<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-22825
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of March 31, 2000.
Common Stock 81,139,386
<PAGE>
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended
March 31, 2000 and 1999
Condensed Consolidated Balance Sheets-
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
2000 and 1999
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share and Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 71,257 $ 67,388
Costs and expenses, excluding
depreciation and amortization 138,807 88,837
Depreciation and amortization 44,412 32,274
--------------- ---------------
Operating (loss) (111,962) (53,723)
Interest income 36,320 13,403
Interest expense (53,337) (31,790)
Other income (expense), net (1,130) 707
--------------- ---------------
(Loss) before income taxes (130,109) (71,403)
(Benefit) for income taxes (796) (1,014)
--------------- ---------------
(Loss) before equity in unconsolidated
entities and minority interest (129,313) (70,389)
Equity in (loss) of unconsolidated entities (13,201) (3,903)
Minority interest in loss of
consolidated entities 4,393 6,538
--------------- ---------------
Net (loss) $ (138,121) $ (67,754)
Preferred dividend and accretion 15,462 -
--------------- ---------------
Net (loss) to common shareholders (153,583) (67,754)
=============== ===============
Basic and Diluted (loss) per average common share:
Net (loss) to shareholders $ (1.95) $ (1.03)
=============== ===============
Weighted average shares outstanding 78,921,825 65,629,601
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 1,708,154 $ 391,412
Short-term investments 1,402,883 1,401,877
Accounts receivable from related parties 15,915 8,015
Accounts receivable, net of reserve for
doubtful accounts of $12,389 at March 31,
2000 and $12,258 at December 31, 1999 28,959 28,434
Unbilled Revenues 2,390 2,124
Interest and dividends receivable 29,594 15,049
Material and supply inventory, at average cost 41,159 21,064
Prepayments and other 20,013 13,853
Investments restricted for debt service 23,471 23,111
------------- --------------
Total current assets 3,272,538 1,904,939
Property, plant and equipment, net of accumulated
depreciation of $259,346 at March 31, 2000 and
$230,581 at December 31, 1999 1,024,625 893,179
Investments restricted for debt service 48 48
Investments 229,711 190,571
Intangible assets, net of accumulated amortization
of $173,849 at March 31, 2000 and $158,384 at
December 31, 1999 159,764 138,491
Deferred charges and other assets 70,853 64,886
-------------- --------------
Total assets $ 4,757,539 $ 3,192,114
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 856 $ 1,225
Accounts payable 77,357 92,785
Accounts payable to related parties 17,166 35,809
Advance billings and customer deposits 18,209 16,901
Deferred income taxes 1,474 1,464
Accrued expenses 113,626 101,261
-------------- --------------
Total current liabilities 228,688 249,445
Long-term debt 2,170,063 2,143,096
Other deferred credits 22,448 24,598
Minority interest 95,354 129,234
Commitments and contingencies
Preferred stock, par value $1 per share: Authorized
25,000,000 shares 1,883,328 253,438
Common shareholders' equity:
Common stock, par value $1 per share: Authorized
200,000,000 shares: Issued and outstanding
81,704,680 at March 31, 2000 and 77,724,070
December 31, 1999 81,704 77,724
Class B Common stock, par value $1 per share:
Authorized 400,000,000 shares: none issued - -
Additional paid-in capital 1,090,153 923,340
Cumulative translation adjustments (9,775) (2,014)
Unearned compensation expense (38,207) -
Unrealized (depreciation) investments (11,915) (6,228)
Treasury stock, 565,294 shares and 562,000 shares at cost
at March 31, 2000 and December 31, 1999, respectively (9,591) (9,391)
Deficit (744,711) (591,128)
-------------- --------------
Total common shareholders' equity 357,658 392,303
-------------- --------------
Total liabilities and shareholders' equity $ 4,757,539 $ 3,192,114
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
March 31,
-----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES $ (139,987) $ (21,406)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (155,262) (75,592)
Investment and advance to unconsolidated entities (19,108) (3,302)
Purchase of investments (45,220) (505,377)
Sales and maturities of short-term investments 1,815 574,480
Other (5,360) (716)
-------------- --------------
Net cash (used in) investing activities (223,135) (10,507)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt & capital lease obligation (519) (235)
Purchase of treasury stock (200) (90)
Payments made for debt financing costs (179) (306)
Contribution from minority interest partner 61,005 -
Proceeds from the issuance of preferred stock 1,614,428 -
Proceeds from the exercise of stock options 5,329 2,545
-------------- --------------
Net cash provided by financing activities 1,679,864 1,914
-------------- --------------
Net increase (decrease) in cash and
temporary cash investments 1,316,742 (29,999)
Cash and temporary cash investments at beginning of year 391,412 120,126
-------------- --------------
Cash and temporary cash investments at March 31 $ 1,708,154 $ 90,127
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 40,063 $ 1,083
============== ==============
Income taxes $ 181 $ 505
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Amounts)
1. RCN Corporation (the "Company" or "RCN") provides a wide range of
telecommunications services through high speed, high capacity advanced fiber
optic networks. RCN currently offers individual or bundled local and long
distance telephone, video and data services, including high speed Internet
access. We provide our services primarily to residential customers in selected
markets with high levels of population density and favorable demographics.
RCN's advanced fiber optic networks have been established in selected markets
in the Boston to Washington D.C. corridor and in the San Francisco to San Diego
corridor, and has begun development in the Chicago market.
2. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1999.
3. During the first quarter of 2000, approximately 263,354 options were
granted, approximately 418,488 were exercised yielding cash proceeds of $5,329
and approximately 414,200 options were canceled. At March 31, 2000, there are
approximately 8,917,528 options outstanding at exercise prices ranging from
$1.30 to $70.50 under RCN's 1997 Plan.
4. Basic loss per share is computed based on net (loss) after preferred
stock dividend and accretion requirements divided by the weighted average
number of shares of common stock outstanding during the period.
Diluted loss per share is computed based on net (loss) after preferred
stock dividend and accretion requirements divided by the weighted average
number of shares of common stock outstanding during the period after giving
effect to convertible securities considered to be dilutive common stock
equivalents. The conversion of preferred stock and stock options during the
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of shares of preferred
stock and stock options which would have been assumed to be converted in the
quarters ended March 31, 2000, and 1999 and have a dilutive effect if the
Company had income from continuing operations is 22,192,772 and 4,310,145,
respectively.
Quarter Ended March 31,
-----------------------------
2000 1999
----------- -----------
Net (loss) $ (138,121) $ (67,754)
Preferred stock dividend and accretion
requirements 15,462 -
---------- ----------
Net loss to common shareholders $ (153,583) $ (67,754)
Basic loss per average common share:
Weighted average shares outstanding 78,921,825 65,629,601
Loss per average common share $ (1.95) $ (1.03)
Diluted loss per average common share:
Weighted average shares outstanding 78,921,825 65,629,601
Dilutive shares resulting from stock options - -
----------- -----------
Weighted average shares and common stock
equivalents outstanding 78,921,825 65,629,601
=========== ===========
Loss per average common share $ (1.95) $ (1.03)
<PAGE>
5. The Company primarily has two components of comprehensive income, cumulative
translation adjustments and unrealized depreciation on investments. The amount
of other comprehensive loss for the quarters ended March 31, 2000 and March 31,
1999 was ($151,570) and ($69,155), respectively.
6. On February 28, 2000, the Company and Vulcan Ventures Incorporated
("Vulcan"), the investment organization of Paul G. Allen, completed a
transaction which culminated in Vulcan acquiring a $1.65 billion investment in
the Company in the form of mandatorily convertible preferred stock (the
"Preferred Stock"), which will be converted into the Company's Common Stock,
("Common Stock"), no later than seven years after it is issued, if not
previously called or converted. Vulcan purchased 1,650,000 shares of the
Preferred Stock. The Preferred Stock has a liquidation preference of $1,000
per share and is convertible into Common Stock at a price of $62 per share.
The Preferred Stock has a dividend rate of 7% per annum. All dividends will be
paid in additional shares of Preferred Stock. At March 31, 2000 the Company
paid dividends in the amount of $10,267 in the form of additional shares of
Series A Preferred Stock. At March 31, 2000 the number of common shares that
would be issued upon conversion of the Series A Preferred Stock was 26,778,495.
In connection with the investment, Vulcan was permitted to appoint two members
to the Company's Board of Directors. On February 28, 2000 Vulcan appointed
William D. Savoy, Vice President of Vulcan and Edward S. Harris, Investment
Analyst with Vulcan.
7. On April 28, 2000, the Company acquired 21st Century Telecom Group, Inc.
("21st Century"). The approximate consideration was $500,000 and the
acquisition will be accounted for by the equity method of accounting. 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.
8. Pursuant to an exchange agreement between NSTAR Communications Securities
Corporation ("NSTAR Securities") and RCN, NSTAR Securities has the right, from
time to time, to convert portions of its ownership interest in RCN-BECOCOM into
shares of the Company's common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Securities.
At the close of business on December 31, 1999, NSTAR Securities exchanged a
further portion of its interest for 2,989,543 shares of RCN common stock. Such
portion of the interest was valued as of May 27, 1999. Immediately following
such exchanges, NSTAR Securities retained a 23.14% sharing ratio in the joint
venture, and the right to invest as if it owned a 49% interest. Such investment
percentage will decrease to the extent NSTAR Securities disposes of such RCN
common stock. In April NSTAR Securities gave notice to us of its intent to
convert its remaining ownership interest currently representing a 29.35%
interest in RCN-BECOCOM. Shares of RCN common stock will be issued to NSTAR
Securities following the valuation of its interest.
9. On March 10, 2000, the Company issued 559,257 shares of restricted stock
with a fair value, on that date, of $67.00 per share. During the performance
period the grantee may vote the shares, but the shares are subject to transfer
restrictions and are all or partially forfeited if a grantee terminates. The
restricted stock vests over three years, 1/3 after year two and the remaining
2/3 after year three and has a five year life. The restricted stock is
considered issued and outstanding. At March 31, 2000, the related unamortized
unearned compensation expense, included as a separate component of
stockholders equity, was $38,207, which is being amortized to expense ratably
over the restriction period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars, Except Per Share Data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to expected capital
expenditures, capital contributions to joint ventures by joint venture partners,
and expected trends in operating losses and cash flows associated with
investments in new markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Form 10-K.
GENERAL
RCN Corporation (the "Company" or "RCN") is the nation's first and largest
single-source facilities-based provider of bundled local and long distance
phone, cable television and high-speed Internet services to the densest
residential markets in the country. The Company is currently delivering
broadband services over its Megaband Network or designing and building its
network on both the East and West coasts as well as in Chicago. In addition,
the Company is a leading Internet Service Provider in its markets. RCN offers
individual or bundled service options, superior customer service and
competitive prices. The Company is also constructing its networks with
significant excess capacity in order to accommodate expanded services in the
future. The Company intends to expand the services provided to its customers
through strategic alliances and opportunistic development of complementary
products. In addition, the Company 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.
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>
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."
<PAGE>
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
For the quarter ended March 31, 2000, sales increased 5.7% to $71,257
from $67,388 for the same period in 1999. Operating losses before
depreciation and amortization were $(67,550) as compared to $(21,449) for the
same period in 1999.
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, 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 $3,869, or 5.7%, to $71,257 for the quarter ended
March 31, 2000 from $67,388 for the quarter ended March 31, 1999. The
increase primarily resulted from average service connections, which increased
8.0% to approximately 944,000 for the quarter ended March 31, 2000
from approximately 874,000 for the quarter ended March 31, 1999 (including
connections of the Starpower joint venture). The increase in average service
connections resulted principally from growth in average on-net connections,
which increased 79.3% from approximately 132,000 for the quarter ended March 31,
1999 to approximately 237,000 for the quarter ended March 31, 2000. Total
advanced fiber connections increased 71.5% from 149,235 at March 31, 1999 to
255,913 at March 31, 2000. Advanced fiber units passed increased 130.4% to
808,023 units at March 31, 2000 from 350,733 units at March 31, 1999.
Voice sales decreased $366, or 2.6%, to $13,593 for the quarter ended
March 31, 2000 from $13,959 for the quarter ended March 31, 1999.
Average advanced fiber voice connections increased approximately 95.2% to
approximately 65,000 for the quarter ended March 31, 2000 (including connections
of the Starpower joint venture) from approximately 33,000 for the quarter ended
March 31, 1999. Average off-net voice connections decreased approximately 29.8%
to approximately 46,000 for the quarter ended March 31, 2000 from approximately
65,000 for the quarter ended March 31, 1999. The increase in voice revenue from
higher average connections of approximately $600 was offset by a decrease in
revenue per connection of approximately 7.5%. Although minutes, calls and
average call length increased, revenue per minute declined.
<PAGE>
Video sales increased $2,631, or 8.7%, to $32,979 for the quarter ended
March 31, 2000 from $30,348 for the quarter ended March 31, 1999. The
increase was primarily due to approximately 30,000 additional average video
connections for the quarter ended March 31, 2000 as compared to the quarter
ended March 31, 1999. Average on-net video connections grew 57,000 or 62.6% to
approximately 147,500 for the quarter ended March 31, 2000 (including
connections of the Starpower joint venture) from approximately 91,000 for the
quarter ended March 31, 1999. Average off-net video connections were
approximately 148,500 and 175,000 for the quarter ended March 31, 2000 and 1999,
respectively. Overall higher service connections contributed approximately
$2,100 to the increase in video sales and higher average revenue per connection
principally contributed the remainder.
Data sales increased $715, or 4.5% to $16,517 for the quarter ended
March 31, 2000 from $15,802 for the quarter ended March 31, 1999. The
increase was primarily due to approximately 27,000 additional average data
connections for the quarter ended March 31, 2000 as compared to the quarter
ended March 31, 1999. While data sales increased in the first quarter of 2000
over the same quarter in 1999 the Company experienced a decline in data revenue
and off net dial-up subscribers resulting from increased competition from free
internet and broadband services from the fourth quarter of 1999 to the first
quarter of 2000.
For the quarter ended March 31, 2000, the Company had approximately 513,000
average off-net data connections and approximately 24,000 average advanced fiber
data connections, including connections of the Starpower joint venture. For the
quarter ended March 31, 1999, the Company had approximately 502,000 average
off-net data connections and approximately 8,000 advanced fiber data
connections, including connections of the Starpower joint venture.
Overall higher average service connections contributed approximately $900
to the increase in data sales which was partially offset by lower
average revenue per connection of 1.0%.
Other sales increased $888 or 12.2% to $8,167 for the quarter ended March 31,
2000 from $7,279 for the quarter ended March 31, 1999. The increase was due
primarily to higher reciprocal compensation, which was offset by lower
television production revenue due to the disposition of the Company's Lancit
Media subsidiary in April 1999.
The Company recognizes that managing customer turnover is an important factor in
maximizing revenues and cash flow. For the quarter ended March 31, 2000, the
Company's average monthly churn rate was approximately 2.3%.
Costs and expenses, excluding depreciation and amortization
- -----------------------------------------------------------
Costs and expenses, excluding depreciation and amortization, are comprised of
direct costs, and operating, selling and general and administrative expenses.
Direct expenses include direct costs of providing services, primarily video
programming, franchise costs and network access fees.
Direct expenses increased $3,319, or 9.5%, to $38,081 for the quarter ended
March 31, 2000 from $34,762 for the quarter ended March 31, 1999. The
increase was principally the result of higher sales, a lower margin on
data sales due principally to higher network backbone costs offset by a higher
margin on voice sales due to a decline in resale telephony customers and an
increase in on-net voice customers.
<PAGE>
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 $46,651, or
86.3%, to $100,726 for the quarter ended March 31, 2000 from $54,075 for the
quarter ended March 31, 1999.
Customer services costs, including order processing, increased approximately
$7,900, or 91.9%, for the quarter ended March 31, 2000 as compared to the
quarter ended March 31, 1999. The increase is primarily personnel related to
support the increase in average connections over the comparable period in
1999 and to increase the level of service. The increases were primarily for
customer service representatives and provisioners which facilitated a "warm
call" program which contacts customers within 48 hrs after initiating services
and a corresponding decline in the number of calls per connection. Customer
service costs per average connection per month increased 77.6% in 2000 over
1999.
Technical expense, including installation and provisioning, increased
approximately $11,600, or 113.5%, for the quarter ended March 31, 2000 as
compared to the quarter ended March 31, 1999. Technical expense increases of
approximately $16,100 were due to engineering and construction headcount and
contract labor additions made to plan and execute network expansion and network
operations control center monitoring. Employee related telephone and vehicle
expenses increased approximately $700 and network and equipment maintenance
costs increased approximately $900. Rental and utility expense, primarily for
material storage and hub sites, increased approximately $800. These increases
are partially offset by an increase of approximately $7,900 in technical costs
capitalized as part of the cost basis of the telecommunications network.
Sales and marketing costs increased approximately $6,400, or 86.7%, for the
quarter ended March 31, 2000 as compared to the quarter ended March 31, 1999.
The increase resulted principally from additional staff and related commissions
and benefits to cover increases in marketable homes, to increase penetration in
the Company's existing markets and to increase the number of services per
customer. Additionally, event marketing activity has increased to promote RCN
brand awareness, community involvement and new products such as the ResiLink
bundled product offering.
Advertising costs increased approximately $3,500, or 55.1%, for the quarter
ended March 31, 2000 as compared to the quarter ended March 31, 1999. The
increase is primarily related to costs incurred for direct product advertising
in response to competitive pressures and continuing churn of dial-up Internet
subscribers.
General and administrative expenses increased approximately $17,200, or 80.1%,
for the quarter ended March 31, 2000 as compared to the quarter ended March 31,
1999. Information technology expenses increased approximately $3,200. The
Company is in the process of developing information technology systems which
will provide a sophisticated customer care infrastructure as well as other
billing and administrative support systems. Such systems include a tracking and
billing system to support the Companies ResiLink bundled service package
These multiple systems are in various stages of development and implementation.
The expense increases represent staff additions to both support this effort and
maintain the systems as well as consulting expenses associated with the
planning, analysis, data conversion and training phases of these projects.
The Company expects that such charges may increase in future periods.
Employee expenses increased approximately $2,700 as a result of increased
support staff while recruiting and training costs increased approximately
$1,700.
Operating taxes, primarily property taxes, increased approximately $1,300 as a
result of expanded operations. Rent and utility expense increased approximately
$3,000, primarily related to additional space required to support the increase
in headcount. The remaining increase primarily represents additional
development and support expenses associated with expanding operations and new
markets.
<PAGE>
Depreciation and amortization
- -----------------------------
Depreciation and amortization was $44,412 for the quarter ended March 31, 2000
and $32,274 for the quarter ended March 31, 1999. The increase of $12,138, or
37.6%, was the result of a higher depreciable basis of plant resulting primarily
from expansion of the Company's advanced fiber network, and amortization of
intangible assets arising from the acquisitions of DNAI and Brainstorm in later
periods of 1999. The cost basis of property, plant and equipment at March 31,
2000 and 1999 was $1,283,971 and $675,093, respectively. Depreciation expense
as a percentage of average gross property, plant and equipment, excluding
construction in progress, was 3.4% and 3.2% for the quarters ended March 31,
2000 and 1999, respectively. The basis of intangible assets was $333,613 and
$273,026 at March 31, 2000 and 1999, respectively. Amortization expense as a
percentage of average intangible assets was 4.9% and 5.8% for the quarter ended
March 31, 2000 and 1999, respectively.
The Company expects that depreciation expense will increase in future periods
due to the expansion of the Company's advanced fiber optic network.
Interest income
- ----------------
Interest income was $36,320 and $13,403 for the quarter ended March 31, 2000
and 1999, respectively. The increase of $22,917, or 171.0%, results from higher
average cash, temporary cash investments and short-term investments as compared
to the same period in 1999. Cash, temporary cash investments and short-term
investments were $3,111,037 at March 31, 2000 and $914,674 at March 31, 1999.
During later periods of 1999, proceeds from the following significant financing
transactions increased cash, temporary cash investments and short-term
investments: (1) the issuance of 250,000 shares of a new issue of the Company's
Series A Preferred Stock in April 1999, which yielded net proceeds of
approximately $240,000, (2) the issuance of 9,200,000 shares of the Company's
common stock, in 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. During the first quarter of 2000, net proceeds
from the investment by Vulcan Ventures Incorporated in RCN convertible preferred
stock were approximately $1,614,000. These increases were partially offset
by capital expenditures of approximately $606,000 and working capital
requirements.
Interest expense
- ----------------
For the quarter ended March 31, 2000, interest expense was $53,337 as compared
to $31,790 for the quarter ended March 31, 1999. The increase resulted primarily
from higher interest and commitment fees of $13,574 relating to the Company's
Credit Facility, which the Company entered into with Chase Manhattan Bank in
June 1999, of which $500,000 of the Term Loan B was borrowed in June 1999.
Additionally, higher interest expense of $9,492 resulted from the Company's
$375,000 Senior Notes issued in December 1999 at 10.125%. The remaining
increase is due to higher accretion on the senior discount notes of $2,662 and
to higher amortization of debt issuance costs of approximately $1,300. These
increases were partially offset primarily by lower interest of approximately
$1,600 relating to the prepayment of the $100,000 term loan and higher
capitalized interest aggregating approximately $3,600.
<PAGE>
Income tax
- ----------
The Company's effective income tax rate was a benefit of .6% and 1.5% for the
quarter ended March 31, 2000 and March 31, 1999, respectively. The Company's
cumulative losses have exceeded the tax effect of accelerated deductions,
primarily depreciation, which the Company has taken for federal income tax
purposes. As a result, generally accepted accounting principles do not permit
the recognition of such excess losses in the financial statements. This
accounting treatment does not impact cash flows for taxes or the amounts or
expiration periods of actual net operating loss carryovers.
Minority interest
- -----------------
For the quarters ended March 31, 2000 and 1999, minority interest of $4,393 and
$6,538, respectively, primarily represents the interest of NSTAR Securities
in the loss of RCN-BECOCOM.
Equity in the loss of unconsolidated entities
- ---------------------------------------------
For the quarter ended March 31, 2000, 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 $1,571, Starpower of $4,094 and
JuniorNet of $7,536. For the quarter ended March 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 $376
and Starpower of $3,527.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Because our network development plan involves relatively low fixed costs, we
are able to schedule capital expenditures to meet expected subscriber growth
in each major market. Our principal fixed costs in each such market are
incurred in connection with the establishment of a video transmission and
telephone switching facility. To make each market economically viable, it is
then necessary to construct infrastructure to connect a minimum number of
subscribers to the transmission and switching facility. We phase our market
entry projects to ensure that we have sufficient cash on hand to fund this
construction.
Based on its current growth plan, the Company expects that it will require a
substantial amount of capital to expand the development of its network and
operations into new areas within its larger target markets. The Company
needs capital to fund the construction of its advanced fiber optic networks,
upgrade its Hybrid Fiber/Coaxial plant, fund operating losses and repay its
debts. The Company currently estimates that its capital requirements
for the period from January 1, 2000 through 2001 will be approximately
$3.6 billion, which include capital expenditures of approximately $1.4 billion
in 2000 and approximately $1.6 billion in 2001. These capital expenditures will
be used principally to fund additional construction to the Company's fiber
optic network in high density areas in the Boston, New York, Washington, D.C.
and San Francisco Bay markets as well as to expand into new markets including
Chicago and Philadelphia, and to develop its information technology systems.
These estimates are forward-looking statements that may change if circumstances
related to construction, timing or receipt of regulatory approvals and
opportunities to accelerate the deployment of the Company's networks do not
occur as expected. In addition to the Company's own capital requirements, its
joint venture partners are expected to contribute approximately $400 million,
of which approximately $339 million has been contributed, to the joint ventures
through 2000 in connection with development of the Boston and Washington, D.C.
markets.
The Company expects to supplement its existing available credit facilities and
operating cash flow by continuing to seek to raise capital to increase its
network coverage and pay for other capital expenditures, working capital, debt
service requirements, anticipated future operating losses and acquisitions.
The Company's current joint venture agreements reduce the amount of expenditures
required by RCN to develop the network due both to access to the joint venture
partners' existing facilities and to the anticipated joint venture partners'
equity contributions. However, the joint venture arrangements will also reduce
the potential cash flows to be realized from operation of the networks in the
markets in which the joint ventures operate and restrict the Company's access
to cash flow generated by the joint ventures (which will be paid in the form of
dividends). The Company may enter into additional joint ventures in the future
as the Company begins to develop new markets.
On February 28, 2000, the Company and Vulcan Ventures Incorporated
("Vulcan"), the investment organization of Paul G. Allen, completed a
transaction which culminated in Vulcan acquiring a $1.65 billion investment in
the Company in the form of mandatorily convertible preferred stock (the
"Preferred Stock"), which will be converted into the Company's Common Stock,
("Common Stock"), no later than seven years after it is issued, if not
previously called or converted. Vulcan purchased 1,650,000 shares of the
Preferred Stock. The Preferred Stock has a liquidation preference of $1,000
per share and is convertible into Common Stock at a price of $62 per share.
The Preferred Stock has a dividend rate of 7% per annum. All dividends will be
paid in additional shares of Preferred Stock. At March 31, 2000 the Company
paid dividends in the amount of $10,267 in the form of additional shares of
Series A Preferred Stock. At March 31, 2000 the number of common shares that
would be issued upon conversion of the Series A Preferred Stock was 26,778,495.
In connection with the investment, Vulcan was permitted to appoint two members
to the Company's Board of Directors. On February 28, 2000 Vulcan appointed
William D. Savoy, Vice President of Vulcan and Edward S. Harris, Investment
Analyst with Vulcan.
Pursuant to an exchange agreement between NSTAR Communications Securities
Corporation ("NSTAR Securities") and RCN, NSTAR Securities has the right, from
time to time, to convert portions of its ownership interest in RCN-BECOCOM into
shares of the Company's common stock, based on an appraised value of such
interest. Shares issued upon such exchanges are issued to NSTAR Securities.
At the close of business on December 31, 1999, NSTAR Securities exchanged a
further portion of its interest for 2,989,543 shares of RCN common stock. Such
portion of the interest was valued as of May 27, 1999. Immediately following
such exchanges, NSTAR Securities retained a 23.14% sharing ratio in the joint
venture, and the right to invest as if it owned a 49% interest. Such investment
percentage will decrease to the extent NSTAR Securities disposes of such RCN
common stock. In April NSTAR Securities gave notice to us of its intent to
convert its remaining ownership interest currently representing a 29.35%
interest in RCN-BECOCOM. Shares of RCN common stock will be issued to NSTAR
Securities following the valuation of its interest.
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 $ 112,866 6,098,355
May 1999 Equity Offering $ 239,897 250,000
June 1999 Equity Offering $ 344,043 9,200,000
February 2000 Equity Offering $1,614,428 1,650,000
The Indentures for the Notes referred to above all contain similar provisions.
The Chase Manhattan Bank acts as Trustee for each of the Indentures. All the
aforementioned Notes are general senior unsecured obligations of RCN. The Senior
Discount Notes do not bear cash interest for the first three years from the
offering. Thereafter, cash interest on the notes will accrue at the respective
interest rate per annum and will be payable semi-annually in arrears every six
months.
The Senior Discount Notes are not callable for five years, and are redeemable in
whole or in part, at any time on or after the fifth year, at the option of RCN.
The Senior Notes are not callable for five years, and are redeemable in whole or
in part, at any time on or after the fifth year, at the option of RCN. Both the
Senior Discount Notes and the Senior Notes may be redeemed after year five at
redemption prices starting at approximately 105% of the principal amount and
declining to 100% of the principal amount, plus any accrued and unpaid interest.
RCN may, at its option, use the net proceeds of certain offerings of RCN Common
Stock to redeem up to an aggregate of 35% of the aggregate principal amount at
maturity of the debt securities issued under the Indentures at a certain
premium. Upon the occurrence of a change of control, RCN must make an offer to
purchase all of the debt securities issued under the Indentures then outstanding
at a premium.
The Indentures contain certain convenants that, among other things, limit the
ability of RCN and its subsidiaries to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, engage in transactions
with stockholders and affiliates, create liens, sell assets and engage in
mergers and consolidations.
On April 7, 1999, Hicks, Muse, Tate & Furst, through Hicks Muse Fund IV
purchased 250,000 shares of Series A Preferred Stock, par value $1 per share,
for gross proceeds of $250,000. The Series A Preferred Stock is cumulative
and has an annual dividend rate of 7% payable quarterly in cash or additional
shares of Series A Preferred Stock and has a initial conversion price of $39.00
per share. The Series A Preferred Stock is convertible into common stock at
any time. The Series A Preferred Stock is subject to a mandatory redemption
on March 31, 2014 at $1,000 per share, plus accrued and unpaid dividends, but
may be called by the Company after four years. At March 31, 2000 the
Company paid dividends in the amount of $17,658 in the form of additional
shares of Series A Preferred Stock. At March 31, 2000 the number of common
shares that would be issued upon conversion of the Series A Preferred Stock was
6,863,013.
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 March 31,
2000 approximately $1,275 in the form of letters of credit had been drawn
under the Revolver. As of March 31, 2000 the Company also had letters of credit
outside the Revolver of approximately $4,223.
The Term Loan A is available for drawing until December 3, 2001, at which time
any undrawn commitments expire. At March 31, 2000 there were no outstanding
loans under the Term Loan A. Any outstanding borrowings under the Term Loan
A at September 3, 2002 will be repaid in quarterly installments based on
percentage increments of the Term Loan A that start at 3.75% per quarter on
September 3, 2002 and increase in steps to a maximum of 10% per quarter on
September 3, 2005 through to maturity at June 3, 2006.
As of March 31, 2000, $500,000 of the Term Loan B was outstanding. The Term
Loan B was fully drawn at closing. Amortization of the Term Loan B starts on
September 3, 2002 with quarterly installments of $1,000 per quarter until
September 3, 2006 when the quarterly installments increase to $121,000 per
quarter through to maturity at June 3, 2007.
The interest rate on the Credit Facility is, at the election of the
Borrowers, based on either a LIBOR or an alternate base rate. For a Revolver
or Term Loan A borrowing, the interest rate will be LIBOR plus a spread of up
to 300 basis points or the base rate plus a spread of 200 basis points,
depending upon financial covenant calculations. In the case of the Revolver and
the Term Loan A, a fee of 125 basis points on the unused commitment accrues
until the Company's EBITDA has become positive and thereafter at up to 125
basis points depending upon the Company's utilization of the commitments.
For all Term Loan B borrowings the interest includes a spread that is fixed at
350 basis points over the LIBOR or 250 basis points over the alternate base
rate.
The Credit Agreement contains conditions precedent to borrowing, events of
default (including change of control) and covenants customary for facilities
of this nature. The Credit Facility is secured by substantially all of the
assets of the Company and its subsidiaries.
Prepayments of the eight-year term loan require payment of a fee of 2% of the
amount of such prepayment if made on or prior to June 3, 2000 and 1% of such
prepayment if made thereafter but on or prior to June 3, 2001.
The foregoing summary of certain provisions of the Credit Agreement does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the Credit Agreement.
The Company has indebtedness that is substantial in relation to its
shareholders' equity and cash flow. At March 31, 2000 the Company had an
aggregate of approximately $2,171,000 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 $3,134,000 and a current ratio of approximately
14.31:1.
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 quarter ended March 31, 2000, the Company's net cash used in operating
activities was $139,987 comprised primarily of a net loss of ($138,121)
adjusted by non-cash depreciation and amortization of $44,412, other non-cash
items totaling $29,966 and working capital changes of $73,166. Net cash used
in investing activities of $223,135 consisted primarily of additions to
property, plant and equipment of $155,262, purchase of investments of $45,220,
and investment and advances to unconsolidated entities of $19,108, partially
offset by net sales and maturities of short-term investments of $1,815. Net
cash provided by financing activities of $1,679,864 included proceeds from the
issuance of preferred stock of $1,614,428, contribution from minority interest
partner of $61,005 and proceeds from the exercise of stock options of $5,329.
<PAGE>
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 3. Quantitative & qualitative disclosures about market risk.
The Company has adopted Item 305 of Regulation S-K "Quantitative & qualitative
disclosures about market risk" which is effective in financial statements for
fiscal years ending after June 15, 1998. The Company currently has no items
that relate to "trading portfolios". Under the "other than trading portfolios"
the Company does have four short-term investment portfolios categorized as
available for sale securities that are stated at cost, which approximates
market, and which are re-evaluated at each balance sheet date and one
portfolio that is categorized as held to maturity which is an escrow account
against a defined number of future interest payments related to the Company's
(10% Senior Discount Notes.). These portfolios consist of Federal Agency notes,
Commercial Paper, Corporate Debt Securities, Certificates of Deposit, U.S.
Treasury notes, and Asset Backed Securities. The Company believes there is
limited exposure to market risk due primarily to the small amount of market
sensitive investments that have the potential to create material market risk.
Furthermore, the Company's internal investment policies have set maturity
limits, concentration limits, and credit quality limits to minimize risk and
promote liquidity. The Company did not include trade accounts payable and
trade accounts receivable in the "other than trading portfolio" because their
carrying amounts approximate fair value.
The objective of the company's "other than trading portfolio" is to invest in
high quality securities and seeks to preserve principal, meet liquidity needs,
and deliver a suitable return in relationship to these guidelines.
<PAGE>
Part II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds
On February 28, 2000, the Company and Vulcan Ventures Incorporated
("Vulcan"), the investment organization of Paul G. Allen, completed a
transaction which culminated in Vulcan acquiring a $1.65 billion investment in
the Company in the form of mandatorily convertible preferred stock (the
"Preferred Stock"), which will be converted into the Company's Common Stock,
("Common Stock"), no later than seven years after it is issued, if not
previously called or converted. Vulcan purchased 1,650,000 shares of the
Preferred Stock. The Preferred Stock has a liquidation preference of $1,000
per share and is convertible into Common Stock at a price of $62 per share. The
Preferred Stock has a dividend rate of 7% per annum. All dividends will be paid
in additional shares of Preferred Stock. At March 31, 2000 the Company paid
dividends in the amount of $10,267 in the form of additional shares of Series A
Preferred Stock. At March 31, 2000 the number of common shares that would be
issued upon conversion of the Series A Preferred Stock was 26,778,495.
In connection with the investment, Vulcan was permitted to appoint two members
to the Company's Board of Directors. On February 28, 2000 Vulcan appointed
William D. Savoy, Vice President of Vulcan and Edward S. Harris, Investment
Analyst with Vulcan.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(99) 1997 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
(b.) Reports on Form 8-K
On March 27, 2000, the Company filed a report on Form 8-K announcing
that certain eligible officers of the Company elected to receive RCN common
stock in lieu of a portion of their cash compensation for period from January
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RCN Corporation
Date: May 15, 2000
/s/ Timothy J. Stoklosa
------------------------------
Timothy J. Stoklosa
Executive Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND IN THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,708,154
<SECURITIES> 1,402,883
<RECEIVABLES> 43,738
<ALLOWANCES> 12,389
<INVENTORY> 41,159
<CURRENT-ASSETS> 3,272,538
<PP&E> 1,283,971
<DEPRECIATION> 259,346
<TOTAL-ASSETS> 4,757,539
<CURRENT-LIABILITIES> 228,688
<BONDS> 2,170,063
0
1,883,328
<COMMON> 81,705
<OTHER-SE> 275,955
<TOTAL-LIABILITY-AND-EQUITY> 4,757,539
<SALES> 0
<TOTAL-REVENUES> 71,257
<CGS> 0
<TOTAL-COSTS> 77,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,806
<INTEREST-EXPENSE> 53,337
<INCOME-PRETAX> (130,109)
<INCOME-TAX> (796)
<INCOME-CONTINUING> (153,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153,583)
<EPS-BASIC> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
RCN Corporation
1997 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose.
The purpose of the RCN Corporation 1997 Stock Plan for Non-Employee Directors
(the "Plan") is to promote the interests of the RCN Corporation (the "Company")
and its stockholders by increasing the proprietary interest of non-employee
directors in the growth and performance of the Company by granting such
directors options to purchase shares of common stock (par value $1.00 per share)
(the "Shares") of the Company and by awarding Shares to such directors in
respect of a portion of the annual retainer and meeting fees payable to such
directors.
2. Administration.
The Plan shall be administered by the Company Board of Directors (the "Board).
Subject to the provisions of the Plan, the Board shall be authorized to
interpret the Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan and to make all other determinations necessary or advisable
for the administration of the Plan; provided however, that the Board shall have
no discretion with respect to the selection of directors to receive options, the
number of Shares subject to any such options, the purchase price thereunder or
the timing of grants of options under the Plan. The determinations of the Board
in the administration of the Plan, as described herein, shall be final and
conclusive. The Secretary and Assistant Secretary of the Company shall be
authorized to implement the Plan in accordance with its terms and to take
such actions of a ministerial nature as shall be necessary to effectuate the
intent and purposes thereof. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the Commonwealth of Pennsylvania.
3. Eligibility.
The class of individuals eligible to receive grants of options and awards of
Shares in respect of the Retainer under the Plan shall be directors of the
Company who are not employees of the Company or its affiliates ("Eligible
Directors"). Any holder of an option or Shares granted hereunder shall
hereinafter be referred to as a "Participant".
4. Shares Subject to the Plan.
Subject to adjustment as provided in Section 7, an aggregate of 100,000 Shares
shall be available for issuance under the Plan. The Shares deliverable upon the
exercise of options or in respect of the Retainer may be made available from
authorized but unissued Shares or treasury Shares. If any option granted under
the Plan shall terminate for any reason without having been exercised, the
Shares subject to, but not delivered under, such option shall be available for
issuance under the Plan.
5. Grant, Terms and Conditions of Options.
(a) Subject to the approval by the Company's shareholders of this Plan, each
Eligible Director on the date of such approval will be granted on such date an
option to purchase 2,000 Shares.
(b) Each Eligible Director will be granted an option to purchase 2,000 shares
of Common Stock on the date of the Company's Annual Shareholders Meeting.
(c) The options granted will be nonstatutory stock options not intended to
qualify under Section 422 of the internal Revenue Code of 1986, as amended (the
"Code") and shall have the following terms and conditions:
(i) Price. The purchase price per Share deliverable upon the exercise of each
option shall be 100% of the Fair Market Value per Share on the date the option
is granted. For purposes of the Plan, "Fair Market Value" shall be the closing
price of the Shares as reported on the principal market or exchange on which the
shares are traded or listed for the date in question, or if there were no sales
on such date, the most recent prior date on which there were sales.
(ii) Payment. Options may be exercised only upon payment of the purchase price
thereof in full. Such payment shall be made in cash.
(iii) Exercisability and Term of Options. Options shall be immediately
exercisable and shall remain exercisable until the earlier of ten years from the
date of grant and the expiration of the one year period provided in paragraph
(iv) below.
(iv) Termination of Service as Eligible Director. Upon termination of a
Participant's service as a director of the Company for any reason, all
outstanding options held by such Eligible Director shall be exercisable in
whole or in part for a period of one year from the date upon which the
Participant ceases to be a director, provided that in no event shall the options
be exercisable beyond the period provided for in paragraph (iii) above.
(y) Nontransferability of Options. No option may be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered by a Participant
otherwise than by will or the laws of descent and distribution, and during the
lifetime of the Participant to whom an option is granted it may be exercised
only by the Participant or by the Participant's guardian or legal
representative. Notwithstanding the foregoing, options may be transferred
pursuant to a qualified domestic relations order.
(vi) Option Agreement. Each option granted hereunder shall be evidenced by an
agreement with the Company which shall contain the terms and provisions set
forth herein and shall otherwise be consistent with the provisions of the Plan.
6. Grant of Shares.
(a) Grant Dates and Formula for Annual Retainer. Shares shall be automatically
Eligible Director on January 1 of each Plan year (each such date is hereinafter
referred to as the "Annual Grant Date") commencing October 1, 1997; provided
however, that for the year ending December 31, 1997, the Annual Grant Date shall
be October 1, 1997 (the "Initial Grant Date"). The total number of Shares
granted to each Eligible Director pursuant to this Section 6(a) shall equal the
quotient obtained by dividing the annual retainer, as determined from time to
time (the "Retainer"), subject to Section 9 hereof ("Annual Retainer"), then in
effect by the Fair Market Value of a Share an the Annual Grant Date (or the
Initial Grant Date, as the case may be) determined in accordance with Section
6(b) hereof; provided however that for the year ending December 31, 1997, the
total number of Shares granted to each Eligible Director shall be equal
to the quotient obtained by dividing (i) the product obtained by multiplying (x)
three-twelfths (3/12) by (y) the Annual Retainer as in effect on October 1, 1997
by (ii) the fair market value of a Share determined in accordance with Section
6(b) hereof. In the event a person becomes an Eligible Director between
applicable Annual Grant Dates, such person shall, on the thirtieth (30th) day
following such appointment, receive the number of Shares equal to the product
obtained by multiplying a (i) fraction, the (I) numerator of which is the
number of months remaining in such year and the (II) denominator of which is
twelve (12) by a (ii) fraction, the (I) numerator of which is the Annual
Retainer in effect on the most recent Annual Grant Date and the denominator of
which is the average of the high and low prices of a Share on the Exchange (as
defined below) as reported for the trading day immediately prior to such person
becoming an Eligible Director.
(b) Fair Market Value. The fair market value of a Share shall for the purposes
of the Annual Grant Date, be the average of the high and low prices of a Share
on the last trading day prior to the applicable Grant Date as its reported on
the principal securities exchange, (which term shall include the Nasdaq Stock
Markets) on which Shares are listed (the "Exchange"), provided, however, with
respect to the Initial Grant Date, it shall be the average of the high and low
prices of a Share as reported on the Exchange for October 1, 1997. Fractional
shares will be rounded to the next highest share. The shares or rights to which
an Eligible Director is entitled under Section 5(b) shall be in lieu of the
payment in cash of the 100% of the Annual Retainer.
7. Adjustment of and Changes in Shares.
In the event of a stock split, stock dividend, extraordinary cash dividend,
subdivision or combination of the Shares or other change in corporate structure
affecting the Shares, the number of Shares authorized by the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
Shares subject to any outstanding option shall be increased or decreased
proportionately, as the case may be, with appropriate corresponding adjustment
in the purchase price per Share thereunder.
8. No Rights of Shareholders.
Neither a Participant nor a Participant's legal representative shall be, or have
any of the rights and privileges a shareholder of the Company in respect of any
Shares purchasable upon the exercise of any option, in whole or in part, unless
and until certificates for such Shares shall have been issued.
9. Plan Amendments.
The Plan may be amended by the Board as it shall deem advisable or to conform to
any change in any law or regulation applicable thereto; provided, that the Board
may not, without the authorization and approval of shareholders of the Company:
(i) increase the number of Shares which may be purchased pursuant to options
hereunder, either individually or in the aggregate, except as permitted by
Section 7, (ii) change the requirement of Section 5(c) that option grants be
priced at Fair Market Value, except as permitted by Section 7, (iii) modify
in any respect the class of individuals who constitute Eligible Directors or
(iv) materially increase the benefits accruing to Participants hereunder. The
provisions of Sections 3, 5 and/or 6 may not be amended more often than once
every six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules under either
such statute.
10. Listing and Registration.
Each Share shall be subject to the requirement that if at any time the Board
shall determine, in its discretion, that the listing, registration or
qualification of the Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of or in connection with, the granting of
such Shares, no such Share may be disposed of unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any condition not acceptable to the Board.
11. Effective Date and Duration of Plan.
The Plan shall become effective on October 1, 1997. The Plan shall terminate the
day following the tenth Annual Shareholders Meeting at which Directors are
elected succeeding such date, unless the Plan is extended or terminated at an
earlier date by Shareholders or is terminated by exhaustion of the Shares
available for issuance hereunder.
