as it develops its advanced fiber
optic network.
<PAGE> 47
The operating losses have resulted primarily from expenditures associated with
the development of the Company's operational infrastructure and marketing
expenses. The Company expects it will continue to experience negative operating
income while it continues to invest in its networks and until such time as
revenue growth is sufficient to fund operating expenses. The Company expects to
achieve positive operating margins over time by (i) increasing the number of
customers it serves, (ii) increasing the number of connections per customer by
cross marketing its services and promoting bundled service options and therefore
increasing the revenue per customer, (iii) lowering the costs associated with
new subscriber additions and (iv) reducing the cost of providing services by
capturing economies of scale. The Company expects its operating revenues will
increase in future periods through internal growth of its current advanced fiber
optic networks, increases in penetration, and increases in the number of
services per customer; however, the Company also expects that operating losses
will increase for some period of time as the Company initiates network
development in new markets and expands its current networks. When the Company
makes its initial investment in a new market, the operating losses typically
increase as the network and sales force are expanded to facilitate growth. The
Company's ability to generate positive cash flow in the future will depend on
the extent of capital expenditures in current and additional markets, the
ability of the 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."
The terms of the Company's joint ventures require the mutual consent of the
Company and its joint venture partner to distribute or advance funds to the
Company. The Company's debt agreements allow subsidiaries and joint ventures to
incur indebtedness for network buildout costs, which indebtedness may contain
limitations on the subsidiaries' and the joint ventures' ability to pay
dividends and distributions to the Company. Cash flows available to the Company
in future periods will be affected by the extent to which operations are
conducted through joint ventures. Due to the degree of control that the Company
has in the joint ventures, RCN accounts for the BECO joint venture on a
consolidated basis and Starpower, Megacable and JuniorNet under the equity
method of accounting.
Prior to September 30, 1997, RCN Corporation was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100 percent of
the outstanding shares of common stock of its wholly owned subsidiaries, RCN
and Cable Michigan, Inc. ("Cable Michigan") to holders of record of C-TEC's
common stock and C-TEC's Class B Common Stock as of the close of business on
September 19, 1997 (the "Distribution"). C-TEC's corporate services group and
corporate financial services company both became subsidiaries of RCN immediately
coincident with the Distribution.
C-TEC, RCN and Cable Michigan have entered into certain agreements, including a
distribution agreement and a tax-sharing agreement, providing for the
Distribution, and governing various ongoing relationships, including the
provision of support services, between the three companies.
Management believes that the Company operates as one reportable operating
segment which contains many shared expenses generated by the Company's various
revenue streams and that any segment allocation of shared expenses incurred on
a single network to multiple revenue streams would be impractical and arbitrary;
furthermore, the Company currently does not make such allocations internally.
The Company's chief decision makers do, however, monitor financial performance
in a way which is different from that depicted in the historical general purpose
financial statements in that such measurement includes the consolidation of all
joint ventures, including Starpower which is not consolidated under generally
accepted principles. Such information, however, does not represent a separate
segment under generally accepted accounting principles and therefore it is not
separately disclosed.
<PAGE> 48
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
For the year ended December 31, 1999, sales increased 30.8% to $275,993
from $210,940 for the same period in 1998. Operating losses before
depreciation, amortization and acquired in-process technology was $(131,967)
as compared to $(51,412) for the same period in 1998.
Sales
- -----
Video sales are comprised primarily of subscription fees for basic, premium
and pay-per-view cable television services; All of RCN's networks can support
these services. A digital tier of cable service is being deployed in selected
markets.
Voice sales include local telephone service fees consisting primarily of monthly
line charges, local toll and special features and long-distance telephone
service fees based on minutes of traffic and tariffed rates or contracted fees.
Voice sales include both resold services and traffic over the Company's own
switches.
Data sales represent Internet access fees billed at contracted rates, 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 $65,053, or 30.8% to $275,993 for the year ended
December 31, 1999 from $210,940 for the year ended December 31, 1998. The
increase was fueled by higher average service connections which increased
32.4% to approximately 909,000 for the year ended December 31, 1999 (including
connections of the Starpower joint venture) from approximately 687,000 for
the year ended December 31, 1998. The increase in average service connections
resulted principally from growth in dial-up Internet connections and growth
in average on-net connections, which increased 245.5% from approximately 49,000
for the year ended December 31, 1998 to approximately 170,000 for the year ended
December 31, 1999. Total advanced fiber connections increased 80.7% from
123,393 at December 31, 1998 to 222,964 at December 31, 1999. Advanced fiber
units passed increased 134.4% to 713,823 units at December 31, 1999 from 304,505
units at December 31, 1998.
Voice sales increased $19,506, or 55.9%, to $54,426 for the year ended
December 31, 1999 from $34,920 for the year ended December 31, 1998.
Approximately $22,000 of the increase in voice sales is attributable to higher
average connections. Average advanced fiber voice connections increased
approximately 292.1% to approximately 47,500 for the year ended December 31,
1999 (including connections of the Starpower joint venture) from approximately
12,000 for the year ended December 31, 1998. Average off-net voice connections
increased approximately 12.2% to approximately 55,700 for the year ended
December 31, 1999 from approximately 49,700 for the year ended December 31,
1998. The increase in voice sales due to higher average connections was
partially offset by lower average revenue per connection of 2.0%. Although
minutes, calls and average length increased, revenue per minute declined.
<PAGE> 49
Video sales increased $12,207, or 10.8% to $125,285 for the year ended
December 31, 1999 from $113,078 for the year ended December 31, 1998. The
increase was primarily due to approximately 27,400 additional average video
connections for the year ended December 31, 1999 as compared to the year ended
December 31, 1998. Average on-net video connections grew 73,600 or 209.1% to
approximately 108,800 for the year ended December 31, 1999 (including
connections of the Starpower joint venture) from approximately 35,200 for the
year ended December 31, 1998. Average off-net video connections were
approximately 168,000 and 214,200 for the year ended December 31, 1999 and 1998,
respectively. Overall higher average service connections contributed
approximately $8,673 to the increase in video sales and higher average revenue
per connection of 1% principally contributed the remainder.
Data sales increased $27,426, or 68% to $67,750 for the year ended
December 31, 1999 from $40,324 for the year ended December 31, 1998. The
increase was primarily due to approximately 154,000 additional average data
connections for the year ended December 31, 1999 as compared to the year ended
December 31, 1998.
For the year ended December 31, 1999, the Company had approximately 515,700
average off-net data connections and approximately 13,600 average advanced fiber
data connections, including connections of the Starpower joint venture. For the
year ended December 31, 1998, the Company had approximately 373,400 average
off-net data connections and approximately 1,900 advanced fiber data
connections, including connections of the Starpower joint venture.
Overall higher average service connections contributed approximately $16,500
to the increase in data sales and higher average revenue per connection of 19.2%
contributed the remainder.
Other sales increased $5,913 or 26.1% to $28,532 for the year ended December 31,
1999 from $22,619 for the year ended December 31, 1998. 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 year ended December 31, 1999, 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 $38,139, or 37.3% to $140,448 for the year ended
December 31, 1999 from $102,309 for the year ended December 31, 1998. The
increase was principally the result of higher sales, a lower margin on video
sales due to higher franchise fees and programming rates, and a lower margin on
data sales due to transitional costs associated with the conversion of existing
circuits to certain technology upgrades.
<PAGE> 50
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 $107,469, or
67.2% to $267,512 for the year ended December 31, 1999 from $160,043 for the
year ended December 31, 1998.
Customer services costs, including order processing, increased approximately
$9,700, or 32.3%, for the year ended December 31, 1999 as compared to the year
ended December 31, 1998. The increase is primarily personnel related to support
the 32.4% increase in average connections over the comparable period in 1998 and
to increase the level of service. Customer service costs per average connection
per month increased .8% in 1999 over 1998.
Technical expense, including installation and provisioning, increased
approximately $23,817, or 77.8%, for the year ended December 31, 1999 as
compared to the year ended December 31, 1998. Technical expense increases of
approximately $29,600 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Rental and utility expense, primarily for
material storage and hub sites, increased approximately $5,500, partially offset
by an increase of approximately $12,100 in technical costs capitalized as part
of the cost basis of the telecommunications network.
Sales and marketing costs increased approximately $8,000, or 27.6%, for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
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.
Advertising costs increased approximately $10,900, or 45.5% for the year ended
December 31, 1999 as compared to the year ended December 31, 1998. The increase
is primarily related to costs incurred to begin to develop brand awareness in
the California market as well as continued expansion of existing markets.
General and administrative expenses increased approximately $55,000, or 118.8%,
for the year ended December 31, 1999 as compared to the year ended December 31,
1998. Information technology expenses increased approximately $15,700. The
Company is in the process of developing information technology systems which
will provide a sophisticated customer care infrastructure as well as other
administrative support systems. The expense increases represent staff additions
to both support this effort and maintain the systems as well as consulting
expenses associated with the planning and analysis stages of such systems
development. The Company expects that such charges may increase in future
periods until the planning and analysis stages of its IT systems development
projects are complete.
Operating taxes, primarily property taxes, increased approximately $2,800 as a
result of expanded operations. External legal expense increased approximately
$4,000 primarily associated with the procurement of regulatory approvals for
potential future markets. Approximately $19,500 of the increase in general
and administrative expense is attributable to acquisitions in 1998, which were
included for a full twelve months in 1999, the June 1998 acquisition of Lancit
Media, which was disposed of in April 1999, and the 1999 acquisitions of DNAI
and Brainstorm. Rent and utility expense increased approximately
$4,800 primarily related to additional space required to support the increase
in headcount. Higher bad debt expense of approximately $3,700 was associated
with the increase in sales. The remaining increase primarily represents
additional development and support expenses associated with expanding operations
and new markets.
<PAGE> 51
Depreciation and amortization
- -----------------------------
Depreciation and amortization was $146,043 for the year ended December 31, 1999
and $89,088 for the year ended December 31, 1998. The increase of $56,955, or
63.9% was the result of a higher depreciable basis of plant resulting primarily
from expansion of the Company's advanced fiber network, and amortization of
intangible assets arising from the acquisitions in 1998. The cost basis of
property, plant and equipment at December 31, 1999 and 1998 was $1,123,760 and
$601,679, respectively. The basis of intangible assets was $296,875 and $267,031
at December 31, 1999 and 1998, respectively.
In future periods, depreciation and amortization are expected to exceed
amounts recorded in 1999 due to depreciation with respect to expansion of the
Company's advanced fiber optic network.
Interest income
- ----------------
Interest income was $76,786 and $58,679 for the year ended December 31, 1999
and 1998, respectively. The increase of $18,107, or 30.9%, results from higher
average cash, temporary cash investments and short-term investments as compared
to the same period in 1998. Cash, temporary cash investments and short-term
investments were approximately $1,793,000 at December 31, 1999 and approximately
$1,013,000 at December 31, 1998. During 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 May 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 (Note 10). These increases were partially offset
by capital expenditures of approximately $526,000 and working capital
requirements.
Interest expense
- ----------------
For the year ended December 31, 1999, interest expense was $158,139 as compared
to $112,239 for the year ended December 31, 1998. The increase resulted
primarily from higher interest and commitment fees of $30,275 relating to the
Company's Credit Facility which the Company entered into with Chase Manhattan
Bank in June 1999 (Note 10), of which $500,000 of the Term Loan B was borrowed
in June 1999. The remaining increase is due to higher accretion on the 11.125%,
9.8% and 11% senior discount notes issued in October 1997, February 1998 and
June 1998, respectively, of $20,976 and to higher amortization of debt issuance
costs of approximately $2,700. These increases were partially offset primarily
by lower interest of approximately $4,300 relating to the prepayment of the
$100,000 term loan (Note 10) and higher capitalized interest aggregating
approximately $5,100.
Gain on the sale of Lancit
- --------------------------
In April 1999, the Company sold its investment in Lancit to JuniorNet, a
commercial-free online learning service for children, for approximately
$24,600 in cash. Concurrent with the sale, the Company acquired an ownership
interest in JuniorNet of approximately 47.54%. The Company recognized a $8,930
gain on the sale. The Company also deferred $8,201 representing the portion of
the gain attributable to the Company's ownership interest in JuniorNet
immediately after the acquisition.
<PAGE> 52
Income tax
- ----------
The Company's effective income tax rate was a benefit of 1.4% and 2.3% for the
year ended December 31, 1999 and December 31, 1998, respectively.
The primary reason for the difference is that the tax effect of the Company's
cumulative losses has exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. As a result, generally accepted accounting principles do not permit
the recognition of such excess losses in the financial statements. This
accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers. For additional
analysis of the changes in income taxes, see the reconciliation of the
effective income tax rate in Note 11 to the consolidated financial statements.
Minority interest
- -----------------
For the year ended December 31, 1999 and 1998 minority interest of $28,262 and
$17,162, respectively, primarily represents the interest of Boston Edison
Company ("BECO") in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
- ---------------------------------------------
For the year ended December 31, 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 $1,763, Starpower of $12,200 and
JuniorNet of $19,997. For the year ended December 31, 1998, equity in the loss
of unconsolidated entities primarily represents the Company's share of the
losses and amortization of excess cost over net assets of Megacable of $2,384
and Starpower of $10,335.
Extraordinary Item - prepayment of debt
- ----------------------------------------
In June 1999, the Company prepaid a term loan with the proceeds of the Credit
Facility (Note 10). The early extinguishment of the debt resulted in the
write off of the applicable unamortized debt issuance cost which is reflected
as an extraordinary charge of ($424).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997:
Sales were $210,940 for the year ended December 31, 1998 as compared to $127,297
for the year ended December 31, 1997.
Operating income before depreciation, amortization, non-recurring charge and
acquired research and development was ($51,412) for the year ended December
31, 1998 as compared to ($7,670) for the year ended December 31, 1997.
Net loss was ($205,442), or ($3.36) per average common share for 1998 and
($52,391) or ($0.95) per average common share for 1997.
<PAGE> 53
Sales
- -----
For the year ended December 31, 1998 total sales were $210,940, an increase
of $83,643 or 65.7%, from $127,297 for the year ended December 31, 1997. The
increase resulted from higher total service connections which increased 219.6%
to approximately 855,000 at December 31, 1998 from approximately 268,000 at
December 31, 1997. The increase in total service connections resulted
principally from dial-up internet connections from the acquisitions of Erols
Internet, Inc. ("Erols") and UltraNet Communications ("UltraNet") in February
1998, and growth in advanced fiber connections, which increased 714.6% from
approximately 15,000 in 1997 to approximately 123,000 at December 31, 1998.
The service connections at December 31, 1998 include connections of the
Starpower joint venture which is accounted for under the equity method of
accounting. The Starpower service connections resulted primarily from
customers in the joint venture market acquired from Erols Internet, Inc.
in February 1998.
Voice revenues increased $21,424 or 534.7% to $25,431 for the year ended
December 31, 1998 from $4,007 for the year ended December 31, 1997, primarily
due to higher average connections. Advanced fiber voice connections increased
approximately 860.4% to approximately 31,000 at December 31, 1998 from
approximately 3,000 at December 31, 1997. Off-net voice connections increased
approximately 161.1% to approximately 65,000 at December 31, 1998 from
approximately 25,000 at December 31, 1997. Contributing to the increase in
off-net voice connections was the launch of telephony service in the Lehigh
Valley, Pennsylvania market in the fourth quarter of 1997.
Overall, higher service connections contributed approximately $20,500 to the
increase in voice revenues and higher revenue per connection contributed
approximately $1,000.
During the fourth quarter of 1998, the Company ceased marketing new customers
for resale of its competitors' local phone service. The Company expects that
the effect of this decision will be lower revenue growth than would result if
such resale continued; however, this decision is also expected to have a
positive impact on the Company's overall gross margin percentage and a neutral
effect on operating income before depreciation and amortization ("EBITDA").
Video revenues increased $9,707 or 9.4% to $113,078 for the year ended
December 31, 1998 from $103,371 for the year ended December 31, 1997. Video
revenues for 1997 included one time launch incentive revenue of approximately
$1,000 related to the launch of certain new channels. The increase in 1998
was primarily due to increases of approximately 22,000 additional video
connections and the conversion of approximately 50,000 off-net connections to
the advanced fiber network at December 31, 1998 as compared to
December 31, 1997.
On-net video connections grew 74,565 or 632.8% to 86,349 at December 31, 1998
from 11,784 at December 31, 1997. Off-net video connections were 175,313 and
227,619 at December 31, 1998 and 1997, respectively.
Overall, higher service connections contributed approximately $6,000 to the
increase in video revenues and higher average revenue per connection
contributed approximately $5,000 offset by the one time launch incentive
revenue of approximately $1,000 received in 1997.
Data revenues increased $40,280 to $40,321 for the year ended December 31, 1998
from $41 for the year ended December 31, 1997 primarily due to the acquisitions
of Erols and UltraNet in February 1998, Interport in June 1998 and Javanet in
July 1998. At December 31, 1998, the Company had approximately 492,000 off-net
data connections and approximately 6,000 advanced fiber data connections,
including connections of the Starpower joint venture.
During the fourth quarter of 1998, dial-up Internet access replaced resold local
phone service as the Company's initial product offering in areas in which RCN's
fiber optic network is still under construction. The Company expects that its
advanced fiber networks will eventually be extended to reach most of its dial-up
Internet connections.
<PAGE> 54
Commercial and other revenues increased $12,232 or 61.5% to $32,110 for the year
ended December 31, 1998 from $19,878 for the year ended December 31, 1997. The
increase was due primarily to an increase in average commercial main access
lines of approximately 9,800 in 1998 over 1997, which contributed approximately
$5,000 to the increase. Higher revenue per commercial main access line
contributed approximately $3,000. Additionally, contributing approximately
$6,000 to the increase was higher wholesale long distance revenue from
Commonwealth Telecom Services, Inc. ("CTSI"), a wholly-owned subsidiary of
Commonwealth Telephone Enterprises, Inc. (formerly C-TEC Corporation). CTSI is
a Competitive Local Exchange Carrier ("CLEC") which operates in areas adjacent
to the traditional service area of Commonwealth Telephone Company (also a
wholly-owned subsidiary of Commonwealth Telephone Enterprises, Inc.)
The Company recognizes that managing customer turnover is an important factor
in maximizing revenues and cash flow. For the quarter ended December 31, 1998,
the Company's average monthly churn rate was approximately 2.8%.
Costs and Expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Direct expenses increased $50,553 or 97.7% to $102,310 for the year ended
December 31, 1998 from $51,757 for the year ended December 31, 1997. The
increase was primarily due to higher voice connections, primarily resold voice,
which contributed approximately $27,500 to the increase. Higher video
programming costs of approximately $8,000 resulted from higher programming
rates, new channels and increased video connections. The remaining increase
primarily represents Internet access costs associated with the increase in
data revenues.
Operating, selling, general and administrative costs increased $76,832 or
92.3%, to $160,042 for the year ended December 31, 1998 from $83,210 for the
year ended December 31, 1997.
Advertising costs increased approximately $14,000 or 136.9% for the year ended
December 31, 1998 as compared to the year ended December 31, 1997. Costs
associated with an extensive high visibility multi-media campaign primarily
in New York City and Boston, which commenced in June 1997, increased
approximately $4,400 over 1997. Internet advertising, primarily associated
with the acquisition of Erols, increased approximately $5,300. Promotional
materials expense increased approximately $1,000. Ad agency fees and costs
to promote the commencement of telephony product offerings, in Lehigh Valley,
Pennsylvania are the significant contributions to the remaining increase in
advertising expense.
Customer service costs, including order processing, increased approximately
$19,500 or 182.1% for the year ended December 31, 1998 as compared to the year
ended December 31, 1997. Increases of approximately $7,500, primarily personnel
related, were due to customer base support for Internet acquisitions. Other
staff and temporary labor increases to support expanding operations in New York
City, Boston, and Lehigh Valley, Pennsylvania contributed approximately $9,000
to the increase. Higher billing costs of approximately $3,000 for increased
customers comprises the remainder of the increase in customer service costs.
Technical expense, including installation and provisioning, increased
approximately $11,000 or 58.1% for the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
Technical expense increases of approximately $8,500 were due to engineering and
construction headcount and contract labor additions made to plan and execute
network expansion and network operations center control monitoring. Resale
telephony installation costs contributed approximately $1,700 to the increase.
Retail expense primarily for materials and hub sites increased approximately
$1,500. Technical expense increases associated with Internet acquisitions in
1998 were approximately $3,500. These increases were partially offset by
approximately $5,200 of technical costs capitalized as part of the cost basis
of the telecommunications network. The remaining increase in technical expenses
is primarily due to higher right of way use fees.
<PAGE> 55
Sales and marketing costs increased approximately $13,000 or 84.6% for the
year ended December 31, 1998 as compared to the year ended December 31, 1997.
The increase resulted from additional staff, contract labor and related
commissions and benefits, aggregating approximately $4,900 to cover increases
in marketable homes, to increase penetration in the Company's existing markets
and to increase the number of services per customer. Telemarketing expense
increased approximately $1,200 due to increased campaigns. Sales and marketing
increases associated with Internet acquisitions in 1998, primarily Erols, were
approximately $5,400.
General and Administrative expenses increased approximately $19,000 or 69.5%.
Internet and Lancit acquisitions in 1998 contributed approximately $6,800.
Legal expense increased approximately $1,500 primarily as a result of various
start-up regulatory expenses related to the procurement of franchise and OVS
agreements. Higher bad debt expense of approximately $1,500 was associated with
the increase in sales. Higher salaries and benefits of approximately $3,800
were due to staff additions, primarily to support the expansion, maintenance
and upgrade of the Company's management information systems, new product
development and integration of acquisitions. In addition, the Company met
certain quarterly performance targets established for 1998 relative to the
determination of a potential contribution to its ESOP plan and accrued the
related amounts aggregating approximately $1,000. Expenditures in 1998 relative
to Year 2000 planning and remediation were approximately $400. The Company is
in the process of developing information technology systems which will provide a
sophisticated customer care infrastructure. Expenses associated with the
planning and analysis stages of such systems development were approximately
$5,000 in 1998. The Company expects that such charges may increase in future
periods during 1999 until the planning and analysis stages of its IT systems
development projects are complete. The above increases were partially offset by
a one-time credit of approximately $2,400 related to the reversal of an accrual
for damages related to contract termination which was settled between the
Company and the counterparty.
Depreciation and amortization
- -----------------------------
Depreciation and amortization was $89,088 for the year ended December 31, 1998
and $53,205 for the year ended December 31, 1997. The increase of $35,883, or
67.4% was the result of both a higher depreciable basis of plant, resulting
primarily from expansion of the Company's advanced fiber network, and
amortization of intangible assets arising from the acquisitions of Erols and
UltraNet in February 1998. The cost basis of property, plant and equipment
at December 31, 1998 and 1997 was $601,679 and $307,759, respectively. The
basis of intangible assets was $267,031 and $149,935 at December 31, 1998 and
1997, respectively.
Acquired in-process research and development
- --------------------------------------------
In connection with the acquisitions of Erols and UltraNet, RCN has
allocated $13,228 for Erols and $5,065 for UltraNet to in-process research
and development ("IPR&D"). Specifically, four projects were identified which
qualified as IPR&D by definition of not having achieved technological
feasibility and representing technology which at the point of acquisition
offered no alternative use than the defined project. The fair value of the
IPR&D projects associated with these acquisitions is based upon a discounted
cash flow analysis modified to represent only that portion of the project
associated with completed research and development efforts at the date of
acquisition. The IPR&D valuation charge was measured by the stage of
completion method. The expected completion percentages are estimated based on
the available financial information at the date of acquisition and were
established on a project by project basis primarily calculated by dividing the
costs incurred to date by the total expected R&D expenses specific to the
project. The significant assumptions utilized by management were as follows:
Cash flow projections, utilizing risk adjusted discount rates of between
35% and 40% for Erols projects, commenced in 1998, and were expected to grow
significantly in 1999 and 2000. Cash flow projections, utilizing risk
adjusted discount rates of between 30% and 33% for UltraNet projects, were
expected to commence in 1999, growing significantly in 2000 and 2001. The
IPR&D projections are founded on significant assumptions with regard to
timing of market entrance, levels of penetration, and costs of provisioning.
<PAGE> 56
RCN is constructing new telecommunications networks. The margins on products
expected to result from acquired in-process technologies in some cases represent
higher margins than RCN's margins on existing products primarily due to the
efficiencies in delivering multiple products, including bundled-service
offerings, over a single state of the art high capacity fiber optic network.
Interest income
- ---------------
Interest income was $58,679 and $22,824 for the years ended December 31, 1998,
and 1997, respectively. The increase of $35,855, or 157.1% results from
higher cash, temporary cash investments and short-term investments as compared
to the same period in 1997. Cash, temporary cash investments and short-term
investments were approximately $1,013,000 at December 31, 1998 and approximately
$639,000 at December 31, 1997. Included in the cash, temporary cash investments
and short-term investments balance at December 31, 1997 were proceeds from 10%
Senior Notes, issued in October 1997, which generated gross proceeds of $225,000
and yielded net proceeds of $218,250; and 11 1/8% Senior Discount Notes, issued
in October 1997, which generated gross proceeds of $350,001 and yielded net
proceeds of $337,751. Additionally, during 1998, proceeds from the following
increased cash, temporary cash investments and short-term investments: 9.8%
Senior Discount Notes, issued in February 1998, which generated gross proceeds
of $350,587 and yielded net proceeds of $344,855; 11% Senior Discount Notes,
issued in June 1998, which generated gross proceeds of $149,999 and yielded
net proceeds of $147,187 and the issuance of 6,098,355 shares of the Company's
Common Stock, issued in June 1998, which yielded net proceeds of $112,866.
Interest expense
- ----------------
For the year ended December 31, 1998, interest expense was $112,239 as compared
to $25,602 for the year ended December 31, 1997. The increase resulted from the
debt financings referred to above, offset by a reduction due to the prepayment
in September 1997 of $131,250 of 9.65% Senior Secured Notes.
Other (expense) income
- ----------------------
Other (expense) income was ($1,889) and $131 for the years ended December 31,
1998 and 1997, respectively. The 1998 expense primarily represents the write
down of certain of the Company's information technology assets which the
Company upgraded with higher capacity state of the art products in connection
with an overall internal technology upgrade.
Income tax
- ----------
The Company's effective income tax rate was a benefit of 2.3% and 29.8% for
the years ended December 31, 1998 and 1997, respectively. The primary reasons
for the difference include the charge for in-process technology which is not
deductible for tax purposes and for which a tax benefit was correspondingly
not recorded. Additionally, during 1998, the tax effect of the Company's
cumulative losses has exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. Except in unusual cases, generally accepted accounting principles do
not permit the recognition of tax benefits of such excess losses in the
financial statements. This accounting treatment does not impact the amount
or expiration periods of actual Net Operating Loss carryovers or cash flows for
taxes. For an analysis of the changes in income taxes, see the reconciliation
of the effective income tax rate in Note 11 to the consolidated financial
statements.
<PAGE> 57
Minority interest
- -----------------
For the year ended December 31, 1998, minority interest of $17,162 primarily
represents the 49% interest of BECO in the loss of RCN-BECOCOM. For the year
ended December 31, 1997, minority interest primarily represents the 49% interest
of BECO in the loss of RCN-BECOCOM of $6,563 and the 19.9% minority interest in
the loss of Freedom of $966. The Company purchased the remaining 19.9%
ownership interest in Freedom on March 21, 1997.
Equity in loss of unconsolidated entities
- -----------------------------------------
For the year ended December 31, 1998, equity in the loss of unconsolidated
entities primarily represents the Company's 50% interest in the loss
of Starpower of $10,335 and the Company's share of the losses and amortization
of excess cost over net assets of Megacable of $2,384. In January 1995, the
Company purchased a forty percent equity position in Megacable, a Mexican
cable television provider, for cash of $84,115. The Company is exposed to
foreign currency translation adjustments resulting from translation into U.S.
dollars of the financial statements of Megacable, which through December 1996
utilized the peso as the local and functional currency. Such adjustments
have historically been included as a separate component of shareholders'
equity. Effective January 1, 1997, since the three year cumulative rate of
inflation at December 31, 1996 exceeded 100%, Mexico was being treated for
accounting purposes under Statement of Financial Accounting Standards No. 52 -
"Foreign Currency Translation" as having a highly inflationary economy through
December 31, 1998. As a result, the financial statements of Megacable are
remeasured as if the functional currency was the U.S. dollar. The remeasurement
of the Mexican peso into U.S. dollars creates translation adjustments which are
included in net income. The Company is also exposed to foreign currency
transaction losses resulting from transactions of Megacable which are made in
currencies different from Megacable's own. The Company's proportionate share
of transaction gains (losses) are included in income as they occur. The Company
does not hedge its foreign currency exchange risk and it is not possible
to determine what effect future currency fluctuations will have on the
Company's operating results. Exchange gains (losses) of ($768) and ($12)
1998 and 1997, respectively, including translation losses in 1998 and 1997,
are included in the respective statements of operations through the Company's
proportionate share of losses of Megacable.
In 1997, Megacable had sales of $37,480, operating income before depreciation
and amortization of $13,409 and net income of $9,739. In 1997, Megacable had
sales of $30,441, operating income before depreciation and amortization of
$10,504 and net income of $6,653. The Company's investment in Megacable
exceed its underlying equity in the net assets of Megacable when acquired
by approximately $94,000, which goodwill is being amortized on a straight-
line basis over 15 years. In 1998 and 1997 amortization of the Company's
excess purchase price over the net assets of Megacable when acquired
was $6,280 in each year. For the year ended December 31, 1997, equity in
the loss of unconsolidated entities primarily represents the Company's share
of the losses and amortization of excess cost over net assets of Megacable.
<PAGE> 58
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 $350 million,
of which approximately $265 million has been contributed, to the joint ventures
through 1999 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.
Pursuant to an exchange agreement between BECO and RCN, BECO has the
right, from time to time, to convert portions of its ownership interest in
RCN-BECOCOM into shares of our common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Communications
Securities Corporation ("NSTAR Securities"). In 1999, BECO and the Company
entered into two exchange transactions pursuant to which BECO converted a
portion of its ownership interest into RCN common stock which was issued to
NSTAR Securities. Prior to such exchange transactions, BECO owned a 49% interest
in the joint venture. On February 19, 1999, BECO exchanged a portion of its
interest for 1,107,539 shares of RCN common stock. Such portion of the interest
was valued as of January 15, 1998. On December 31, 1999, BECO exchanged a
further portion of its interest for 2,989,543 shares of RCN common stock.
(Note 19). Such portion of the interest was valued as of May 27, 1999.
Following such exchanges, BECO 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.
<PAGE> 59
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 $601,045 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 Proceeds Number of Shares
- -------------- ------------------------------ ---------- ------------------
June 1998 Equity Offering $19.50/share $112,866 6,098,355
April 1999 Equity Offering $39/share $239,897 250,000
June 1999 Equity Offering $39/share $344,342 9,200,000
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.
The Indentures contain certain covenants 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.
<PAGE> 60
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 December 31, 1999 the
Company paid dividends in the amount of $13,053 in the form of additional
shares of Series A Preferred Stock. At December 31, 1999 the number of common
shares that would be issued upon conversion of the Series A Preferred Stock was
6,744,949. The Company incurred $10,000 of issuance cost in connection
with the sale of the Series A Preferred Stock.
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 December 31,
1999 approximately $4,914 in the form of letters of credit had been drawn
under the Revolver.
The Term Loan A is available for drawing until December 3, 2001, at which time
any undrawn commitments expire. At December 31, 1999 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 December 31, 1999, $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.
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.
<PAGE> 61
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 December 31, 1999 the Company had an
aggregate of approximately $2,144,000 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 $1,793,000 and a current ratio of approximately
7.24:1.
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 year ended December 31, 1999, the Company's net cash used in operating
activities was $83,721 comprised primarily of a net loss of ($355,028)
adjusted by non-cash depreciation and amortization of $146,043, other non-cash
items totaling $98,599 and working capital changes of $35,898. Net cash used
in investing activities of $1,088,552 consisted primarily of additions to
property, plant and equipment of $526,240, purchase of short-term investments
of $4,230,149, investment in unconsolidated joint venture of $25,439 and
acquisitions of $53,322, partially offset by net sales and maturities of
short-term investments of $3,724,495. Net cash provided by financing activities
of $1,443,559 included the issuance of long-term debt of $875,000, proceeds
from the issuance of stock of $584,239, proceeds from the issuance of stock
options of $12,422, contribution from minority interest partner of $91,140 and
decrease in investments restricted for debt service of $22,500, partially offset
by the repayment of long-term debt and capital leases of $101,622, and payments
made for debt financing costs of $39,484.
<PAGE> 62
For the year ended December 31, 1998, the Company's net cash provided by
operating activities was $35,110 comprised primarily of a net loss of ($205,442)
adjusted by non-cash depreciation and amortization of $89,088, other non-cash
items totaling $95,569 and working capital changes of $58,133. Net cash used
in investing activities of $828,176 consisted primarily of additions to
property, plant and equipment of $285,867, purchase of short-term investments of
$936,401, investment in unconsolidated joint venture of $20,000 and acquisitions
of $47,361 (primarily the Erols, UltraNet and JavaNet acquisitions), partially
offset by net sales and maturities of short-term investments of $461,795. Net
cash provided by financing activities of $690,282 included the issuance of
long-term debt of $502,587, proceeds from the issuance of stock of $112,866,
contribution from minority interest partner of $77,849 and decrease in
investments restricted for debt service of $22,375, partially offset by the
repayment of long-term debt of $7,770, purchase of treasury stock of $9,301 and
payments made for debt financing costs of $10,185.
IMPACT OF THE YEAR 2000 ISSUE
The Company has completed its assessment of and has taken corrective action to
mitigate any potential adverse effects that the year 2000 issue may have had on
its operations. Costs in connection with any modifications made to make our
systems compliant have not been and are not expected to be material. We are not
currently aware of any operational or technical problems as a result of the
year 2000 issue, however there can be no assurance that the year 2000 issue will
not have a material adverse impact on our financial condition or our results of
operations in the future.
Item 7a. 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 (see note 5). 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, 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. See note 10 to the
consolidated financial statements.
<PAGE> 63
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Sales $ 275,993 $ 210,940 $ 127,297
Costs and expenses, excluding depreciation and amortization 407,960 262,352 134,967
Depreciation and amortization 146,043 89,088 53,205
Acquired in-process research and development - 18,293 -
Nonrecurring charges - - 10,000
-----------------------------------------
Operating (loss) (278,010) (158,793) (70,875)
Interest income 76,786 58,679 22,824
Interest expense (158,139) (112,239) (25,602)
Gain on sale of subsidiary 8,930 - -
Other (expense) income, net (3,567) (1,889) 131
-----------------------------------------
(Loss) before income taxes (354,000) (214,242) (73,522)
(Benefit) for income taxes (5,094) (4,998) (20,849)
-----------------------------------------
(Loss) before minority interest and
equity in unconsolidated entities (348,906) (209,244) (52,673)
Minority interest in loss of consolidated entities 28,262 17,162 7,296
Equity in (loss) of unconsolidated entities (33,960) (12,719) (3,804)
-----------------------------------------
(Loss) before extraordinary item and cumulative
effect of change in accounting principle (354,604) (204,801) (49,181)
Extraordinary item - debt prepayment costs, net of tax (424) - (3,210)
Cumulative effect of change in accounting for
start-up costs, net of tax - (641) -
-----------------------------------------
Net (loss) (355,028) (205,442) (52,391)
Preferred stock dividend and accretion requirements 13,542 - -
-----------------------------------------
Net (loss) to common shareholders $ (368,570) $ (205,442) $ (52,391)
=========================================
Basic and diluted earnings per average common share:
(Loss) before extraordinary item and
cumulative effect of change in accounting principle $ (5.11) $ (3.35) $ (0.89)
Extraordinary item - debt prepayment costs $ (0.01) $ - $ (0.06)
Cumulative effect of change in accounting
for start-up costs $ - $ (0.01) $ -
Net (loss) $ (5.12) $ (3.36) $ (0.95)
Weighted average shares outstanding 71,966,301 61,187,354 54,965,716
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 64
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments $ 391,412 $ 120,126
Short-term investments 1,401,877 892,448
Accounts receivable from related parties 8,015 6,919
Accounts receivable, net of reserve for doubtful accounts
of $12,258 in 1999 and $5,766 in 1998 43,483 27,261
Unbilled revenues 2,124 2,727
Material and supply inventory 21,064 3,870
Prepayments and other 13,853 15,368
Deferred income taxes - 712
Investments restricted for debt service 23,111 23,437
----------------------
Total current assets 1,904,939 1,092,868
----------------------
Property, plant and equipment, net of accumulated depreciation
of $230,581 in 1999 and $153,304 in 1998 893,179 448,375
Investments restricted for debt service 48 19,869
Investments 190,571 129,529
Intangible assets, net of accumulated amortization of
$158,384 in 1999 and $97,313 in 1998 138,491 169,718
Deferred charges and other assets 64,886 47,256
----------------------
Total assets $3,192,114 $1,907,615
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt and capital lease obligations $ 1,225 $ 4,097
Accounts payable to related parties 35,809 7,153
Accounts payable 92,785 65,623
Advance billings and customer deposits 16,901 21,679
Accrued interest 13,090 5,267
Accrued cost of sales 18,296 12,000
Deferred income taxes 1,464 -
Accrued expenses 69,875 62,250
----------------------
Total current liabilities 249,445 178,069
----------------------
Long-term debt 2,143,096 1,263,036
Deferred income taxes - 3,281
Other deferred credits 24,598 14,667
Minority interest 129,234 77,116
Commitments and contingencies (Note 14)
Preferred stock, par value $1 per share:
Authorized 25,000,000 shares: Issued 263,053
shares at December 31, 1999 253,438 -
Common shareholders' equity:
Common stock, par value $1 per share: Authorized 200,000,000 shares:
Issued 77,724,070 and 65,477,493 shares at
December 31, 1999 and 1998, respectively 77,724 65,477
Class B common stock, par value $1 per share: Authorized
400,000,000 shares: none issued
Additional paid-in capital 923,340 539,770
Cumulative translation adjustments (2,014) (3,055)
Unrealized (depreciation) appreciation on investments (6,228) 1,113
Treasury stock, 562,000 shares and 557,000 shares at cost
at December 31, 1999 and 1998, respectively (9,391) (9,301)
Accumulated deficit (591,128) (222,558)
----------------------
Total common shareholders' equity 392,303 371,446
----------------------
Total liabilities and shareholders' equity $3,192,114 $1,907,615
======================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE> 65
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) $ (355,028) $ (205,442) $ (52,391)
Accretion of discounted debt 101,901 80,925 8,103
Accretion on short-term investments (6,318) (2,010) -
Amortization of debt issuance costs 5,534 2,816 408
Acquired in-process research and development - 18,293 -
Unrealized (depreciation) appreciation on short-term investments (7,341) - -
Gain on sale of subsidiary (8,621) - (661)
Extraordinary item - debt prepayment penalty 424 - 3,210
Depreciation and amortization 146,043 89,088 53,205
Deferred income taxes and investment tax credits, net (9,270) (6,147) (10,503)
Provision for losses on accounts receivable 7,691 4,125 2,732
Equity in loss of unconsolidated entities 33,960 12,719 3,804
Minority interest (28,262) (17,162) (7,296)
Net change in certain assets and liabilities,
net of business acquisitions:
Accounts receivable and unbilled revenues (22,353) 3,500 (14,979)
Material and supply inventory (17,124) (1,109) (1,605)
Accounts payable 59,950 28,456 11,193
Accrued expenses 25,943 37,446 3,353
Accounts receivable from related parties (1,096) 2,910 3,180
Accounts payable to related parties 2,179 3,405 (1,132)
Unearned revenue (2,659) (17,629) -
Other (9,274) 926 1,448
---------------------------------------
Net cash (used in) provided by operating activities (83,721) 35,110 2,069
---------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (526,240) (285,867) (79,042)
Purchase of short-term investments (4,230,149) (936,401) (445,137)
Sales and maturities of short-term investments 3,724,495 461,795 76,923
Acquisitions and investments (54,822) (47,361) (30,490)
Investment in unconsolidated joint venture (25,439) (20,000) -
Proceeds from sale of subsidiary 23,711 - 1,900
Other (108) (342) (14)
---------------------------------------
Net cash (used in) investing activities (1,088,552) (828,176) (475,860)
---------------------------------------
</TABLE>
<PAGE> 66
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities
Repayment of long-term debt and capital leases (101,622) (7,770) (141,250)
Issuance of long-term debt 875,000 502,587 688,000
Proceeds from the issuance of common stock 344,342 112,866 -
Proceeds from the issuance of preferred stock 239,897 112,866 -
Purchase of treasury stock (90) (9,301) -
Contribution to minority interest partner (122) (108) -
Change in affiliate notes, net - - 97,624
Extraordinary item - debt prepayment penalty (424) - (3,210)
Payments made for debt financing costs (39,484) (10,185) (20,151)
Cash contribution from minority interest partner 91,140 77,849 9,016
Decrease (increase) related to investments
restricted for debt service 22,500 22,375 (61,250)
Proceeds from the exercise of stock options 12,422 1,969 230
Transfers from C-TEC - - 89,323
Transfers (to) C-TEC - - (23,474)
---------------------------------------
Net cash provided by financing activities 1,443,559 690,282 634,858
---------------------------------------
Net increase (decrease) in cash and temporary cash investments 271,286 (102,784) 161,067
Cash and temporary cash investments at beginning of year 120,126 222,910 61,843
---------------------------------------
Cash and temporary cash investments at end of year $ 391,412 $ 120,126 $222,910
=======================================
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Income taxes $ 1,897 $ 1,047 $ 1,090
=======================================
Interest (net of $5,126 and $1,636 capitalized in 1999
and 1998, respectievly) $ 42,880 $ 28,781 $ 16,536
=======================================
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE> 67
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
Supplemental Schedule of Non-Cash Investing and Financing Activities
In July 1999, RCN completed the acquisition of Brainstorm Networks, Inc.
The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 15,785
Less:
Fair value of RCN stock issued 11,619
Liabilities assumed 1,850
-----------
Net cash paid $ 2,316
In August 1999, RCN completed the acquisition of Direct Network Access, Ltd.
The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 11,416
Less:
Fair value of RCN stock issued 6,844
Liabilities assumed 1,107
------------
Net cash paid $ 3,465
Preferred stock dividends in the form of additional shares of preferred
stock aggregated $13,053 in 1999.
Non-cash accretion of preferred stock was $489 in 1999.
In February 1999, BECO exchanged a portion of its ownership interest in
RCN-BECOCOM for 1,107,539 shares of RCN Common Stock, with a fair value
of aproximately $19,520.
In February 1998, RCN completed the acquisition of Erols Internet, Inc.
The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 147,000
Less:
Fair value of RCN stock issued (45,000)
Fair value of stock options exchanged (11,000)
Liabilities assumed (55,000)
-----------
Net cash paid (including out of pocket expenses of
approximately $1,400 and repayment of debt
of approximately $5,100) $ 36,000
===========
RCN contributed to Starpower approximately 60% of
the subscribers and related unearned revenue acquired in the acquisition
of Erols.
In February 1998, RCN completed the acquisition of UltraNet.
The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 41,500
Less:
Fair value of RCN stock issued (26,200)
Fair value of stock options exchanged (1,900)
Liabilities assumed (5,700)
-----------
Net cash paid $ 7,700
===========
In June 1998, RCN completed the acquisition of Interport Communications, Corp.
The transaction was accounted for as a purchase
A summary of the transaction is as follows:
Fair value of assets acquired $ 11,000
Less:
Fair value of RCN stock issued (8,500)
Liabilities assumed (1,200)
-----------
Net cash paid $ 1,300
===========
In June 1998, RCN completed the acquisition of Lancit Media Entertainment, Ltd.
The transaction was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 14,800
Less:
Fair value of RCN stock issued (7,400)
Liabilities assumed (7,000)
-----------
Net cash paid $ 400
===========
<PAGE> 68
In July 1998, RCN completed the acquisition of JavaNet, Inc. The transaction
was accounted for as a purchase.
A summary of the transaction is as follows:
Fair value of assets acquired $ 21,800
Less:
Fair value of RCN stock issued (13,400)
Liabilities assumed (4,700)
-----------
Net cash paid $ 3,700
===========
In 1997, certain intercompany accounts receivable and payable and intercompany
note balances were transferred to Shareholders' Net Investment in connection
with the Distribution.
BECO's contribution of the IRU to the RCN-BECOCOM joint venture (Note 7)
is included in "Telecommunications Network" at its fair value.
See accompanying notes to Consolidated Financial Statements
<PAGE> 69
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
Additional
Common Paid Accumulated
Stock in Capital Deficit
--------- ---------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 1 $ - $ -
Net loss from 1/1/97 through 9/30/97
Net loss from 10/1/97 through 12/31/97 (17,116)
Transfers from C-TEC
Common stock issued in connection
with the distribution 54,968 321,556
Stock plan transactions 20 210
--------- ---------- ---------
Balance, December 31, 1997 54,989 321,766 (17,116)
Net loss (205,442)
Common stock offering 6,099 106,767
Stock plan transactions 436 2,001
Common Stock and stock options issued
in connection with acquisitions 3,953 109,258
Purchase of treasury stock
Unrealized appreciation on investments
Other (22)
--------- ---------- ---------
Balance, December 31, 1998 $ 65,477 $ 539,770 $(222,558)
Net loss to common shareholders (368,570)
Common stock offering 9,200 335,142
Stock plan transactions 1,466 10,956
Conversion of joint venture ownership
interest 1,108 18,413
Common stock and stock options issued
in connection with acquisitions 467 18,852
Purchase of treasury
stock
Unrealized depreciation
on investments
Cumulative translation
adjustments
Other 6 207
--------- ---------- ---------
Balance, December 31, 1999 $ 77,724 $ 923,340 $(591,128)
========= ========== =========
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
Unrealized
Shareholders Cumulative Appreciation/ Total
Treasury Net Translation Depreciation Shareholders
Stock Investment Adjustment on Investments Equity
-------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ 393,819 $ (3,055) $ - $ 390,765
Net loss from 1/1/97 through 9/30/97 (35,275) (35,275)
Net loss from 10/1/97 through 12/31/9 (17,116)
Transfers from C-TEC 17,980 17,980
Common stock issued in connection
with the distribution (376,524) -
Stock plan transactions 230
-------- ----------- ------------ ------------ ------------
Balance, December 31, 1997 - - (3,055) - 356,584
Net loss (205,442)
Common stock offering 112,866
Stock plan transactions 2,437
Stock and stock options issued
in connection with acquisitions 113,211
Purchase of treasury stock (9,301) (9,301)
Unrealized appreciation on investments 1,113 1,113
Other (22)
-------- ---------- ------------ ------------ ------------
Balance, December 31, 1998 $ (9,301) $ - $ (3,055) $ 1,113 $ 371,446
Net Loss to common shareholders (368,570)
Common stock offering 344,342
Stock plan transactions 12,422
Conversion of joint venture ownership
interest 19,521
Common stock issued in
connection with acquisitions 19,319
Purchase of treasury
stock (90) (90)
Unrealized depreciation
on investments (7,341) (7,341)
Cumulative translation
adjustments 1,041 1,041
Other 213
-------- ---------- ------------ ------------ ------------
Balance, December 31, 1999 $ (9,391) $ - $ (2,014) $ (6,228) $ 392,303
======== ========== ============ ============ ============
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
Common Treasury Shares
Shares Issued Stock Outstanding
------------- --------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996 1,400 - 1,400
Common stock issued in connection with
the distribution 54,967,952 54,967,952
Stock plan transactions 20,518 20,518
------------- --------- -----------
Balance, December 31, 1997 54,989,870 - 54,989,870
Common stock offering 6,098,355 6,098,355
Stock plan transactions 436,342 436,342
Common Stock issued in connection with
acquisitions 3,952,926 3,952,926
Purchase of treasury stock (557,000) (557,000)
------------- --------- -----------
Balance, December 31, 1998 65,477,493 (557,000) 64,920,493
Preferred stock offering
Preferred stock dividend
Common stock offering 9,200,000 9,200,000
Stock plan transactions 1,518,897 1,518,897
Conversion of joint venture ownership
interest 1,107,539 1,107,539
Common Stock issued in connection with
acquisitions 420,141 420,141
Purchase of treasury stock (5,000) (5,000)
------------- ---------- -----------
Balance, December 31, 1999 77,724,070 (562,000) 77,162,070
============= ========== ===========
See accompanying notes to Consolidated Financial Statements
</TABLE>
<PAGE> 72
RCN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
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 has begun development in the Chicago market.
Prior to September 30, 1997, RCN Corporation was operated as part of C-TEC
Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100 percent of
the outstanding shares of common stock of its wholly owned subsidiaries, RCN
and Cable Michigan, Inc. ("Cable Michigan") to holders of record of C-TEC's
common stock and C-TEC's Class B common stock as of the close of business on
September 19, 1997 (the "Distribution"). C-TEC's corporate services group and
corporate financial services company both became subsidiaries of RCN immediately
coincident with the Distribution.
C-TEC's corporate services group had historically provided substantial support
services such as finance, cash management, legal, human resources, insurance and
risk management and its financial statements are included in the consolidated
financial statements of the Company. Prior to the Distribution, the corporate
office allocated the cost for these services pro rata among the business units
supported. In the opinion of management, the method of allocating these costs
is reasonable; however, the costs of these services remaining with the Company
after allocation to C-TEC's other business units are not necessarily indicative
of the costs that would have been incurred by the Company on a stand-alone
basis. The historical expense levels for these services after allocation to CTE
and Cable Michigan was approximately $8,000 for the nine months ending September
30,1997.
C-TEC, RCN and Cable Michigan have entered into certain agreements providing for
the Distribution, and governing various ongoing relationships, including the
provision of support services, between the three companies.
The consolidated financial statements have been prepared using the historical
basis of assets and liabilities and historical results of operations of all
wholly and majority owned subsidiaries. However, the historical financial
information for 1997 presented herein reflects periods during which the Company
did not operate as an independent company and accordingly, certain assumptions
were made in preparing such financial information. Such information, therefore,
may not necessarily reflect what the results of operations, financial condition
or cash flows of the Company would have been had the Company been an
independent, public company during all of 1997.
The consolidated financial statements include the accounts of all wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated. The Company has a 48.96% interest in Megacable, a Mexican cable
television system operator, and accounts for its investment by the equity
method. The RCN-BECOCOM joint venture which the Company controls and in which
the minority investors do not possess significant veto rights is consolidated.
The Starpower and JuniorNet joint ventures are accounted for by the equity
method.
<PAGE> 73
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Temporary Cash Investments -
- ------------------------------------
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
temporary cash investments.
Short-Term Investments and Investments Restricted for Debt Service -
- ------------------------------------------------------------------
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date in accordance with Statement of Financial Accounting
Standards No. 115 - "Accounting for Certain Investments in Debt and Equity
Securities." At December 31, 1999 and 1998, marketable debt and equity
securities have been categorized as available for sale. The Company states its
short-term investments at market. Investments restricted for debt service have
been categorized as held to maturity since management has the positive intent
and ability to hold such securities to maturity. At December 31, 1999,
investments restricted for debt service are comprised of U.S. Treasury notes and
Federal Agency notes and are stated at cost, which approximates market.
Material and Supply Inventory -
- -----------------------------
Material and supply inventory includes telecommunications equipment for use in
construction of the Company's services network. Inventories are stated at
average cost.
Property, Plant and Equipment and Depreciation -
- ----------------------------------------------
Property, plant and equipment reflects the original cost of acquisition or
construction, including related payroll and costs such as taxes, fringe
benefits, and certain general administrative costs.
Depreciation is provided on the straight-line method based on the useful lives
of the various classes of depreciable property. The average estimated lives of
depreciable property, plant and equipment are:
Lives
-----
Telecommunications network 5-22.5 years
Computer equipment 3-10 years
Buildings and leasehold improvements 5-45 years
Furniture, fixtures and vehicles 3-10 years
Other 5-10 years
Repairs of all property, plant and equipment and minor replacements and renewals
are charged to expense as incurred. Major replacements and betterments are
capitalized. Gain or loss is recognized on major retirements and dispositions.
<PAGE> 74
Intangible Assets -
- -----------------
Intangible assets are valued at cost and are amortized on a straight-line basis
over the expected period of benefit ranging from 1 to 15 years. The average
estimated lives of intangible assets are:
Lives
-----
Franchises and subscriber lists 3-11 years
Acquired current products/technologies 4 years
Noncompete agreements 5-8 years
Goodwill 3-10 years
Building access rights 3-4 years
Other intangible assets 1-15 years
Accounting for Impairments -
- --------------------------
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"). The Company has not
recognized any material impairment losses pursuant to SFAS 121.
Revenue Recognition -
- -------------------
Local telephone service revenue is recognized as earned based on tariffed rates.
Long distance telephone service revenue is recognized based on minutes of
traffic processed and tariffed rates or contracted fees. Reciprocal
compensation, the fee local exchange carriers pay to terminate calls on each
others networks, is recognized on a cash basis due to the uncertain regulatory
environment. Revenues from cable programming services are recognized in the
month the service is provided. Internet access web page and server hosting
and private line point to point data transmission service revenues are
recognized based on contracted fees.
Advertising Expense -
- -------------------
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $34,865, $28,841 and $12,203 in 1999, 1998 and 1997,
respectively.
Debt Issuance Costs -
- --------------------
Debt issuance costs are amortized over the life of the note. Debt Issuance
costs charged to operations were $5,534, $2,816 and $408 in 1999, 1998, and
1997, respectively.
Stock Based Compensation -
- ------------------------
The Company applies Accounting Principles Board Opinion No. 25 - "Accounting
for Stock Issued to Employees" ("APB 25") in accounting for its stock plans.
The Company has adopted the disclosure - only provisions of Statement of
Financial Accounting Standards No. 123 - "Accounting for Stock-Based
Compensation" ("SFAS 123").
Income Taxes -
- ------------
The Company and its subsidiaries report income for federal tax purposes on
a consolidated basis. Income tax expense is allocated to subsidiaries on a
separate return basis except that the Company's subsidiaries receive benefits
for the utilization of net operating losses and investment tax credits included
in the consolidated return even if such losses and credits could not have been
used on a separate return basis. Prior to the Distribution, the Company and its
subsidiaries were included in the consolidated federal income tax return of
C-TEC. The Company accounts for income taxes using the asset and liability
method.
<PAGE> 75
Foreign Currency Translation -
- ----------------------------
The Company has a 48.96% interest in Megacable. For 1997 and 1998, the Company
considered Megacable to operate in a highly inflationary economy due to the
three-year cumulative rate of inflation at December 31, 1996 exceeding 100%.
As a result, the financial statements of Megacable were remeasured as if the
functional currency were the U.S. dollar. The remeasurement of the Mexican peso
into U.S. dollars creates translation adjustments which were included in net
income. Beginning January 1, 1999, the Company discontinued highly inflationary
accounting for our Megacable investment and resumed using the Mexican Peso as
the functional currency. As a result the Company's equity is effected by the
translation from the Mexican Peso. The Company's proportionate share of such
adjustments were gains of $1,041 for the year ended December 31, 1999.
The Company's proportionate share of gains and losses resulting from
transactions of Megacable, which are made in currencies different from its own,
are included in income as they occurred. For purposes of determining its
equity in the earnings of Megacable, the Company translates the revenues and
expenses of Megacable into U.S. dollars at the average exchange rates that
prevailed during the period. Assets and liabilities are translated into U.S.
dollars at the rates in effect at the end of the fiscal period.
Comprehensive Income -
- --------------------
The Company primarily has two components of comprehensive income, cumulative
translation adjustments and unrealized appreciation (depreciation) on
investments. The cumulative foreign currency translation adjustment was $1,041
for 1999; the unrealized appreciation (depreciation) on investments was ($7,341)
for 1999 and $1,113 for 1998. The amount of other comprehensive loss for the
years ended December 31, 1999 and 1998 was ($361,328) and ($204,329),
respectively.
Segment Disclosure -
- ------------------
Management believes that the Company operates as one reportable operating
segment which contains many shared expenses generated by the Company's various
revenue streams and that any segment allocation of shared expenses incurred on
a single network to multiple revenue streams would be impractical and arbitrary;
furthermore, the Company currently does not make such allocations internally.
The Company's chief decision makers do, however, monitor financial performance
in a way which is different from that depicted in the historical general purpose
financial statements in that such measurement includes the consolidation of all
joint ventures, including Starpower which is not consolidated under generally
accepted accounting principles. Such information, however, does not represent
a separate segment under generally accepted accounting principles and therefore
it is not separately disclosed.
3. EARNINGS PER SHARE
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
year ended December 31, 1999, 1998, and 1997 and have a dilutive effect if the
Company had income from continuing operations is 10,008,239, 3,198,493 and
517,506, respectively.
<PAGE> 76
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(Loss) before extraordinary item and
cumulative effect of change in accounting
principle $ (354,604) $ (204,801) $ (49,181)
Preferred stock dividend and accretion
requirements ( 13,542) - -
----------- ----------- -----------
$ (368,146) $ (204,801) $ (49,181)
Basic (loss) per average common share:
Weighted average shares outstanding 71,996,301 61,187,354 54,965,716
=========== =========== ===========
(Loss) per average common share before
extraordinary item and cumulative effect of
change in accounting principle $ (5.11) $ (3.35) $ (0.89)
Diluted (loss) per average common share:
Weighted average shares outstanding 71,996,301 61,187,354 54,965,716
Dilutive shares resulting from stock options - - -
----------- ----------- -----------
71,996,301 61,187,354 54,965,716
=========== =========== ===========
(Loss) per average common share before
extraordinary item and cumulative effect
of change in accounting principle $ (5.11) $ (3.35) $ (0.89)
</TABLE>
4. BUSINESS COMBINATIONS
In August 1999, the Company acquired Direct Network Access, Ltd.("DNAI"),one
of the Bay Area's largest independent ISPs. The Company acquired DNAI for
approximately $3,454 in cash and RCN common stock with a fair value at the time
of issuance of approximately $6,844.
In July 1999, the Company acquired Brainstorm Networks, Inc.("Brainstorm"),
a leading independent Internet Service Provider ("ISP") that provides dedicated
and DSL services. The Company purchased Brainstorm for approximately $2,897
in cash and RCN common stock with a fair value at the time of issuance of
approximately $11,619.
Both of these transactions were accounted for under the purchase method
of accounting. Approximately $25,015 has been allocated to goodwill which is
being amortized over approximately 4 years. The Company does not expect these
acquisitions to have a material Proforma effect on its financial position or
results of operations.
<PAGE> 77
In July 1998, the Company acquired Javanet, Inc. ("Javanet"). The consideration
was $3,700 in cash and RCN Common Stock with a fair value of approximately
$13,400 at the time of issuance. The transaction was accounted for by the
purchase method of accounting. Approximately $14,800 has been allocated to
goodwill. Such goodwill is being amortized over approximately three years.
In June 1998, the Company acquired Interport Communications Corp. ("Interport").
The total approximate consideration for the transaction was $1,300 in cash and
RCN Common Stock with a fair value of approximately $8,500 at the time of
issuance. The transaction was accounted for by the purchase method of
accounting. Approximately $7,200 has been allocated to goodwill. Such goodwill
is being amortized over approximately four years.
In June 1998, the Company acquired Lancit Media Entertainment, Ltd. ("Lancit"),
a producer of high quality children's programming. The total approximate
consideration for the transaction was $400 in cash and RCN Common Stock with a
fair value of approximately $7,400 at the time of issuance. The transaction was
accounted for by the purchase method of accounting. In April 1999, the Company
disposed of its Lancit Media subsidiary (Note 7 (d)).
In February 1998, the Company acquired Erols Internet, Inc. ("Erols"). The
total approximate consideration was $36,000 in cash including out of pocket
costs of approximately $1,400 and the assumption and repayment of debt of
approximately $5,100 and RCN Common Stock with a fair value of approximately
$45,000 at the time of issuance. Additionally, the purchase price includes
approximately $11,000 representing the fair value of Erols stock options which
were converted to RCN stock options in connection with the acquisition. The
transaction was accounted for by the purchase method of accounting.
RCN contributed to Starpower approximately 60% of the subscribers and related
unearned revenue acquired in the acquisition of Erols. (Note 7)
Goodwill and the value assigned to certain acquired current products and
technologies, primarily residential dial-up and dedicated Internet access, and
Internet advertising of approximately $35,000 was recorded in connection
with the acquisition of Erols and contribution to Starpower. These intangible
assets are being amortized over approximately four years.
In February 1998, the Company acquired Ultranet Communications, Inc.
("Ultranet"). The total approximate consideration was $7,700 in cash including
cash payments aggregating approximately $503 to certain holders of Ultranet
stock options and RCN Common Stock with a fair value of approximately $26,200
at the time of issuance. Additionally, the purchase price includes
approximately $1,900 representing the fair value of UltraNet stock options which
were converted to RCN stock options in connection with the acquisition. The
transaction was accounted for by the purchase method of accounting.
RCN contributed to RCN-BECOCOM approximately 30% of the subscribers acquired
in the acquisition of Ultranet.
Goodwill and the value assigned to certain acquired current products and
technologies, primarily residential dial-up and dedicated Internet access
of approximately $31,100 was recorded in connection with the acquisition of
UltraNet and contribution to RCN-BECOCOM. These intangible assets are being
amortized over approximately four years.
<PAGE> 78
In connection with the acquisitions of Erols and UltraNet, RCN has
allocated $13,228 for Erols and $5,065 for UltraNet to in-process research
and development ("IPR&D"). Specifically, four projects were identified which
qualified as IPR&D by definition of not having achieved technological
feasibility and representing technology which at the point of acquisition
offered no alternative use than the defined project. The fair value of the
IPR&D projects associated with these acquisitions is based upon a discounted
cash flow analysis modified to represent only that portion of the project
associated with completed research and development efforts at the date of
acquisition. The IPR&D valuation charge was measured by the stage of
completion method. The expected completion percentages are estimated based on
the available financial information at the date of acquisition and were
established on a project by project basis primarily calculated by dividing the
costs incurred to date by the total expected R&D expenses specific to the
project. The significant assumptions utilized by management were as follows:
Cash flow projections, utilizing risk adjusted discount rates of between
35% and 40% for Erols projects. Cash flow projections, utilizing risk
adjusted discount rates of between 30% and 33% for UltraNet projects.
The IPR&D projections are founded on significant assumptions with regard to
timing of market entrance, levels of penetration, and costs of provisioning.
RCN is constructing new telecommunications networks. The margins on products
expected to result from acquired in-process technologies in some cases represent
higher margins than RCN's margins on existing products primarily due to the
efficiencies in delivering multiple products, including bundled-service
offerings, over a single state of the art high capacity fiber optic network.
For both the Erols and the UltraNet acquisitions, RCN identified the R&D
development projects to include:
- Cable Modem Internet access for subscribers, consisting of projects to
develop the hardware, systems and software to permit subscribers to be offered
high-speed Internet access through direct cable connection.
-Internet Telephony, representing projects to develop the potential for dial-
up telephone service through the Internet.
- E-Commerce Systems, consisting of the companies' efforts to develop a
suitable system that would permit subscribers to conduct commercial activities
over the Internet.
-High-speed shared office Internet access, representing a blending of fiber
optic and Internet networking technologies, which was under development as a
package to be offered to commercial clients.
Relative to the qualification of these projects as IPR&D projects under
the meaning within Statement of Financial Accounting Standards No. 2
("SFAS 2"), each represented at the date of acquisition a development
project associated with new and uncertain technology that was incomplete and
had not reached technical feasibility. Further, the technology under
development in each of these areas was not seen to present opportunities
for alternative future use should the contemplated development project
fail to achieve completion. In each of the above projects, the uncertainty
associated with each, in the absence of a successful product introduction,
may result in the possible abandonment of the project and the loss of both
invested development funds and the profit contributions that such projects
were expected to bring to the business as a whole.
<PAGE> 79
In March 1997, the Company paid $15,000 in full satisfaction of contingent
consideration from its 1996 acquisition of Freedom New York LLC ("Freedom").
The Company also paid $10,000 to terminate a marketing services agreement
between Freedom and an entity controlled by Freedom's former minority owners;
which the Company charged to operations for the quarter ended March 31, 1997.
The following unaudited pro forma summary presents information as if the
acquisitions of Erols, Ultranet, Interport, Javanet and Lancit had occurred at
the beginning of 1997. Results of operations for DNAI and Brainstorm are not
material. The pro forma information is based on historical information and is
provided for information purposes only and does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the consolidated entities.
Years Ended
December 31, 1998 1997
--------- ---------
(Unaudited)
Proforma Data:
Sales $ 226,272 $ 159,611
(Loss) from continuing operations before
extraordinary items $(220,271) $(106,338)
Net (loss) $(220,912) $(109,548)
========= =========
Earnings Per Share:
(Loss) from continuing operations before
extraordinary items $ (3.53) $ (1.80)
Net (loss) $ (3.54) $ (1.86)
5. SHORT-TERM INVESTMENTS
Short-term investments, stated at market, include the following at December 31,
1999 and 1998:
1999 1998
---------- --------
Federal agency notes $ 178,524 $126,580
Commercial Paper 219,318 85,234
Corporate debt securities 289,898 417,378
Certificates of deposit - 14,997
U.S. Treasury notes 434,500 84,399
Asset backed securities 279,637 163,860
---------- --------
Total $1,401,877 $892,448
========== ========
At December 31, 1999, short-term investments with a market value of $856,401
have contractual maturities of one to three years. All remaining short term
investments have contractual maturities under one year.
<PAGE> 80
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1999 1998
---------- ----------
Telecommunications plant $ 580,544 $398,746
Computer equipment and software 132,074 43,439
Buildings, leasehold improvements and land 42,959 22,653
Furniture, fixtures and vehicles 51,123 31,430
Construction in process 311,093 104,161
Other 5,967 1,250
---------- --------
Total property, plant and equipment 1,123,760 601,679
Less accumulated depreciation (230,581) (153,304)
---------- --------
Property, plant and equipment, net $ 893,179 $448,375
========== ========
Depreciation expense was $81,930, $39,000 and $24,257 for the years ended
December 31, 1999, 1998 and 1997, respectively.
7. INVESTMENTS AND JOINT VENTURES
Investments at December 31, are as follows:
1999 1998
--------- --------
Megacable $ 86,191 $ 67,978
Starpower Communications, LLC 74,733 61,495
JuniorNet Corporation 27,581 -
Other 2,066 56
-------- --------
Total Investments $190,571 $129,529
======== ========
At December 31, 1999, the Company has a 50% interest in Starpower, a 48.96%
interest in Megacable and a 47.5% interest in JuniorNet. At December 31, 1998,
the Company has a 50% interest in Starpower and a 40% interest in Megacable.
The Company accounts for these investments on the equity method.
a. RCN-BECOCOM
In 1996 RCN and the Boston Edison Company ("BECO"), through wholly-owned
subsidiaries, formed a joint venture to use 126 fiber miles of BECO's fiber
optic network to deliver our comprehensive communications package in Greater
Boston. A joint venture agreement provided for the organization and operation
of RCN-BECOCOM, LLC, an unregulated entity with a term expiring in the year
2060. RCN-BECOCOM is a Massachusetts limited liability company organized to
own and operate an advanced fiber optic telecommunications network and to
provide, in the market in and around Boston, Massachusetts, voice, video and
data services. At December 31, 1999 we owned 53.88% of the equity interest in
RCN-BECOCOM and BECO owned the remaining 46.12% interest. At December 31, 1998
we owned 51.00% of the equity interest in RCN-BECOCOM and BECO owned the
remaining 49.00% interest.
This joint venture with BECO is reflected in our financial statements on a
consolidated basis.
<PAGE> 81
RCN manages the business of RCN-BECOCOM pursuant to the terms of a management
agreement with an initial term expiring on December 31, 2001.
BECO has transferred to RCN-BECOCOM, an indefeasible right of use of certain
of its network facilities through the year 2060.
During 1998, the Company contributed to RCN-BECOCOM the Internet business in the
RCN-BECOCOM market, acquired in the acquisition of UltraNet, including
approximately 30% of the subscribers acquired from UltraNet. The total value
of the Internet business contributed to the joint venture was agreed to in arms-
length negotiations between the joint venture partners, based on the proportion
of subscribers contributed to RCN-BECOCOM to total subscribers acquired from
UltraNet.
BECO has the right to convert its ownership interest in RCN-BECOCOM into RCN
Common Stock pursuant to specific terms and conditions. On February 19, 1999,
BECO exchanged a portion of its interest for 1,107,539 shares of RCN common
stock. Such portion of the interest was valued as of January 15, 1998.
b. Starpower
The Company and PEPCO are each 50% partners in Starpower, a joint venture with
a perpetual term.
Starpower was formed to construct, own, lease, operate and market a network
for the selling of voice, video, data and other telecommunications services
to commercial and residential customers in the greater Washington, D.C.,
Virginia and Maryland area.
A subsidiary of RCN provides support services including customer service,
billing, marketing and certain administrative, accounting and technical support
services, each of which is provided at cost.
During 1998, the Company contributed to Starpower the Internet business in the
Starpower market, acquired in the acquisition of Erols, including approximately
60% of the subscribers acquired from Erols, and related unearned revenue. The
total value of the Internet business contributed to the joint venture was agreed
to in arms-length negotiations between the joint venture partners, based on the
proportion of subscribers contributed to Starpower to total subscribers
acquired from Erols.
The Company recorded its proportionate share of (losses) of ($12,200), and
($10,335) in 1999 and 1998, respectively.
c. Megacable
The basis of the Company's investment in Megacable exceeded its underlying
equity in the net assets of Megacable when acquired in 1995 by approximately
$94,000.
As of July 31, 1999, the Company executed on a pledge of an 8.96% equity
interest in Megacable made by Mazon Corporativo, S.A. de. C.V. ("Mazon")
to collateralize Mazon's indebtedness to the Company, which had a book value of
$18,373. As a result, the indebtedness was cancelled, and the Company's
underlying equity in the net assets of Megacable was increased by approximately
$7,000. The amortization of the excess equity is done on a straight-line basis
over a 15 year period. At December 31, 1999, the unamortized excess over the
underlying equity in the net assets was $73,932. The Company recorded its
proportionate share of (losses) and amortization of excess cost over net assets
of ($1,763), ($2,385) and ($3,869) in 1999, 1998 and 1997, respectively.
<PAGE> 82
d. JuniorNet
The basis of the Company's investment in JuniorNet Corporation ("JuniorNet")
exceeded its underlying equity in the net assets of JuniorNet when acquired in
1999 by approximately $50,000.
In April 1999, the Company acquired a 47.5% stake in JuniorNet. The Company
purchased the ownership stake for approximately $47,000 in cash. Concurrent
with that transaction, JuniorNet purchased the Company's Lancit Media subsidiary
for approximately $25,000 in cash. The Company acquired Lancit in June 1998 for
approximately $400 in cash and shares of its common stock with a fair value at
the time of issuance of approximately $7,400. The Company recorded its
proportionate share of (losses) and amortization of excess cost over net assets
of ($19,997) in 1999.
8. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31,
1999 1998
-------- --------
Franchises and subscriber lists $ 87,796 $ 85,984
Acquired current products/technologies 72,629 72,629
Noncompete agreements 11,100 11,100
Goodwill 103,785 57,447
Building access rights 15,295 15,295
Other intangible assets 6,270 24,576
-------- --------
Total intangible assets 296,875 267,031
Less accumulated amortization (158,384) (97,313)
-------- --------
Intangible assets, net $138,491 $169,718
======== ========
Amortization expense charged to operations in 1999, 1998 and 1997 was $64,113,
$50,088 and $28,948, respectively.
9. DEFERRED CHARGES
Deferred charges and other assets consist of the following at December 31:
1999 1998
-------- --------
Note and interest receivable - Mazon
Corporativo, S.A. de C.V. $ - $18,373
Debt issuance costs 60,639 27,112
Other 4,247 1,771
------- -------
Total $64,886 $47,256
======= =======
<PAGE> 83
10. DEBT
a. Long-term debt
Long-term debt outstanding at December 31 is as follows:
1999 1998
---------- ----------
Term Credit Agreement $ - $ 100,000
Term Loans 500,059 -
Senior Notes 10% due 2007 225,000 225,000
Senior Discount Notes 11 1/8% due 2007 444,430 398,827
Senior Discount Notes 9.8% due 2008 420,591 382,216
Senior Discount Notes 11% due 2008 176,495 158,573
Senior Notes 10.125% due 2010 375,000 -
Capital Leases 2,746 2,517
---------- ----------
Total 2,144,321 1,267,133
Due within one year 1,225 4,097
---------- ----------
Total Long-Term Debt $2,143,096 $1,263,036
========== ==========
In December 1999, the Company completed an offering of 10.125% Senior Notes with
an aggregate principal amount of $375,000. (the "10.125% Indenture").
The 10.125% Senior Notes are general senior obligations of the Company which
mature in January 2010.
The 10.125% Senior Notes are redeemable, in whole or in part, at any time on or
after January 15, 2005 at the option of the Company and have redemption prices
starting at 105% of the principal amount and declining to 100% of the principal
amount, plus any accrued interest.
In June 1999, the Company and certain of its subsidiaries together, ( the
"Borrowers") entered into a $1,000,000 Senior Secured Credit Facility (the
"Credit Facility"). 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 (the "Credit Agreement").
Also in June 1999, the Company prepaid its previous eight-year term credit
facility in the amount of $100,000 with the proceeds of the Credit Facility.
The early extinguishment of the previous term credit facility required the write
off of the applicable unamortized debt issuance cost resulting in an
extraordinary item of approximately ($424).
The Revolver may be borrowed and repaid from time to time. At December 31,
1999 there were no outstanding loans under the Revolver. 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
December 31, 1999 approximately $4,914 in the form of letters of credit
had been drawn under the Revolver.
The Term Loan A is available for drawing amounts until December 3, 2001.
Principle payments under Term Loan A commenced on September 2002. The Term Loan
A matures in June 2006. At December 31, 1999 there were no outstanding loans
under the Term Loan A.
<PAGE> 84
Principle payments under Term Loan B commenced on September 2002. The Term Loan
B matures in June 2007. As of December 31, 1999, $500,000 of the Term Loan B was
outstanding.
The interest rate on the Credit Facility is, at the election of the
Borrowers, based on either a LIBOR or an alternate base rate option. plus a
spread that is variable for the Revolver and Term Loan A borrowing based on
the Company's earnings before interest, income taxes, depreciation and
amortization ("EBITDA") and fixed for Term Loan B.
The Credit Agreement contains covenants customary for facilities of this nature,
including financial covenants and covenants limiting debt, liens, investments,
consolidation, mergers, acquisitions, asset sales, sale and leaseback
transactions, payments of dividends and other distributions, making of capital
expenditures and transactions with affiliates. The Borrowers must apply 50% of
excess cash flow, as defined in the Credit Agreement, for each fiscal year
commencing with the fiscal year ending on December 31, 2003 and certain cash
proceeds realized from certain asset sales, certain payments under insurance
policies and certain incurrences of additional debt to repay the Credit
Facility.
The Credit Facility is collateralized by substantially all of the assets of the
Company and its subsidiaries.
The 11% Senior Discount Notes (the "11% Indenture") are general senior
obligations of the Company, limited to $256,755 aggregate principal amount at
maturity and will mature on July 1, 2008. The 11% Senior Discount Notes were
issued at a discount to yield gross proceeds of $150,000. The 11% Senior
Discount Notes will not bear cash interest prior to January 1, 2003.
The 11% Senior Discount Notes are redeemable, in whole or in part, at any time
on or after July 1, 2003. The 11% Senior Discount Notes have redemption prices
starting at 105.5% of the principal amount at maturity and declining to 100% of
the principal amount at maturity, plus any accrued interest.
The 9.8% Senior Discount Notes (the "9.8% Indenture") are general senior
obligations of the Company, limited to $567,000 aggregate principal amount at
maturity and will mature on February 15, 2008. The 9.8% Senior Discount Notes
were issued at a discount to yield gross proceeds of $350,588. The 9.8%
Senior Discount Notes will not bear cash interest prior to February 15, 2003.
The 9.8% Senior Discount Notes are redeemable, in whole or in part, at any time
on or after February 15, 2003 at the option of the Company. The 9.8% Senior
Discount Notes have redemption prices starting at 104.9% of the principal
amount at maturity and declining to 100% of the principal amount at maturity,
plus any accrued interest.
In October 1997, the Company issued 10% Senior Notes with an aggregate
principal amount of $225,000 and 11 1/8% Senior Discount Notes with an aggregate
principal amount at maturity of $601,045, both due 2007. The Senior Discount
Notes were issued at a discount and generated gross proceeds to the Company of
$350,000. In January 1998 the Company exchanged its 10% Senior Notes due 2007,
Series B for any and all outstanding 10% Senior Notes due 2007, Series A and its
11 1/8% Senior Discount Notes due 2007, Series B for any and all outstanding
11 1/8% Senior Discount Notes due 2007 Series A.
<PAGE> 85
The 10% Senior Notes were issued under an indenture dated October 17, 1997 (the
"10% Indenture"). The 10% Senior Notes are general senior obligations of the
Company which mature on October 15, 2007 and are collateralized by a pledge of
the Escrow Account representing funds that, together with the future proceeds
from the investment thereof, will be sufficient to pay interest on the 10%
Senior Notes for six scheduled interest payments.
The 10% Senior Notes are redeemable, in whole or in part, at any time on or
after October 15, 2002 at the option of the Company. The 10% Senior Notes have
redemption prices starting at 105% of the principal amount and declining to 100%
of the principal amount, plus any accrued interest.
The 11 1/8% Senior Discount Notes were issued under an indenture dated October
17, 1997 (the "11 1/8% Indenture"). The 11 1/8% Senior Discount Notes are
general senior obligations of the Company, limited to $601,045 aggregate
principal amount at maturity and will mature on October 15, 2007. The 11 1/8%
Senior Discount Notes were issued at a discount to yield gross proceeds of
$350,000. The 11 1/8% Senior Discount Notes will not bear cash interest prior to
October 15, 2002.
The 11 1/8% Senior Discount Notes are redeemable, in whole or in part, at any
time on or after October 15, 2002 at the option of the Company. The 11 1/8%
Senior Discount Notes have redemption prices starting at 105.562% of the
principal amount at maturity and declining to 100% of the principal amount at
maturity, plus any accrued interest.
The 9.8% Senior Discount Notes, the 11% Senior Discount Notes, the 10% Senior
Notes and the 11 1/8% Senior Discount Notes contain certain covenants that,
among other things, limit the ability of the Company 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. At December 31,
the Company was restricted from making any dividend payments under the terms
of the Indentures.
Contractual maturities of long-term debt are as follows:
Year Ending December 31, Aggregate Amounts
2000 $ -
2001 $ -
2002 $ 2,000
2003 $ 4,000
2004 $ 4,000
In July 1999, the Company entered into $250,000 of two-year interest rate
protection agreements with various counterparties. These agreements convert
$250,000 of the Company's floating rate debt under the Credit Facility to a
fixed rate of approximately 6.08%. At December 31, 1999, the Company's
reported interest expense was approximately $432 higher due to these
agreements.
<PAGE> 86
11. INCOME TAXES
The (benefit)for income taxes is reflected in the Consolidated
Statements of Operations as follows:
1999 1998 1997
---------- -------- --------
Current:
Federal $ - $ - $(11,795)
State 659 1,149 1,449
---------- -------- --------
Total Current 659 1,149 (10,346)
---------- -------- --------
Deferred:
Federal (3,169) (4,410) (10,161)
State (2,584) (1,737) (342)
---------- -------- --------
Total Deferred (5,753) (6,147) (10,503)
---------- -------- --------
(Benefit) for income taxes:
Before extraordinary item (5,094) (4,998) (20,849)
Extraordinary item - - ( 1,728)
---------- -------- --------
Total (benefit) provision for income taxes $ (5,094) $ (4,998) $(22,577)
========== ======== ========
At December 31, 1998, the Company had tax related balances due to affiliates
$150 respectively.
Temporary differences that give rise to a significant portion of deferred tax
assets and liabilities at December 31, are as follows:
1999 1998
---------- ----------
Net operating loss carryforwards $ 213,961 $ 78,963
Alternative minimum tax credits - 85
Employee benefit plans 2,076 746
Reserve for bad debt 4,097 1,794
Start-up costs 3,980 825
Investment in unconsolidated entity 24,503 6,265
Accruals for nonrecurring charges and
contract settlements 1,332 909
Deferred revenue 1,256 10,401
Intangible assets 1,912 -
Other, net 5,203 6,734
---------- ---------
Total deferred tax assets 258,320 106,722
---------- ---------
Property, plant and equipment (24,409) (18,177)
Intangible assets - (6,618)
All other - (2,428)
---------- ---------
Total deferred liabilities (24,409) (27,223)
---------- ---------
Subtotal 233,911 79,499
Valuation allowance (235,375) (82,068)
---------- ---------
Total deferred taxes $ (1,464) $ (2,569)
========== =========
<PAGE> 87
During 1999, the Company generated federal net operating losses in the amount
of $314,708 and acquired separate return limitation year (SRLY) net operating
losses from the 1999 acquisitions of $1,018 which results in a deferred tax
asset totaling $110,504. In the opinion of management, realization of the
Company's deferred tax assets is not assured. A valuation allowance has
therefore been established for the federal and state deferred tax assets. A
valuation allowance has also been provided, as in past years, against the state
net operating losses which, in the opinion of management, are also uncertain as
to their realization.
The net change in the valuation allowance for deferred tax assets during 1999
was an increase of $153,307.
Net operating losses will expire as follows:
Federal State
2000-2019 $ 437,720 $ 491,019
2017-2018 21,205 203,176
--------- ---------
Total $ 458,925 $ 694,195
========= =========
The (benefit) for income taxes is different from the amounts computed
by applying the U.S. statutory federal tax rate of 35%. The differences are as
follows:
For the Years Ended
December 31,
1999 1998 1997
-----------------------------
(Loss) before (benefit) for
income taxes and extraordinary item $(359,698) $(210,440) $(70,030)
========= ========= ========
Federal income tax benefit at statutory rate $(125,895) $ (73,654) $(24,511)
State income taxes net of federal
income tax benefit (1,042) (382) 719
Federal valuation allowance 115,382 45,035 -
Write down of acquired R&D costs - 6,403 -
Amortization of goodwill 8,610 5,580 830
Contribution to subsidiary - Goodwill - 3,744 -
Estimated nondeductible expenses (3,000) 10,472 1,913
Adjustment to prior year accrual 132 (25) (197)
Other, net 719 (2,171) 397
--------- --------- --------
Total (benefit) for income taxes $ (5,094) $ (4,998) $(20,849)
========= ========= ========
12. Stockholders' Equity and Stock Plans
In June 1999 the Company completed a public offering of 9,200,000 shares
of Common Stock at a price of $39.00 per share. The net proceeds to the
Company were approximately $344,342 after deducting issuance costs.
<PAGE> 88
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,
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 December 31, 1999 the
Company paid dividends in the amount of $13,053 in the form of additional
shares of Series A Preferred Stock. At December 31, 1999 the number of common
shares that would be issued upon conversion of the Series A Preferred Stock was
6,744,949. The Company incurred $10,000 of issuance cost in connection
with the sale of the Series A Preferred Stock.
In June 1998, the Company completed a public offering of 6,794,500 shares of
Common Stock at a price of $19.50 per share. Of the 6,794,500 shares offered,
6,098,355 were offered by the Company and 696,145 shares were offered by a
Selling Stockholder. The net proceeds to the Company were approximately
$112,866 after deducting issuance costs.
In March 1998, the Company's Board of Directors approved a two-for-one stock
split, payable in the form of a 100% stock dividend. All share and per share
data, stock option data, and market prices of the Company's common stock have
been restated to reflect this stock dividend.
The 1997 RCN Corporation Stock Option Plan ("the 1997 Plan") contemplates the
issuance of incentive stock options, as well as stock options that are not
designated as incentive stock options, performance-based stock options, stock
appreciation rights, performance share units, restricted stock, phantom stock
units and other stock-based awards (collectively, "Awards"). Up to 10,000,000
shares of Common Stock, plus 3,040,100 shares of Common Stock issuable in
connection with the Distribution related option adjustments, may be issued
pursuant to Awards granted under the 1997 Plan.
Unless earlier terminated by the Company Board, the 1997 Plan will expire on the
tenth anniversary of the Distribution.
Prior to the Distribution, certain employees of RCN were granted stock option
awards under C-TEC's stock option plans. In connection with the Distribution,
3,040,100 options for Common Stock were issued. Each C-TEC option was
adjusted so that each holder would currently hold options to purchase shares of
CTE Common Stock, RCN Common Stock and Cable Michigan Common Stock. The number
of shares subject to, and the exercise price of, such options were adjusted to
take into account the Distribution and to ensure that the aggregate intrinsic
value of the resulting RCN, Cable Michigan and CTE options immediately after the
Distribution was equal to the aggregate intrinsic value of the C-TEC options
immediately prior to the Distribution.
<PAGE> 89
Information relating to stock options is as follows:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding December 31, 1996 2,268,000 $ 7.10
Granted 4,862,100 $14.31
Exercised 20,000 $ 8.07
Canceled 3,000 $ 8.36
-----------
Outstanding December 31, 1997 7,107,100 $11.95
Granted 2,527,424 $14.81
Exercised 408,389 $ 4.82
Canceled 373,993 $15.22
-----------
Outstanding December 31, 1998 8,852,142 $12.96
Granted 3,393,071 $41.63
Exercised 1,507,119 $ 8.26
Canceled 1,153,222 $23.72
===========
Outstanding December 31, 1999 9,584,872 $22.34
Shares exercisable December 31, 1999 3,066,517 $10.84
The following table summarizes stock options outstanding and exercisable at
December 31, 1999:
<TABLE>
<CAPTION> Stock Options
Stock Options Outstanding Exercisable
------------------------------------------------------ -----------------------------------
Weighted Average
Range of Exercise Remaining Weighted Average Weighted Average
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
1.30-6.50 116,628 7.4 $ 3.89 104,061 $ 3.74
6.51-8.40 2,042,820 5.4 $ 7.28 1,570,960 $ 7.11
8.41-19.25 3,980,451 8.0 $ 15.29 1,322,923 $ 15.15
19.26-29.81 701,273 7.2 $ 24.62 68,573 $ 23.87
29.82-49.13 2,743,700 6.6 $ 44.02 -
---------- --- ---------
9,584,872 7.0 3,066,517
</TABLE>
No compensation expense related to employee stock option grants was recorded in
1999,1998 or 1997 as the option exercise prices were equal to fair market value
on the date granted.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using a Black Scholes option pricing
model with weighted average assumptions for dividend yield of 0% for 1999, 1998
and 1997; expected volatility of 59.9% for 1999, 78.9% for 1998, and 47.4%
for 1997; risk-free interest rate of 5.62%, 4.72% and 6.52% for 1999, 1998 and
1997, respectively; and expected lives of 3 years for 1999, and 5 years for 1998
and 1997.
The weighted-average fair value of options granted during 1999 was $18.48.
<PAGE> 90
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Net earnings - as reported $(368,570) $(205,442) $(52,391)
Net earnings - pro forma $(384,941) $(214,586) $(54,419)
Basic and diluted earnings per share - as reported $ (5.12) $ (3.36) $ (0.95)
Basic and diluted earnings per share - pro forma $ (5.34) $ (3.51) $ (0.99)
</TABLE>
The Company has an Executive Stock Purchase Plan ("ESPP"). Under the ESPP,
participants may purchase shares of RCN Common Stock in an amount of between 1%
and 20% of their annual base compensation and between 1% and 100% of their
annual bonus compensation provided, however, that in no event shall the
participant's total contribution exceed 20% of the sum of their annual
compensation, as defined by the ESPP. The share units credited to a
participant's account do not give such participant any rights as a
shareholder.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement.
Amounts contributed under the ESPP will be subject to the claims of the
Company's creditors and creditors of certain affiliates of the Company.
The number of shares which may be distributed under the RCN ESPP as matching
shares or in payment of share units is 500,000. At December 31, 1999, there
were 170,385 RCN ESPP shares arising from participants' contributions and
170,385 matching shares. The Company recognizes the cost of the matching shares
over the vesting period. At December 31, 1999, deferred compensation cost
relating to matching shares was $1,030. Expense recognized in 1999 and 1998
was $656 and $615, respectively. Matching shares are included in weighted
average shares outstanding for purposes of computing earnings per share.
13. PENSIONS AND EMPLOYEE BENEFITS
C-TEC sponsors a 401(k) savings plan which, prior to the Distribution, covered
substantially all employees of the Company who were not covered by collective
bargaining agreements. Contributions made by the Company to the 401(k) plan were
based on a specific percentage of employees contributions. Contributions charged
to expense in 1997 prior to the Distribution were $515.
In connection with the Distribution, RCN established a 401(k) savings plan
that will also qualify as an ESOP (the "ESOP"). Contributions charged
to expense in 1999, 1998 and 1997 for these plans were $1,948, $1,255 and
$306, respectively.
The Company provides certain postemployment benefits to former or inactive
employees of the Company who are not retirees. These benefits are primarily
short-term disability salary continuance. The Company accrues the cost of
postemployment benefits over employees' service lives. The Company uses the
services of an enrolled actuary to calculate the expense. Prior to the
Distribution, C-TEC allocated the cost of these benefits to the Company based on
the Company's proportionate share of consolidated annualized salaries. The
Company reimbursed C-TEC for its allocable share of the consolidated
postemployment benefit cost. The net periodic postemployment benefit cost
was approximately $302, $543 and $458 in 1999, 1998 and 1997, respectively.
<PAGE> 91
14. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1999 related to
its 2000 construction budget.
b. Total rental expense, primarily for office space and equipment, was
$18,321, $10,475 and $3,505 for 1999, 1998 and 1997, respectively. At
December 31, 1999, rental commitments under noncancelable leases, excluding
annual pole rental commitments of approximately $915 that are expected to
continue indefinitely, are as follows:
Year Aggregate Amounts
2000 $21,388
2001 $19,098
2002 $18,658
2003 $13,758
2004 $12,906
Thereafter $64,342
c. The Company has outstanding letters of credit aggregating $4,914 at December
31, 1999.
d. The Company has entered into various noncancelable contracts for network
services. Future obligations under these agreements are as follows:
Year Network Services
2000 $ 3,000
2001 $ 2,750
e. In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial position or results of operations or
liquidity of the Company.
f. The Company has agreed to indemnify Cable Michigan and CTE and their
respective subsidiaries against any and all liabilities which arise primarily
from or relate primarily to the management or conduct of the business of the
Company prior to the effective time of the Distribution. The Company has also
agreed to indemnify Cable Michigan and CTE and their respective subsidiaries
against 30% of any liability which arises from or relates to the management or
conduct prior to the effective time of the Distribution of the businesses of
C-TEC and its subsidiaries and which is not a true CTE liability, a true Cable
Michigan liability or a true Company liability.
The Tax Sharing Agreement, by and among the Company, Cable Michigan and CTE (the
"Tax Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution Date. Under the Tax Sharing Agreement, Adjustments (as defined
in the Tax Sharing Agreement) to taxes that are clearly attributable to the
Company Group, the Cable Michigan Group, or the CTE Group will be borne solely
by such group. Adjustments to all other tax liabilities will be borne 50% by
CTE, 30% by the Company and 20% by Cable Michigan.
Notwithstanding the above, if as a result of the acquisition of all or a portion
of the Capital stock or assets of the Company, the Distribution fails to qualify
as a tax-free distribution under Section 355 of the Code, then the Company will
be liable for any and all increases in tax attributable thereto.
g. Under the Starpower Amended and Restated Operating Agreement, the Company is
committed to make quarterly capital contributions aggregating the following in
the years ended December 31:
2000 $43,619
2001 $ 9,005
h. If, within five years after the Distribution, the ESOP portion of the 401(k)
Plan does not hold shares representing 3% of the number of shares of Company
Common Stock outstanding immediately after the Distribution as increased
by the number of shares issuable to BECO pursuant to the Exchange Agreement
(collectively, "Outstanding Company Common Stock") with a market value at such
time of not less than $24,000, RCN will issue to the ESOP, in exchange for a
note from the ESOP (the "ESOP Note"), the amount of Company Common Stock
necessary to increase the ESOP's holdings of Company Common Stock to that level,
provided, however, that RCN is not obligated to issue shares to the ESOP in
excess of 5% of the number of shares of Outstanding Company Common Stock.
As of December 31, 1999, the ESOP holds 29,746 shares of outstanding
Company Common Stock.
<PAGE> 92
15. RELATED PARTY TRANSACTIONS
The Company had the following transactions with related parties during the years
ended December 31, 1999, 1998 and 1997:
1999 1998 1997
------- ------- -------
Corporate office costs allocated to related parties $ 5,235 $ 9,946 $12,091
Interest income on affiliate notes - - 8,688
Interest expense on affiliate notes - - 537
Long-distance terminating access charge expense from
related party 732 1,556 1,312
Royalty fees charged by related party - - 669
Expenses allocated to unconsolidated joint
venture partner 21,466 14,681 -
Related party expenses for network construction 48,878 - -
Related party expenses for utility service 2,236 - -
Terminating revenues from related party 8,216 13,322 1,576
Other related party expenses 274 1,598 2,199
At December 31, 1999 and 1998, the Company has accounts receivable from related
parties of $8,015 and $6,919, respectively, for these transactions. At
December 31, 1999 and 1998, the Company has accounts payable to related parties
of $35,809 and $7,153, respectively, for these transactions.
16. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of trade
receivables, cash and temporary cash investments, and short-term investments.
The Company places its cash, temporary cash investments and short-term
investments with high credit quality financial institutions and limits the
amount of credit exposure to any one financial institution. The Company
also periodically evaluates the creditworthiness of the institutions with
which it invests. The Company does, however, maintain invested balances
in excess of federally insured limits.
The Company's trade receivables reflect a customer base primarily centered in
the Boston to Washington, D.C. corridor of the United States. The Company
routinely assesses the financial strength of its customers. As a consequence,
concentrations of credit risk are limited.
The Company is a 50% partner in the Starpower joint venture, which is not
consolidated in the Company's financial statements under generally accepted
accounting principles.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity of
these investments.
b. Short-term investments
Short-term investments consist of commercial paper, U.S. Treasury Notes,
asset-backed securities, corporate debt securities, certificates of deposit
and federal agency notes. Short-term investments are carried at market value.
c. Long-term investments
Long-term investments consist of investments accounted for under the equity
method for which disclosure of fair value is not required. The note and
interest receivable was carried at cost plus accrued interest which management
believes approximates fair value.
<PAGE> 93
d. Investments restricted for debt service
Investments restricted for debt service consist of funds placed in escrow
from the proceeds of the 10% Senior Notes which, together with the proceeds from
the investment thereof, will be sufficient to pay interest on the 10% Senior
Notes for six scheduled interest payments. Investments restricted for debt
service are carried at amortized cost. The fair value of investments restricted
for debt service is based on quoted market prices.
e. Long-term debt
The fair value of fixed rate long-term debt was estimated based on the Company's
current incremental borrowing rate for debt of the same remaining maturities.
The fair value of floating rate debt is considered to be equal to the carrying
value since the debt reprices at least every six months and the Company believes
that its credit risk has not changed from the time the floating rate debt was
borrowed and therefore, it would obtain similar rates in the current market.
f. Letters of credit
The contract amount of letters of credit represents a reasonable estimate of
their value since such instruments reflect fair value as a condition of their
underlying purpose and are subject to fees competitively determined in the
marketplace.
The estimated carrying fair value of the Company's financial instruments is as
follows at December 31:
1999 1998
--------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- --------- ----------
Financial Assets:
Cash and temporary cash
investments $ 391,412 $ 391,412 $120,126 $120,126
Short-term investments $1,401,877 $1,401,877 $892,448 $892,448
Note and interest receivable $ - $ - $ 18,373 $ 18,373
Investments restricted for debt
service $ 23,159 $ 21,684 $ 43,306 $ 43,072
Financial Liabilities:
Fixed rate long-term debt:
Senior Notes 10.125% $ 375,000 $ 375,000 $ - $ -
Senior Notes 10% $ 225,000 $ 223,875 $225,000 $216,000
Senior Discount Notes 11.125% $ 444,430 $ 426,742 $398,827 $351,611
Senior Discount Notes 9.8% $ 420,591 $ 371,385 $382,216 $306,180
Senior Discount Notes 11.0% $ 176,495 $ 166,891 $158,573 $138,750
Floating rate long-term debt:
Term Loan B $ 500,000 $ 500,000 $ - $ -
Term Credit Agreement $ - $ - $100,000 $100,000
Unrecognized financial instruments:
Letters of credit $ 4,914 $ 4,914 $ 3,810 $ 3,810
<PAGE> 94
18. QUARTERLY INFORMATION (Unaudited)
<TABLE>
<CAPTION>
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 67,388 $ 66,929 $ 69,622 $ 72,054
Operating (loss) before depreciation,
amortization and nonrecurring charges $(21,449) $(25,406) $(32,587) $ (52,525)
Operating (loss) $(53,723) $(55,947) $(68,720) $ (99,620)
Loss before extraordinary item $(67,754) $(63,358) $(91,774) $(131,718)
Loss before extraordinary item common share $ (1.03) $ (0.97) $ (1.26) $ (1.78)
Net (loss) $(67,754) $(63,782) $(91,774) $(131,718)
Common Stock
High $ 39.75 $ 54.50 $ 51.50 $ 54.25
Low $ 17.75 $ 33.75 $ 32.25 $ 37.31
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
Sales $ 40,138 $ 49,808 $ 58,172 $ 62,822
Operating (loss) before depreciation,
amortization and nonrecurring charges $ (8,317) $ (9,619) $(16,578) $ (16,898)
Operating (loss) $(44,741) $(28,319) $(40,724) $ (45,009)
Loss before cumulative effect of change
in accounting principle $(41,785) $(43,795) $(54,430) $ (64,791)
Loss before cumulative effect of change
in accounting principle per average
common share $ (0.74) $ (0.75) $ (0.84) $ (1.00)
Net (loss) $(41,785) $(43,795) $(54,430) $ (65,432)
Common Stock
High $ 30.63 $ 29.38 $ 24.31 $ 25.00
Low $ 15.88 $ 19.25 $ 12.38 $ 8.75
</TABLE>
19. SUBSEQUENT EVENTS
In December 1999, the Company has announced it has entered into a definitive
agreement with respect to the acquisition of 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 transaction is
approximately $500,000 payable in RCN stock and assumed debt. The transaction
will be accounted for under the purchase method of accounting.
In February 2000, the Company made a $5,000 loan to Juniornet in the form of
a convertible bridge loan.
On October 4, 1999, the Company announced that Vulcan Ventures
Incorporated ("Vulcan"), the investment organization of Paul G. Allen, agreed
to make a $1,650,000 investment in the Company. The investment, which
closed on February 28, 2000, is in the form of mandatorily convertible preferred
stock (the "Preferred Stock"), which will be converted into Common Stock no
later than seven years after it is issued. Vulcan has agreed to purchase
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.
In connection with the investment, Vulcan will generally be permitted
to appoint two members to our Board of Directors. On February 28, Vulcan
appointed William D. Savoy, President of Vulcan and Edward S. Harris, Investment
Analyst with Vulcan. The Preferred Stock will automatically be converted to
Common Stock or Class B Stock seven years after the transaction closes, if not
previously called or converted. The Preferred Stock has a dividend rate of 7%
per annum. All dividends will be paid in additional shares of Preferred Stock.
<PAGE> 95
Pursuant to an exchange agreement between BECO and RCN, BECO has the
right, from time to time, to convert portions of its ownership interest in
RCN-BECOCOM into shares of our common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Communications
Securities Corporation ("NSTAR Securities"). In 1999, BECO and the Company
entered into two exchange transactions pursuant to which BECO converted a
portion of its ownership interest into RCN common stock which was issued to
NSTAR Securities. Prior to such exchange transactions, BECO owned a 49% interest
in the joint venture. At the close of business on December 31, 1999, BECO
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, BECO 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.
20. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In December 1998 the American Institute of Certified Public Accountants
issued Statement of Position 98-5 - "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires that all start-up costs, including
amounts previously capitalized as start-up and organization costs, be
expensed. The Company adopted SOP 98-5 in 1998 and expensed the amount
of unamortized organization costs previously capitalized. The resulting
charge of $641 is reflected in the 1998 Statement of Operations as the
cumulative effect of a change in accounting principle.
<PAGE> 96
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in these
financial statements is the responsibility of the management of RCN Corporation.
The financial statements report on management's accountability for Company
operations and assets. To this end, management maintains a system of internal
controls and procedures designed to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity with accounting principles generally accepted in the United States.
The system includes documented policies and guidelines, augmented by a
comprehensive program of internal and independent audits conducted to monitor
overall accuracy of financial information and compliance with established
procedures.
PRICEWATERHOUSECOOPERS LLP, independent accountants, conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements presented
herein.
The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company. The Audit Committee
recommends to the Board of Directors the independent auditors for election by
the shareholders. The Committee also meets periodically with management and the
independent and internal auditors to review accounting, auditing, internal
accounting controls and financial reporting matters. As a matter of policy, the
internal auditors and the independent auditors periodically meet alone with, and
have access to, the Audit Committee.
\s\ Timothy J. Stoklosa
- -----------------------
Timothy J. Stoklosa
Executive Vice President
Chief Financial Officer
<PAGE 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
RCN Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 37 present fairly, in all
material respects, the financial position of RCN Corporation and its
Subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
listed in the index appearing under Item 14 (a)(2) on page 37 present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
\s\ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 8, 2000
FIRST AMENDMENT, dated as of
December 3, 1999 (this "Amendment"), to the
Credit Agreement, dated as of June 3, 1999
(as amended, supplemented or otherwise
modified from time to time, the ("Credit
Agreement"), among RCN CORPORATION, (the
"Company") RCN TELECOM SERVICES OF
PENNSYLVANIA, INC., RCN CABLE SYSTEMS, INC.,
JAVANET, INC., RCN FINANCIAL MANAGEMENT,
INC., UNET HOLDING, INC., INTERPORT
COMMUNICATIONS CORP. and ENET HOLDING,
INC. (collectively, the "Borrowers"), the
LENDERS party thereto, and THE CHASE
MANHATTAN BANK, as Administrative Agent
and Collateral Agent.
WHEREAS, pursuant to the credit Agreement, the Lenders
have agreed to make certain loans to the Borrowers;
and
WHEREAS the Company and the Borrowers have requested
that certain provisions of the Credit Agreement be modified in
the manner provided for in this Amendment, and the Lenders are
willing to agree to such modifications as provided for in this
Amendment.
NOW, THEREFORIE, the parties hereto hereby agree as
follows:
1. Defined Terms. Capitalized terms used and not
defined herein shall have the meanings given to them in the
Credit Agreement, as amended hereby.
2. Amendments to the Credit Amendments.
(a) The definition of the term "Change in Control" in
Section 1.01 of the Credit Agreement is hereby amended by
deleting the word "and" immediately prior to the reference to
"David McCourt" and inserting a comma in place thereof and by
inserting, immediately after the reference to "David McCourt",
the following: "or Paul G. Allen and his Controlled Affiliates
(including, for so long as it is so Controlled, Vulcan Ventures
Incorporated)".
(b) Section 6.12 of The Credit Agreement is hereby
amended by deleting paragraphs (e), (f), (g), (h), W, W and (1)
therefrom in their entirety and substituting for each such
paragraph the following paragraph having the same designation:
"(e) Minimum Consolidated Revenue. Permit Consolidated
Revenue for any period of four consecutive fiscal quarters ending
on a date set forth below to be less than the amount set forth
opposite such date:
Fiscal Quarter Minimum
Ending Consolidated Revenue
- ------------------ --------------------
December 31, 1999 $270,000,000
March 31, 2000 300,000,000
June 30, 2000 320,000,000
September 30, 2000 340,000,000
December 31, 2000 365,000,000
March 31, 2001 385,000,000
June 30, 2001 410,000,000
September 30, 2001 450,000,000
December 31, 2001 495,000'000"
"(f) Minimum On-Net Connections. Permit On-Net
Connections at the end of any fiscal quarter ending on a date set
forth below to be less than the number set forth opposite such
date;
Fiscal Quarter Minimum
Ending On-Net Connections
- ------------------ ------------------
December 31, 1999 200,000
March 31, 2000 210,000
June 30, 2000 230,000
September 30, 2000 270,000
December 31, 2000 335,000
March 31, 2001 400,000
June 30, 2001 525,000
September 30, 2001 650,000
December 31, 2001 770,000"
"(g) Maximum Cumulative Negative EBITDA. Permit cumulative
negative EBITDA from the period commencing with the first day of
the first fiscal quarter ending on or after the date of this
Agreement to the last day of each fiscal quarter ending during a
period set forth below to exceed (i.e., be a greater negative
number than) the amount set forth below for such period:
Maximum
Cumulative
Negative
Period EBITDA
- ----------------------------------------- -------------
June 30, 1999 through December 31, 1999 -$150,000,000
January 1, 2000 through December 31, 2001 -$320,000,000"
"(h) Minimum Annualized EBITDA. Permit Annualized
EBITDA determined as of any date set forth below to be less
than the amount set forth opposite such date below:
Minimum
Annualized
Date EDITDA
- ----------------------- ------------
March 31, 2002 $15,000,000
June 30, 2002 $40,000,000
September 30, 2002 $100,000,000"
"(i) Maximum Senior Secured Debt to Annualized EBITDA.
Permit the ratio of W Senior Secured Debt outstanding on any
day from and including (A) the last day of any fiscal
quarter ending on the dates or during the periods set forth
below through (B) the day immediately preceding the last day
of the immediately following fiscal quarter to (ii)
Annualized EBITDA determined as of the date referred to in
clause (i)(A) above to exceed the ratio set forth below
opposite such date or period:
Fiscal Quarter
ENDING Maximum Ratio
- --------------------------- -------------
December 31, 2002 5.00 to I
March 31, 2003 5.00 to I
June 30, 2003 3.50 to 1
July 1, 2003 and 3.00 to 1"
thereafter
"(k) Interest Coverage Ratio. Permit the ratio of
(i) Annualized EBITDA determined as of the last day of
any fiscal quarter ending on the dates or in the years
set forth below to (ii) Annualized Cash Interest Expense
determined as of the last day of such fiscal quarter to be
less than the ratio set forth below opposite such date or
period:
Fiscal Quarter Ending on
or During Minimum Ratio
- ------------------------------------- --------------
June 30, 2002 1.25 to 1
September 30,2002 1.25 to 1
December 31,2002 1-25 to 1
Fiscal Year ending December 31,2003 1.50 to 1
Fiscal Year ending December 31,2004 1-75 to 1
Fiscal Year ending December 31,2005 2-00 to 1
Fiscal Year ending December 31,2006 2.00 to 1
Fiscal Year ending December 31,2007 2.00 to 1"
"(1) Minimum Fixed Charge Coverage Ratio. Permit the
ratio of (i) Annualized EBITDA determined as of the last day of
any fiscal quarter ending on or after June 30, 2002 to (ii)
Annualized Fixed Charges determined as of such date to be less
than 1.00 to I in respect of any such fiscal quarter ending at
any time from k7une 30, 2002 to and including September 30, 2002
and 1.20 to 1 in respect of any such fiscal quarter ending
thereafter."
3. No Other Amendments; Confirmation. Except as
expressly amended hereby, the provisions of the Credit Agreement
are and shall remain in full force and effect.
4. Representations and Warranties. The Company and the
Borrowers hereby represent and warrant to the Administrative
Agent and the Lenders that, as of the date hereof:
(a) No Default or Event of Default has occurred and
is continuing.
(b) The execution, delivery and performance by the
Company and the Borrowers of this Amendment have been duly
authorized by all necessary corporate and other action and
do not and will not require any registration with, consent
or approval of, notice to or action by, any person
(including any Governmental Authority) in order to be
effective and enforceable. The Credit Agreement as amended
by this Amendment constitutes the legal, valid and binding
obligation of the Company and the Borrowers, enforceable
against each in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other laws affecting
creditors' rights generally and subject to general
principles of equity, regardless of whether considered in a
proceeding in equity or at law.
(c) All representations and warranties of each Loan
Party set forth in the Loan Documents are true and correct
in all material respects-
5. Conditions Precedent to Effectiveness. This
Amendment shall become effective when the Agent shall have
received counterparts hereof duly executed and delivered by the
Company, the Borrowers and the Required Lenders (the "Effective
Date").
6. Conditions Subsequent to Continued Effectiveness.
In the event that (i) the Company has not, prior to December 3,
2000, received cash proceeds of not less then $1,650.000.00
from the issuance and sale to Paul Allen or his Controlled
Affiliates, including. for so long as it is so controlled,
Vulcan Ventures Incorporated ("Vulcan"), of shares of
mandatorily convertible preferred stock of the Company (the
"Vulcan Preferred") or (ii) the agreement between the Company
and Vulcan for the issuance and sale of the Vulcan Preferred is
terminated prior to the consummation of such issuance and sale,
this Amendment shall cease to be effective for all purposes with
the same effect as if it had never become effective.
7. Expenses. The Borrowers agree to reimburse the
Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and
disbursements of Cravath, Swaine & Moore, counsel for the Agent.
8. Governing Law; Counterparts.(a) This Amendment
and the rights and obligations of the parties hereto shall be
governed by, and construed and interpreted in accordance with,
the laws of the State of New York.
(b) This Amendment may be executed by one or more of
the parties to this Amendment on any number of separate
counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument. This
Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their duly authorized
officers as of the day and year first above written.
RCN CORPORATION,
by /s/ Bruce C. Godfrey
_________________________
Name: Bruce C. Godfrey
Title: Chief Financial Officer
RCN TELECOM SERVICES OF
PENNSYLVANIA, INC.
by /s/ Bruce C. Godfrey
_________________________
Name: Bruce C. Godfrey
Title: Chief Financial Officer
RCN CABLE SYSTEMS, INC.,
by /s/ Bruce C. Godfrey
_________________________
Name: Bruce C. Godfrey
Title: Chief Financial Officer
JAVA NET, INC.,
by /s/ Bruce C. Godfrey
_________________________
Name: Bruce C. Godfrey
Title: Chief Financial Officer
RCN FINANCIAL MANAGEMENT, INC.,
by /s/ Bruce C. Godfrey
_________________________
Name: Bruce C. Godfrey
Title: Chief Financial Officer
RCN CORPORATION
LIST OF SUBSIDIARIES Exhibit 21
State of PERCENTAGE
Name Incorporation OWNED
- -------------------------------------------------- ------------- ----------
RCN Corporation DE 100%
RCN Services, Inc PA 100%
TEC Air, Inc. DE 100%
RCN Financial Management, Inc. DE 100%
RCN Internet Services, Inc. DE 100%
UNET Holding, Inc. DE 100%
Interport Communications Corp NY 100%
Port Telecom Corporation DE 100%
Erde Network Systems Corporation DE 100%
JMP Communications Corporation DE 100%
JavaNet, Inc. DE 100%
Brainstorm Networks, Inc. CA 100%
C-TEC Financial Services, Inc. NV 100%
RCN Cable Systems, Inc. DE 100%
C-TEC Cable System Services, Inc. PA 100%
RCN of New Jersey, Inc. PA 100%
RCN of Southeast New York, Inc. PA 100%
RCN Telecom Services, Inc. PA 100%
RCN Telecom Services of Southeast New York, Inc. NY 100%
Fiberfone of Pennsylvania, Inc PA 100%
Fiberfone of New Jersey, Inc. NJ 100%
Fiberfone of Michigan, Inc. MI 100%
C-TEC Fiber Systems of New Jersey, Inc. NJ 100%
RCN Long Distance Company PA 100%
RCN International Holdings, Inc. DE 100%
RCN Telecom Holding Company DE 100%
RCN Operating Services, Inc. NJ 100%
RCN Telecom Services of Illinois, Inc. IL 100%
RCN Telecom Services of Maryland, Inc. MD 100%
RCN Telecom Services of Massachusetts, Inc. MA 100%
RCN Telecom Services of Michigan, Inc. MI 100%
RCN Telecom Services of New York, Inc. NY 100%
RCN Telecom Services of Washington, Inc. WA 100%
RCN Telecom Services of Delaware, Inc. DE 100%
RCN Telecom Services of California, Inc. CA 100%
RCN Telecom Services of Philadelphia, Inc. PA 100%
RCN Telecom Services of New Jersey, Inc. NJ 100%
RCN Telecom Services of Virginia, Inc. VA 100%
RCN Telecom Services of Washington, D.C., Inc. DC 100%
RCN Telecom Services of Maine, Inc. ME 100%
RCN Telecom Services of New Hampshire, Inc. NH 100%
RCN Telecom Services of Vermont, Inc. VT 100%
RCN Telecom Services of Rhode Island, Inc. RI 100%
RCN Telecom Services of Connecticut, Inc. CT 100%
RCN Telecom Service of Nevada, Inc. NV 100%
RCN Telecom Services of Arizona, Inc. AZ 100%
RCN Telecom Services of Oregon, Inc. OR 100%
FNY Holding Company, Inc. NY 100%
RCN Corporate Services, Inc. NJ 100%
RCN Financial Services, Inc. DE 100%
Freedom New York L.L.C. DE 100%
RCN-BecoCom, LLC MA 53.88%
Starpower Communications, LLC DE 50%
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-71525, 333-61223, 333-63889, and 333-48797) and
on Form S-8 (No. 333-37959 and 333-38137) of RCN Corporation of our report
dated March 8, 2000 relating to the financial statements and financial
statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 31, 2000
Exhibit 24
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas P. O'Neill, III do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Thomas P. O'Neill, III (SEAL)
--------------------------------
Thomas P. O'Neill, III
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, James Q. Crowe do make, constitute
and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd of March,
2000
/s/ James Q. Crowe (SEAL)
-----------------------
James Q. Crowe
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ David C. McCourt (SEAL)
------------------------
David C. McCourt
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael B. Yanney do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Michael B. Yanney (SEAL)
----------------------------
Michael B. Yanney
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard R. Jaros do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Richard R. Jaros (SEAL)
------------------------
Richard R. Jaros
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Alfred Fasola do make, constitute
and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd of
March, 2000.
/s/ Alfred Fasola (SEAL)
-------------------------
Alfred Fasola
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Stuart E. Graham do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000 and such specific rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Stuart E. Graham (SEAL)
----------------------------
Stuart E. Graham
Witness:
/s/ Camille D'Alessandro
- ------------------------------
Camille D'Alessandro
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene Roth do make, constitute and
appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial Officer, as my
true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Eugene Roth (SEAL)
-------------------------
Eugene Roth
Witness:
/s/ Pearl Morrell
- ---------------------------
Pearl Morrell
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas J. May do make, constitute
and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Thomas J. May (SEAL)
-------------------------
Thomas J. May
Witness:
/s/ Carol Batchelder
- --------------------------
Carol Batchelder
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Walter Scott, Jr. do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Water Scott, Jr. (SEAL)
--------------------------
Walter Scott, Jr.
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael A. Adams do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Michael A. Adams (SEAL)
---------------------------
Michael A. Adams
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Edward S. Harris do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and owers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 7th day of March,
2000.
/s/ Edward S. Harris (SEAL)
---------------------------
Edward S. Harris
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Levitt do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day of March,
2000.
/s/ Michael J. Levitt (SEAL)
---------------------------
Michael J. Levitt
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, William D. Savoy do make,
constitute and appoint Timothy J. Stoklosa, RCN Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the RCN Corporation Form 10-K for the fiscal year ended
December 31, 1999, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with the
same validity as I could, if personally present, and I hereby ratify and affirm
that my said attorney as I may deem to act for me, shall do, by virtue of these
presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence and
be in full force and effect on or about March 31, 2000, and such specific
rights, powers and authority shall remain in full force and effect thereafter
until termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by this
instrument authorized to perform, with the right to revoke such appointment of
substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 7th day of March,
2000.
/s/ William D. Savoy (SEAL)
---------------------------
William D. Savoy
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 391,412
<SECURITIES> 1,401,877
<RECEIVABLES> 57,872
<ALLOWANCES> 12,258
<INVENTORY> 21,064
<CURRENT-ASSETS> 1,904,939
<PP&E> 1,123,760
<DEPRECIATION> 230,581
<TOTAL-ASSETS> 3,192,114
<CURRENT-LIABILITIES> 249,445
<BONDS> 2,143,096
253,438
0
<COMMON> 77,724
<OTHER-SE> 314,579
<TOTAL-LIABILITY-AND-EQUITY> 3,192,114
<SALES> 0
<TOTAL-REVENUES> 275,993
<CGS> 0
<TOTAL-COSTS> 272,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,691
<INTEREST-EXPENSE> 158,139
<INCOME-PRETAX> (354,000)
<INCOME-TAX> (5,094)
<INCOME-CONTINUING> (354,604)
<DISCONTINUED> 0
<EXTRAORDINARY> (424)
<CHANGES> 0
<NET-INCOME> (355,028)
<EPS-BASIC> (5.12)
<EPS-DILUTED> (5.12)
</TABLE>
