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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period September 30, 2002.
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 (I.R.S. 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)
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 September 30, 2002.
Common Stock 110,496,411
RCN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations for the Quarter Ended
and Nine Months Ended September 30, 2002 and 2001
Condensed Consolidated Balance Sheets-
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
September 30, 2002 and 2001
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
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
2
This Quarterly Report on Form 10-Q is for the Quarter Ended September 30, 2002.
This Quarterly Report modifies and supersedes documents filed prior to this
Quarterly Report. The SEC allows us to incorporate by reference information that
we file with them, which means that we can disclose important information to you
by referring you directly to those documents. Information incorporated by
reference is considered to be part of this Quarterly Report. In this Quarterly
Report, "RCN", "we", "us" and "our" refer to RCN Corporation and its
subsidiaries.
You should carefully review the information contained in this Quarterly Report
and in other reports or documents that we file from time to time with the SEC.
Some of the statements and information contained in this Form 10-Q discuss
future expectations, contain projections of results of operations or financial
condition or state other forward-looking information. Those statements and
information are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those
contemplated by the statements. The "forward-looking" information is based on
beliefs of management as well as assumptions made and information currently
available to us. In some cases, these so-called forward-looking statements can
be identified by words like "may," "will," "should," "expects," "plans,"
"anticipates," "believes," estimates," "predicts," "potential," or "continue" or
the negative of those words and other comparable words. These statements only
reflect our predictions. Actual events or results may differ substantially.
Important factors that could cause actual results to be materially different
from anticipated results and expectations expressed in any forward-looking
statements made by or on behalf of us include, but are not limited to, the
Company's failure to:
- achieve and sustain profitability based on the implementation of our
broadband network;
- obtain adequate financing;
- overcome significant operating losses;
- produce sufficient cash flow to fund our business and our
anticipated growth;
- attract and retain qualified management and other personnel;
- develop and implement effective business support systems for
provisioning orders and billing customers;
- obtain and maintain regulatory approvals;
- meet the terms and conditions of our franchise agreements and debt
agreements, including the indentures relating to our bonds and our
secured credit agreement;
- achieve adequate customer penetration of our services to offset the
fixed costs of our network;
- reduce our overhead costs;
- develop and successfully implement appropriate strategic alliances
or relationships;
- obtain equipment, materials, inventory at competitive prices;
- obtain video programming at competitive rates;
- complete acquisitions or divestitures;
- efficiently and effectively manage changes in technology, regulatory
or other developments in the industry, changes in the competitive
climate in which we operate, and relationships with franchising
authorities.
- respond to competitive pressures from better funded and more
established service providers
The Company undertakes no obligation to publicly update any forward-looking
statements whether as a result of new information, future events or otherwise.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 114,494 $ 103,702 $ 340,131 $ 295,878
Costs and expenses, excluding non-cash
stock based compensation, depreciation
and amortization:
Direct expenses 43,848 47,040 137,074 144,995
Operating and selling, general
and administrative 91,218 100,696 280,943 349,317
Non-cash stock based compensation 10,902 15,093 25,304 45,852
Depreciation and amortization 55,745 70,855 214,809 242,330
Asset impairment and special charges, net (20) - 891,786 470,880
----------- ----------- ----------- -----------
Operating loss (87,199) (129,982) (1,209,785) (957,496)
Investment income 2,593 16,185 12,509 72,086
Interest expense (47,106) (48,155) (126,704) (152,275)
Other income, net 1,101 10,804 593 6,809
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes (130,611) (151,148) (1,323,387) (1,030,876)
Provision (benefit) for income taxes - 36 (880) (3,251)
----------- ----------- ----------- -----------
Loss from continuing operations before
equity in unconsolidated entities
and minority interest (130,611) (151,184) (1,322,507) (1,027,625)
Equity in loss of unconsolidated entities (48) (4,496) (23,964) (4,825)
Minority interest in loss of
consolidated entities - 6,047 36,650 18,132
----------- ----------- ----------- -----------
Net loss from continuing operations (130,659) (149,633) (1,309,821) (1,014,318)
Income from discontinued operations, net of tax 2,376 736 5,112 5,193
Extraordinary item, net of tax - 75,482 13,073 75,482
----------- ----------- ----------- -----------
Net loss (128,283) (73,415) (1,291,636) (933,643)
Preferred dividend and accretion requirements 40,871 38,225 120,589 112,792
----------- ----------- ----------- -----------
Net loss to common shareholders $ (169,154) $ (111,640) $(1,412,225) $(1,046,435)
=========== =========== =========== ===========
Basic and Diluted loss per average common share:
Net loss from continuing operations $ (1.56) $ (1.93) $ (13.57) $ (12.23)
Net income from discontinued operations $ .02 $ .01 $ .05 $ .06
Extraordinary item $ - $ .77 $ .12 $ .82
Net loss to shareholders $ (1.54) $ (1.15) $ (13.40) $ (11.35)
=========== =========== =========== ===========
Weighted average shares outstanding 109,798,588 97,324,957 105,354,946 92,174,281
See accompanying notes to Condensed Consolidated Financial Statements.
4
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and temporary cash investments $ 89,020 $ 476,220
Short-term investments 261,770 362,271
Accounts receivable from related
parties 10,174 16,698
Accounts receivable, net of reserve
for doubtful accounts of $11,547
at September 30, 2002 and $17,081
at December 31, 2001 48,549 46,145
Unbilled revenues 897 2,052
Interest and dividends receivable 2,060 4,558
Prepayments and other 18,070 18,828
Restricted short-term investments 36,433 23,676
Current assets of discontinued operations 4,137 5,726
---------- ----------
Total current assets 471,110 956,174
Property, plant and equipment, net of
accumulated depreciation of $755,008
at September 30, 2002 and $567,681 at
December 31, 2001 1,273,975 2,250,218
Investments in joint ventures and equity
securities 213,584 229,294
Intangible assets, net of accumulated
amortization of $64,720 at September 30,
2002 and $64,496 at December 31, 2001 1,846 3,232
Goodwill 6,130 45,057
Deferred charges and other assets 44,541 49,055
Noncurrent assets of discontinued operations 66,513 70,101
---------- ----------
Total assets $2,077,699 $3,603,131
========== ==========
5
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
LIABILITIES, REDEEMABLE PREFERRED AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of capital lease
obligations and long-term debt $ 35,054 $ 22,532
Accounts payable 27,994 34,718
Accounts payable to related parties 13,312 20,693
Advance billings and customer deposits 23,330 21,895
Accrued exit costs 30,671 39,271
Accrued expenses, interest, cost of sales,
employee compensation and other 167,498 214,435
Current liabilities of discontinued operations 3,861 3,886
---------- ----------
Total current liabilities 301,720 357,430
---------- ----------
Long-term debt 1,704,861 1,873,616
Other deferred credits 5,189 10,653
Minority interest 992 51,298
Commitments and contingencies
Redeemable preferred stock, Series A,
convertible, par value $1 per share; 708,000
shares authorized, and 318,363 and 302,217
shares issued and outstanding at
September 30, 2002 and December 31, 2001,
respectively 310,602 293,951
Redeemable preferred stock, Series B,
convertible, par value $1 per share; 2,681,931
shares authorized, and 1,974,796 and 1,874,645
shares issued and outstanding at
September 30, 2002 and December 31, 2001,
respectively 1,952,263 1,848,325
Common shareholders' equity:
Common stock, par value $1 per share, 300,000,000
shares authorized, 110,496,411 and 99,841,256
shares issued, respectively 110,496 99,841
Additional paid-in capital 1,442,547 1,416,529
Cumulative translation adjustments (5,134) (8,208)
Unearned compensation expense (6,928) (15,898)
Unrealized appreciation on investments 1,945 2,949
Treasury stock, 682,867 shares and 513,615
shares at cost at September 30, 2002 and
December 31, 2001, respectively (9,583) (8,309)
Accumulated deficit (3,731,271) (2,319,046)
---------- ----------
Total common shareholders' deficit (2,197,928) (832,142)
---------- ----------
Total liabilities, redeemable preferred stock and
common shareholders' deficit $2,077,699 $3,603,131
========== ==========
See accompanying notes to Condensed Consolidated Financial Statements.
6
RCN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(Unaudited)
For the
Nine Months Ended
September 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(1,291,636) $ (933,643)
Income from discontinued operations (5,112) (5,193)
Extraordinary item (13,073) (75,482)
----------- -----------
Net loss from continuing operations (1,309,821) (1,014,318)
Adjustments to reconcile net loss from
continuing operations to net cash
used in operating activities:
Accretion of discounted debt 57,054 90,514
Amortization of financing costs 12,986 6,378
Non-cash stock based compensation expense 25,304 45,852
Gain on sale of property, plant
and equipment - (7,268)
Depreciation and amortization 214,809 242,330
Benefit from income taxes, net (880) (3,251)
Provision for losses on accounts receivable 9,809 10,479
Write down on non-marketable investment 2,250 (8,197)
Equity in (income) loss of
unconsolidated entities 23,964 4,825
Minority interest (36,650) (18,132)
Impairments and special charges 891,786 470,535
----------- -----------
(109,389) (180,253)
Change in working capital (75,388) (215,153)
----------- -----------
Net cash used in continuing operations (184,777) (395,406)
Cash provided by discontinued operations 13,412 14,338
----------- -----------
Net cash used in operating activities (171,365) (381,068)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment,
net of retirements and capitalized interest (101,422) (443,311)
Short-term investments, net 99,497 678,208
Increase in restricted short-term investments (12,757) (22,388)
Investment in unconsolidated joint venture (7,500) (40,500)
Proceeds from sale of assets 17,636 40,232
Discontinued operations (1,536) (1,303)
----------- -----------
Net cash (used in) provided by investing activities (6,082) 210,938
----------- -----------
7
RCN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(Unaudited)
Cash flows from financing activities:
Repayments of long term debt (195,281) (50,000)
Payments of capital lease obligations (2,311) (487)
Issuance of long term debt - 250,000
Payments made for debt financing costs (12,077) -
Proceeds from the issuance of common stock - 50,000
Proceeds from the exercise of stock options 4 137
Distribution to minority interest (88) -
----------- ---------
Net cash (used in) provided by financing activities (209,753) 249,650
----------- ---------
Net (decrease) increase in cash and
temporary cash investments (387,200) 79,520
Cash and temporary cash investments at
beginning of period 476,220 356,377
----------- ---------
Cash and temporary cash investments at
end of period $ 89,020 $ 435,897
=========== =========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of $8,565 and $28,000 capitalized
in 2002 and 2001, respectively) $ 50,903 $ 91,115
=========== =========
Income taxes paid $ 1,113 $ -
=========== =========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During the nine months ended September 30, 2002, the Company issued 7.5 million
shares of the Company's Common Stock, with a fair value of $11,625, to NSTAR
Communications in exchange for NSTAR Communication's 17.83% investment in
RCN-Becocom.
During the nine months ended September 30, 2002, the Company issued 2,589,237
shares of the Company's Common Stock, with a fair value of $7,875 to retire
long-term debt with a face value of $24,037.
During the nine months ended September 30, 2002 and 2001, the Company entered
into capital lease obligations of $5,671 and $3,583, respectively.
For the nine months ended September 30, 2002 and 2001, preferred stock dividends
in the form of additional shares of redeemable preferred stock aggregated
$116,297 and $108,502, respectively.
Non-cash accretion of preferred stock was $4,292 and $4,290 for the nine months
ended September 30, 2002 and 2001, respectively.
See accompanying notes to Condensed Consolidated Financial Statements
8
RCN CORPORATION AND SUBSIDIARIES
FORM 10Q
QUARTER ENDED SEPTEMBER 30,2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of RCN Corporation
and its wholly owned subsidiaries, (the "Company") have been prepared in
conformity with accounting principles generally accepted in the United States
and the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted as
permitted by the Securities and Exchange Commission.
The accompanying condensed consolidated financial statements are unaudited. In
the opinion of management, such statements include all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented. These condensed consolidated financial statements should
be read in conjunction with the audited financial statements and notes included
in the Company's December 31, 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the Quarter
Ended and Nine Months Ended September 30, 2002 are not necessarily indicative of
operating results for the full year.
Management believes that the Company operates as one reportable operating
segment. For a more complete discussion of the Company's accounting policies,
use of estimates, and certain other information, refer to the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those classifications used in
2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143
requires retirement obligations to be recognized when they are incurred and
displayed as liabilities, with a corresponding amount capitalized as part of the
related long-lived asset. The capitalized element is required to be expensed
using a systematic and rational method over its useful-life. SFAS 143 will be
adopted by the Company commencing January 1, 2003 and is not expected to have a
significant impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Under certain provisions of SFAS No. 145, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement as
extraordinary items net of the effects of income taxes. Instead, those gains and
losses should be included as a component of income before income taxes. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
9
15, 2002 with early adoption encouraged. Any gain or loss on the extinguishment
of debt that was classified as an extraordinary item should be reclassified upon
adoption. Had the Company adopted SFAS No. 145 in the fiscal year 2002, the
extraordinary gains on early retirement of debt of $13,073 in 2002 and $75,482
in 2001 would have been reflected in loss before income taxes. There would be no
resulting change in the reported net loss.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. SFAS No. 146 will be adopted by the Company for
exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a material impact
on its financial position, results of operations and cash flows.
3. ASSET IMPAIRMENT AND SPECIAL CHARGES
As a response to the severe slowdown in the telecommunications industry and the
economy, the limited available capital in the telecommunications industry, and
following the completion of the Amendment to the Company's Credit Agreement with
JPMorgan Chase dated March 25, 2002, the Company revised its growth plan during
the second quarter 2002. The revised plan meets the terms and conditions set
forth in the Amendment, which permitted the Company to lower its growth
trajectory. Under the revised plan, the Company has substantially curtailed
future capital spending and network geographic expansion in all existing
markets, has focused on the continuation of customer acquisition growth, and has
reduced operating expenses. The Company also performed a comprehensive review of
its network capacity and current network utilization levels for the purpose of
identifying underutilized network-related assets and assets not in use. The
review consisted of a detailed assessment of the current network infrastructure,
ongoing network optimization activities, usage projections based on target
future customer levels, and available capital resources for completion of
construction in progress and future expansion. As a result of all of the
foregoing, the Company recognized an asset impairment during 2002 of
approximately $888,520 of which $884,193 was recognized in the second quarter
2002. In addition, the Company recognized approximately $3,266 of special
charges net of recoveries for exiting excess real estate facilities in 2002, as
a result of the curtailing of construction and expansion, and the consolidation
of certain operating activities.
The total asset impairment and special charges for the nine months ended
September 30, 2002 is comprised of the following:
Nine Months Ended
September 30, 2002
------------------
Impairment of property plant, and equipment $734,821
Abandoned assets 52,071
Construction materials 61,322
Goodwill 38,927
Franchises 1,379
10
--------
Total asset impairment 888,520
Exit costs for excess facilities 3,266
--------
Total asset impairment and
special charges $891,786
========
The review compared the net book values of each reporting unit with undiscounted
future cash flow projections based on the Company's current operating plan. The
results indicated that certain assets and capitalized costs associated with the
building and constructing the Company's network in all of the Company's
overbuild reporting units were not recoverable. To determine the impairment loss
of those assets to be held and used, the Company performed a fair value test,
using the "best-estimate" approach on the primary asset group of each reporting
unit by comparing the carrying value to the present value of estimated future
cash flows for the remaining useful life of the asset group. The amount by which
the carrying value of the assets exceeded the present value of estimated cash
flows was approximately $734,821. The impairment loss affected all of the
Company's overbuild reporting units and none of the Company's incumbent
reporting units. Concurrent with the assessment of the asset impairment, the
Company began a review of the useful life estimates of its long-lived assets. We
anticipate the study to be completed in the fourth quarter 2002.
The impairment loss on the Company's assets was measured in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 provides guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of, and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. On January 1, 2002, the
Company adopted the guidance of SFAS No. 144.
Based on the Company's revised business plan, certain construction projects in
progress were stopped and other previous planned expansion projects were
abandoned. This stoppage is deemed to be other than temporary. As a result,
certain subscriber related assets were stranded based on the cost of retrieving
the assets. The Company also abandoned certain corporate assets including
leasehold improvements in certain facilities that were exited. The costs related
to these stranded assets were approximately $52,071.
Construction material levels were also assessed based on the revised business
plan and stoppage of certain construction projects. The assessment process
resulted in the identification of excess construction material that cannot be
used for alternative purposes and which is either to be returned to vendors or
resold to a secondary market. The carrying values of the construction materials
that were identified that will be used in operations were written down to market
value, which was lower than carrying value. The carrying values of the
identified excess construction materials that will be sold were written down to
the anticipated recovery rate or salvage value. The total amount of charges to
dispose of inventory determined to be in excess was approximately $61,322.
In conjunction with the asset impairment review and test, the Company also
performed a test to identify any potential impairment on the carrying value of
goodwill on each identified reporting unit of the Company. The results of the
test indicated that the carrying amount of goodwill on certain reporting units
was impaired. During the second quarter 2002, the Company measured the
impairment loss by the amount the carrying value exceeded the implied fair value
11
of the goodwill on the reporting unit. This amount was approximately $38,927.
The fair value of the reporting units was estimated using the expected present
value of future cash flows. This measurement is in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets". This pronouncement changes the
accounting for goodwill and intangible assets with indefinite lives from an
amortized method to an impairment approach. On January 1, 2002, the Company
adopted the provisions of SFAS No. 142. Our transitional impairment test,
measured as of January 1, 2002, did not result in an impairment loss.
As a result of the change in expansion plans, management has been in contact
with the relevant franchising authorities to inform them of the Company's
decision to stop construction and expansion. Based on the revised business plan
and the curtailing of expansion, the Company wrote off the value of certain
franchise licenses of approximately $1,379. A review to evaluate the effects, if
any, was conducted on the Company's obligations under the associated franchise
agreements. The estimated costs less recoveries associated to exit certain
franchises for the nine months ended September 30, 2002 were approximately $392
and were included in the Operating, selling, and G&A expense line, and
approximately $1,440 was paid during the nine months ended September 30, 2002.
Over the past year, a detailed review of facility requirements against lease
obligations has been continuously conducted to identify excess space. Along with
the stoppage of certain construction projects and expansion, the Company has
also consolidated certain operating activities, which resulted in exiting excess
facilities. The estimated costs less recoveries, to exit excess real estate
facilities for the nine months ended September 30, 2002 were approximately
$3,266, and approximately $10,818 was paid during the nine months ended
September 30, 2002.
The total activity for the quarter ended September 30, 2002 for accrued exit
costs representing estimated damages, costs and penalties relating to franchises
and real estate facilities is presented below. Recoveries are recorded when
sublease agreements are executed at more favorable rates than originally
anticipated or franchise issues are resolved for lower expense than anticipated.
Franchise Exit Total
Costs and Facility Accrued
Penalties Exit Costs Exit Costs
-------------- ---------- ----------
Balance at December 31, 2001 $15,710 $23,561 $39,271
Six months ended June 30, 2002:
Additional accrued costs 3,251 14,197 17,448
Recoveries (784) (10,911) (11,695)
Payments (386) (7,976) (8,362)
------- ------- -------
Balance at June 30, 2002 17,791 18,871 36,662
------- ------- -------
Three months ended September 30, 2002:
Additional accrued costs - 168 168
Recoveries (2,075) (188) (2,263)
Payments (1,054) (2,842) (3,896)
------- ------- -------
Balance at September 30, 2002 $14,662 $16,009 $30,671
======= ======= =======
12
The Company also recognized an asset impairment during the second quarter of
2001. In light of the declining economic environment, the Company modified its
growth trajectory based on the lack of available capital and anticipated
availability of capital. The Company also began to undertake certain initiatives
to effect operational efficiencies and reduce costs.
Accordingly, in 2001, management revised its strategic and fundamental plans in
order to achieve these objectives. Based on these revisions to its plans,
management took actions during the second quarter of 2001 to realign resources
to focus on core opportunities and product offerings. The Company also shifted
focus from beginning construction in new markets to completing additional
construction activities in its existing markets so that the Company could
achieve higher growth with lower incremental capital spending. Specifically,
expansion to new markets was curtailed and expansion plans for existing markets
over the subsequent 24 to 36 months were curtailed in some markets, delayed in
some markets and shifted in other markets as deemed appropriate.
As a result, in 2001, the Company assessed the recoverability of its investment
in each market, which lead to the recognition of an impairment to goodwill and
the recording of special charges aggregating approximately $471,000. The special
charge of $471,000 included the impairment of identifiable intangible and
goodwill assets in the amount of $256,000, and the impairment of property and
equipment in the amount of $114,000. In addition, charges to dispose of excess
construction materials were approximately $70,000 and estimated costs to exit
excess facilities were approximately $31,000.
4. GOODWILL AND INTANGIBLE ASSETS
The Company has $6,130 of goodwill and $1,846 of unamortized identifiable
intangible assets at September 30, 2002. In addition, there is approximately
$59,000 of remaining goodwill embedded in the carrying amount of the Company's
investment in Mega Cable. On January 1, 2002, the Company adopted the provisions
of SFAS No. 142, "Goodwill and Other Intangible Assets". This pronouncement
changes the accounting for goodwill and intangible assets with indefinite lives
from an amortized method to an impairment approach. Accordingly, the Company no
longer records amortization relating to its existing goodwill and embedded
goodwill. The Company has identified and established 10 reporting units, which
correspond to the geographical markets in which the Company operates.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
Goodwill
--------
Balance as of January 1, 2002 $ 45,147
Impairment losses (38,927)
Goodwill of discontinued operations (90)
--------
Balance as of September 30, 2002 $ 6,130
========
During the second quarter 2002, the Company performed a test and identified that
the carrying value of goodwill on certain identified reporting units of the
Company was impaired. Also during the second quarter 2002, the Company measured
the impairment loss by the amount the carrying value exceeded the implied fair
13
value of the goodwill on the reporting units. This amount of the impairment loss
was $38,927. The fair value of the reporting units was estimated using the
expected present value of future cash flows. This measurement is in accordance
with SFAS No. 142. The impairment amount is included in the line item Asset
impairment and special charges and is discussed further in Note 3. The Company
also assessed for impairment, the value of goodwill imbedded in the carrying
amount of the Company's investment in Mega Cable, in accordance with the
Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock". The results indicated that there was no impairment
on the embedded goodwill.
The goodwill of discontinued operations represents the carrying value of
goodwill associated with the assets of the Company's central New Jersey
reporting unit. See note 5.
The estimated annual amortization of goodwill no longer recorded in accordance
with the adoption of SFAS No. 142 prior to the impairment would have been
approximately $12,000. The estimated annual amortization of goodwill no longer
recorded after the impairment is approximately $1,677. The estimated annual
amortization of goodwill embedded in the carrying value of the investment in
Mega Cable would have been approximately $7,300.
The following table provides comparative earnings and earnings per share had the
non-amortization provisions of SFAS No. 142 been adopted for the previous
periods presented:
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Loss before extraordinary items $ (169,154) $ (187,122) $(1,425,298) $(1,121,917)
Extraordinary item - 75,482 13,073 75,482
----------- ----------- ----------- -----------
Adjusted net loss to common
shareholders $ (169,154) $ (111,640) $(1,412,225) $(1,046,435)
Goodwill amortization, net of tax - 4,266 - 49,919
Amortization of goodwill embedded in
the carrying value of the investment
in Mega Cable - 1,833 - 5,499
----------- ----------- ----------- -----------
Adjusted net loss to common shareholders $ (169,154) $ (105,541) $(1,412,225) $ (991,017)
=========== =========== =========== ===========
Basic and diluted loss per common share:
Weighted average shares outstanding 109,798,588 97,324,957 105,354,946 92,174,281
Loss from continuing operations $ (1.56) $ (1.93) $ (13.57) $ (12.23)
Income from discontinued operations .02 .01 .05 .06
Extraordinary item - .77 .12 .82
----------- ------------ ----------- -----------
Reported net loss (1.54) (1.15) (13.40) (11.35)
Goodwill amortization - .04 - .54
Amortization of embedded goodwill - .02 - .06
----------- ----------- ----------- ----------
Adjusted net loss per common share $ (1.54) $ (1.09) $ (13.40) $ (10.75)
=========== =========== =========== ==========
The following are identifiable intangible assets that have finite lives and are
subject to amortization:
14
September 30, December 31,
2002 2001
------------ ------------
Franchise and subscriber lists $ 65,646 $ 66,334
Non-compete agreements 100 100
Building access rights 98 98
Other intangible assets 722 1,196
-------- --------
Total intangible assets 66,566 67,728
Less accumulated amortization (64,720) (64,496)
-------- --------
Intangible assets, net $ 1,846 $ 3,232
======== ========
The total amortization expense for nine months ended September 30, 2002 was
$226. The estimated aggregate amortization expense for the next five succeeding
fiscal years is:
For the period October 1, 2002 through
December 31, 2002 $ 40
For the year ended December 31, 2003 $ 260
For the year ended December 31, 2004 $ 204
For the year ended December 31, 2005 $ 219
For the year ended December 31, 2006 $ 225
The Company had no identifiable intangible assets with indefinite lives that are
not subject to amortization at September 30, 2002 and December 31, 2001.
5. DISCONTINUED OPERATIONS
During the third quarter 2002, the Company entered into a definitive agreement
to sell its central New Jersey cable system assets and customers serviced by
this network for an estimated cash sales price of approximately $245,000,
subject to adjustments. The central New Jersey network services approximately
80,000 customers. The sale is subject to certain conditions, including receipt
of consents and appropriate state and federal regulatory approval. The sales
price is subject to certain adjustments based on minimum subscriber levels and
profitability measures, and working capital items. In addition, the Company will
be reimbursed for certain post-signing expenditures related to ongoing upgrades
to the central New Jersey network being performed by the Company. The
transaction is not subject to any buyer-financing conditions, and is structured
as an asset purchase, with the buyer assuming certain liabilities related to the
business. The asset sale is expected to be finalized during the first quarter
2003, and the Company expects to realize a gain of approximately $155,000 to
$180,000 on the transaction. In accordance with the Amendment to the Credit
Agreement, proceeds from the sale of the central New Jersey assets in excess of
$250,000 are to be applied to the two outstanding Term Loans on a pro-rata
basis. All proceeds below $250,000 may be used in connection with the Company's
acquisition of telecommunications assets (as defined in the Credit Agreement).
The Company will continue to operate in central New Jersey until the asset sale
is complete. In accordance with SFAS No. 144, the results of operations for
central New Jersey is reported as discontinued operations.
The following are the summarized results of operations for the quarter and nine
months ended September 30, 2002 and 2001 for the central New Jersey operations:
15
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands)
Sales $13,500 $12,645 $40,387 $37,380
Direct expenses $ 4,964 $ 4,182 $14,012 $12,169
Operating and selling, general and
administrative, and depreciation
and amortization expense $ 5,973 $ 7,251 $19,888 $19,699
Income before tax $ 2,493 $ 736 $ 5,229 $ 5,193
Income after tax $ 2,376 $ 736 $ 5,112 $ 5,193
In accordance with SFAS No. 144, depreciation and amortization is no longer
recognized on assets to be sold.
The current and noncurrent assets and liabilities of the central New Jersey
operation to be sold as of September 30, 2002 and December 31, 2001 are as
follows:
September 30, December 31,
2002 2001
------------ ------------
(in thousands)
Current assets:
Accounts receivable, net of reserve $ 4,137 $ 5,726
------- -------
Current assets of discontinued operations $ 4,137 $ 5,726
======= =======
Noncurrent assets:
Property, plant and equipment, net $66,403 $69,980
Intangible assets, net 20 31
Goodwill 90 90
------- -------
Noncurrent assets of discontinued operations $66,513 $70,101
======= =======
Current liabilities:
Advanced billings and customer deposits $ 3,861 $ 3,886
------- -------
Current liabilities of discontinued operations $ 3,861 $ 3,886
======= =======
6. ASSET SALES
In 2002, the Company completed the sale of a portion of our business customer
base that was not served by our broadband network. The sale was based on certain
contingencies outlined in the sales agreement. After such contingencies, cash
proceeds of the sale are approximately $2,325, which includes approximately
10,350 service connections of which 7,750 are incumbent commercial resale voice
lines and the balance is digital subscriber lines. The final result of the sale
has not been determined, but the Company does expect to realize an immaterial
gain on the transaction in the fourth quarter 2002.
7. JOINT VENTURE
16
In December 1996, the Company became party to the RCN-Becocom joint venture (the
"Joint Venture") with NSTAR Communications, Inc. ("NSTAR Communications"), a
subsidiary of NSTAR, regarding construction of our broadband network and
operation of our telecommunications business in the Boston metropolitan area.
NSTAR is a holding company that, through its subsidiaries, provides regulated
electric and gas utility services in the Boston area. Pursuant to the joint
venture agreements, both parties agreed to make capital contributions in
accordance with their respective membership interests. In addition, RCN gained
access to and use of NSTAR's large broadband network, rights-of-way and
construction services. Pursuant to an exchange agreement between NSTAR
Communications and RCN, NSTAR Communications retained 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. As of December 31, 2001,
NSTAR Communications had exchanged portions of its interest for a total of
4,097,193 shares of RCN Common Stock. Following such exchanges, NSTAR retained a
17.83% profit and loss sharing ratio in the joint venture, and an investment
percentage interest of 36.53%.
In April 2000, NSTAR Communications gave notice of its intent to convert its
remaining ownership interest into shares of the Company's Common Stock. In
October 2000, the Company and NSTAR Communications reached an agreement in
principle regarding settlement of the final valuation of this exchange and to
amend certain other agreements governing the Joint Venture. These discussions
continued and in June 2002, NSTAR Communications received 7.5 million shares of
the Company's Common Stock with a market value of $11,625, in exchange for NSTAR
Communications investment, which had a carrying value of approximately $13,781.
Following this exchange, NSTAR Securities profit and loss sharing ratio in the
joint venture was reduced to zero and it retained its investment percentage and
the right to invest in future capital calls as if it owned a 29.76% interest.
Any future capital contributions made by NSTAR for operating and liquidity
requirements would require an adjustment to the sharing ratio and investment
percentage accordingly. In connection with the exchange, NSTAR on behalf of
itself and controlled affiliates, agreed to certain "standstill" restrictions
for the period of one year from June 19, 2002, including refraining from further
acquisitions of the Company's Common Stock beyond 10.75% in aggregate of the
total number of voting shares and refraining from activities designed to solicit
proxies or otherwise influence shareholders or management of RCN.
Under the amended agreements governing the Joint Venture, future investments by
NSTAR Communications are not convertible into the Company's Common Stock. NSTAR
Communications is permitted to invest in response to capital calls, based on its
investment percentage, at its option, in Joint Venture equity, or in a Class B
Preferred Equity interest of the Joint Venture, which carries a cash coupon rate
of 1.84% per month guaranteed by the Company and RCN Telecom Services of
Massachusetts, Inc. The maximum permitted amount of such investment is $100
million. Such coupon includes amortization of principal over a fifteen-year
term. The security is callable by RCN after eight years following issuance at a
redemption price equal to the net present value of the payments over the life of
the security discounted on a monthly basis using an annual discount rate of 12%.
There was no Class B Preferred Equity interest outstanding at September 30, 2002
or December 31, 2001.
The financial results of RCN-Becocom are consolidated in our financial
statements. NSTAR's portion of the operating loss in RCN-Becocom is reported in
the line item, Minority interest in the loss of consolidated entities. For the
quarter and the nine months ended September 30, 2002, NSTAR's portion of the
loss in RCN-Becocom was $0 and $36,651, respectively.
17
8. DEBT AND LIQUIDITY
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 were 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 (as amended, the "Credit Agreement").
The Company entered into an Amendment to the Credit Agreement dated March 25,
2002 (the "Amendment"). This Amendment amends certain financial covenants and
certain other negative covenants, and adds certain covenants to reflect the
Company's current business plan and amends certain other terms of the Credit
Agreement, including increases to the interest rate margins and commitment fee
payable thereunder. In connection with the Amendment, the Company agreed to pay
to certain lenders and third parties an aggregate fee of approximately $12,126
of which approximately $12,077 was paid through September 30, 2002, to repay
$187,500 of outstanding term loans under the Credit Facility, and to permanently
reduce the amount available under the revolving loan from $250,000 to $187,500.
The Company has also agreed that it may not draw down additional amounts under
the revolving loan until the later of the date on which the Company delivers to
the lenders financial statements for the period ending March 31, 2004, and the
date on which the Company delivers to the lenders a certificate with
calculations demonstrating that the Company's earnings before interest, income
taxes, depreciation and amortization, non-cash stock based compensation, and
asset impairment and special charges ("adjusted EBITDA") was at least $60,000 in
the aggregate for the two most recent consecutive fiscal quarters. In connection
with the Amendment, each of the lenders party thereto also agreed to waive any
default or event of default under the Credit Agreement that may have occurred
prior to the date of the Amendment. The Company can make no assurance that in
the future, it will be able to satisfy and comply with the covenants under the
Amendment to the Credit Agreement.
As adjusted by the Amendment, 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. For the Revolver or Term Loan A borrowing, the interest rate will be
LIBOR plus a spread of up to 350 basis points or the base rate plus a spread of
250 basis points, depending upon whether the Company's adjusted EBITDA has
become positive and thereafter upon the ratio of debt to adjusted EBITDA. In the
case of the Revolver the Company will pay a fee of 150 basis points on the
unused commitment. For all Term Loan B borrowings the interest includes a spread
that is fixed at 400 basis points over the LIBOR or 300 basis points over the
alternate base rate. In addition, the LIBOR rate is subject to a 3.00% per annum
minimum.
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 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.
18
The Credit Facility is collateralized by substantially all of the assets of the
Company and its subsidiaries.
In accordance with the Amendment, the Company prepaid $62,500 of the Term Loan A
on March 25, 2002. At September 30, 2002, $180,469 of the Term Loan A was
outstanding. Amortization of the Term Loan A commenced on September 3, 2002 and
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.
In accordance with the Amendment, the Company prepaid $125,000 of the Term Loan
B on March 25, 2002. At September 30, 2002, $374,250 of the Term Loan B was
outstanding. Amortization of the Term Loan B commenced on September 3, 2002 with
quarterly installments of $750 per quarter until September 3, 2006 when the
quarterly installments increase to $90,750 per quarter through to maturity at
June 3, 2007.
During the first quarter ended March 31, 2002, the Company completed two debt
repurchases for certain of its Senior and Senior Discount Notes. The Company
retired approximately $24,037 in face amount of debt with a book value of
$22,142. The Company recognized an extraordinary gain of approximately $13,073
from the early retirement of debt in which approximately $722 in cash was paid
and approximately 2,589,237 shares of common stock with a value of $7,875 were
issued. In addition, the Company incurred fees of $180 and wrote off debt
issuance costs of $292. There were no debt repurchases during either of the
quarters ended June 30 and September 30, 2002.
Long-term debt outstanding at September 30, 2002 and December 31, 2001 is as
follows:
September 30, December 31,
2002 2001
------------ -----------
Term Loans $ 554,719 $ 750,000
Senior Notes 10% due 2007 161,116 161,116
Senior Discount Notes 11.125% due 2007 319,090 316,351
Senior Discount Notes 9.8% due 2008 314,872 293,073
Senior Discount Notes 11% due 2008 133,874 123,499
Senior Notes 10.125% due 2010 231,736 231,736
Capital Leases 24,508 20,373
---------- ----------
Total 1,739,915 1,896,148
Due within one year 35,054 22,532
---------- ----------
Total Long-Term Debt $1,704,861 $1,873,616
========== ==========
Contractual maturities of long-term debt over the next 5 years are as follows:
Aggregate Amounts
For the period October 1, 2002 through
December 31, 2002 $ 8,354
For the year ended December 31, 2003 $ 38,466
For the year ended December 31, 2004 $ 46,471
For the year ended December 31, 2005 $ 64,813
For the year ended December 31, 2006 $221,468
19
The Company currently expects to fund expenditures for capital requirements as
well as liquidity needs for operations from a combination of available cash
balances, proceeds from revenues and financing arrangements. However, expenses
may exceed the Company's estimates and the financing needed may be higher than
estimated. The Company may experience difficulty raising capital in the future,
as both the equity and debt capital markets have recently been difficult to
access on reasonable terms, particularly for securities issued by
telecommunications and technology companies. In addition to raising capital
through the debt and equity markets, the Company may continue to sell or dispose
of existing businesses or investments to fund portions of the business plan. The
Company may not be successful in producing sufficient cash flow, raising
sufficient debt or equity capital on terms that it will consider acceptable. The
Company can make no assurances that we will have sufficient funds to meet or
refinance our debt when it becomes due.
9. STOCK OPTIONS
Incentive Stock Options
The Company granted 139,800 and 54,250 Incentive Stock Options ("ISO's")with a
fair value under SFAS No. 123 of approximately $164 and $44 to employees during
the quarter ended September 30, 2002 and 2001, respectively.
Non-cash stock based compensation expense under SFAS No. 123 related to ISO's
recognized during the quarter ended September 30, 2002 and 2001 was
approximately $3,485 and $3,466, respectively. Non-cash stock based compensation
expense under SFAS No. 123 related to ISO's recognized during the nine months
ended September 30, 2002 and 2001 was approximately $10,551 and $10,310,
respectively. As of September 30, 2002, the Company had not reflected $11,895 of
unamortized compensation expense in its financial statements for options granted
as of September 30, 2002. The unamortized compensation expense is recognized
over the ISO's vesting period, which is three years.
Outperform Stock Option Plan
The Company did not grant Outperform Stock Options ("OSO's") to employees during
the quarters ended September 30, 2002 and 2001.
Non-cash stock based compensation expense related to OSO's recognized during the
quarter ended September 30, 2002 and 2001 was approximately $5,776 and $6,416,
respectively. Non-cash stock based compensation expense related to OSO's
recognized during the nine months ended September 30, 2002 and 2001 was
approximately $17,307 and $19,923, respectively. As of September 30, 2002, the
Company had not reflected $54,784 of unamortized compensation expense in its
financial statements for options granted as of September 30, 2002. The
unamortized compensation expense is recognized over the OSO's vesting period,
which is five years.
Restricted Stock
The Company recorded $1,386 and $4,919 of non-cash compensation expense during
the quarter ended September 30, 2002 and 2001, respectively, and $3,280 and
$14,662 for the nine months ended September 30, 2002 and 2001, respectively,
relating to grants of restricted stock to employees pursuant to its restricted
stock program. During the quarter and nine months ended September 30, 2002, the
Company cancelled 96,541 and 794,376, respectively, grants of restricted stock,
20
resulting in a $1,958 and $13,318 reduction to non-cash compensation expense for
the quarter and nine months ended September 30, 2002.
As of September 30, 2002, the Company had unearned compensation costs of $6,928
which is being amortized to expense over the restriction period.
Redeemable Preferred Stock
At September 30, 2002 the Company paid cumulative dividends in the amount of
$68,363 in the form of additional Series A Preferred Stock. At September 30,
2002 the number of common shares that would be issued upon conversion of the
Series A Preferred Stock was 8,163,154.
At September 30, 2002 the Company paid cumulative dividends in the amount of
$324,796 in additional shares of Series B Preferred Stock. At September 30, 2002
the number of common shares that would be issued upon conversion of the Series B
Preferred Stock was 31,851,549.
10. 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 quarter and nine months
ended September 30, 2002 and have a dilutive effect if the Company had income
from continuing operations is 28,691,810 and 39,353,035, respectively. The
number of shares of preferred stock and stock options which would have been
assumed converted in the quarter and nine months ended September 30, 2001 and
have a dilutive effect if the Company had income from continuing operations is
28,229,211 and 41,009,930, respectively.
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
Net (loss) $ (128,283) $ (73,415) $(1,291,636) $ (933,643)
Preferred stock dividend and accretion
requirements 40,871 38,225 120,589 112,792
----------- ----------- ----------- -----------
Net loss to common shareholders $ (169,154) $ (111,640) $(1,412,225) $(1,046,435)
Basic loss per average common share:
Weighted average shares outstanding 109,798,588 97,324,957 105,354,946 92,174,281
Loss per average common share from
Continuing operations $ (1.56) $ (1.93) $ (13.57) $ (12.23)
Net income from discontinued operations $ .02 $ .01 $ .05 $ .06
Extraordinary item - .77 $ .12 .82
Net loss to common shareholders $ (1.54) $ (1.15) $ (13.40) $ (11.35)
Diluted loss per average common share:
Weighted average shares outstanding 109,798,588 97,324,957 105,354,946 92,174,281
Dilutive shares - - - -
----------- ----------- ----------- -----------
Weighted average shares and common stock
equivalents outstanding 109,798,588 97,324,957 105,354,946 92,174,281
=========== =========== =========== ===========
Loss per average common share $ (1.54) $ (1.15) $ (13.40) $ (11.35)
21
11. COMPREHENSIVE INCOME
The Company has two components of comprehensive income, cumulative translation
adjustments and unrealized appreciation/depreciation on investments. The amount
of total comprehensive loss for the quarter ended September 30, 2002 and 2001
was $(128,052) and $(67,210), respectively. The amount of total comprehensive
loss for the nine months ended September 30, 2002 and 2001 was $(1,289,566) and
$(930,315), respectively.
12. RELATED PARTY TRANSACTIONS
In July 2002, the Company entered into a four year data center outsourcing
contract with (i)Structure, Inc., a Level 3 Communications Company. As of
September 30, 2002, Level 3 owned 24.11% of the outstanding shares of common
stock in RCN. The (i)Structure data center will primarily host the Company's
billing systems and financial support applications. The base service fee is
approximately $150 per month.
The Company has an existing relationship with Commonwealth Telephone
Enterprises, Inc. ("CTE"), formerly C-TEC Corporation. Our Chairman and Chief
Executive Officer is also the Chairman of CTE. Eight of our Directors also serve
on the board of directors of CTE. Prior to September 30, 1997, RCN was a wholly
owned subsidiary of CTE. On September 30, 1997, C-TEC distributed the shares of
RCN to its shareholders. The Company agreed to provide or cause to be provided
certain specified services (management services) to CTE for a transitional
period after the distribution. The total cash collected for these services
during the quarters ended September 30, 2002 and 2001 was $211 and $96,
respectively. The total cash collected for these services during the nine months
ended September 30, 2002 and 2001 was $505 and $840, respectively. The agreement
is designed to reflect an arrangement that would have been agreed upon by
independent parties negotiating at arm's length.
The Company also provided CTE local and long distance services. The revenue
recognized for these services for the quarter ended September 30, 2002 and 2001
was $1,576 and $1,753, respectively. The revenue recognized for these services
for the nine months ended September 30, 2002 and 2001 was $4,913 and $5,123,
respectively.
22
PART I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands, except per share data)
The following discussion should be read in conjunction with the RCN
Corporation's ("RCN" or the "Company") condensed consolidated financial
statements and notes for the periods ended September 30, 2002, and with the
audited financial statements and notes, and the Risk Factors included in the
Company's December 31, 2001 Annual Report on the Form 10-K filed with the
Securities and Exchange Commission.
INTRODUCTION
RCN Corporation is a leading facilities-based competitive provider of bundled
phone, cable television and high-speed Internet services to the most densely
populated markets in the U.S. We had approximately 900,000 average connections
during the nine months ended September 30, 2002 and provide service in the
Boston, New York, Philadelphia, Chicago, Los Angeles, San Francisco and
Washington D.C. metropolitan markets.
We believe we are the first company in many of our markets to offer one-stop
shopping for video, phone and Internet services to residential customers. The
costs associated with the growth of our network and our operational
infrastructure, expanding the level of service provided to our customers, and
sales and marketing expenses are the primary reasons for the past operating
losses. The Company does anticipate operating income in the foreseeable future
as we continue our efforts to optimize our network infrastructure, increase
operating efficiencies, and reduce operating costs. We expect to accomplish this
as the Company continues to increase the number of customers on our network,
increase the number of services per customer while lowering the costs associated
with the new subscribers and reducing the costs of providing services by
capturing economies of scale. Certain of our operating markets are currently
achieving positive operating results before the recognition of non-cash expenses
primarily relating to the previous network development and non-cash stock based
compensation.
GENERAL
Our primary business is delivering bundled communications services, including
local and long distance telephone, video programming (including digital cable
TV) and data services (including cable modem high speed internet access and dial
up Internet) to residential customers over our predominantly owned network. We
currently serve customers in 7 of the 10 most densely populated areas of the
country. These markets include Boston and 18 surrounding communities, New York
City, including Queens, the Philadelphia suburbs, Washington D.C. and certain
suburbs, Chicago, San Francisco and certain suburbs, and certain communities in
Los Angeles. We also serve the Lehigh Valley in Pennsylvania, and we are the
incumbent franchised cable operator in many communities in central New Jersey
and around Carmel, New York.
ResiLink(SM) is the brand name of our premier family of bundled service
offerings that enables residential customers to enjoy pre-packaged bundles of
Phone, Cable TV and high-speed Internet for a flat monthly price. These packages
have
23
different combinations of our core services and include various phone features
and premium channels. In addition, we offer RCN Essentials(SM), which is
designed to appeal to customers seeking simplification and value. These packages
offer consumers a core set of communications and entertainment services that
include cable TV and phone and lets customers build their own bundle through the
purchase of additional voice, video and data products.
In addition to ResiLink, we sell Phone, Cable TV, High-Speed cable modem and
dial-up Internet to residential customers on an a-la-carte basis, and we provide
communication services to commercial customers. We are working to leverage the
excess capacity of our broadband network to allow us to expand our offering of
new services.
Our services are typically delivered over our predominately owned high-speed,
high-capacity, fiber-optic network. Our network is a broadband fiber-optic
platform that typically employs diverse backbone architecture and localized
fiber-optic nodes. This architecture allows the Company to bring its
state-of-the-art broadband within approximately 900 feet of its customers, with
fewer electronics than existing competitors' local networks. We have generally
designed our broadband network to have sufficient capacity so that we believe we
have the capability of adding new communications services more efficiently and
effectively than the incumbents or other competitors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements of the Company and its wholly-owned
subsidiaries and joint ventures are prepared in conformity with accounting
principles generally accepted in the United States. Generally accepted
accounting principles require management to make estimates and assumptions that
affect the amounts reported in the financial statements and notes. When sources
of information regarding the carrying values of assets and liabilities are not
readily apparent, the Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable for making
judgments. The Company evaluates all of its estimates on an on-going basis.
Actual results could differ from those estimates.
The significant accounting policies of the Company are described in the notes to
the consolidated financial statements included in the Company's December 31,
2001 Annual Report on the form 10-K filed with the Securities and Exchange
Commission.
The critical accounting practices that contain management judgement and
estimates used in the preparation of our condensed consolidated financial
statements include the economic useful lives of the property, plant and
equipment, estimated losses from the inability of our customers to make required
payments, estimated costs to settle any disputes or claims, including legal
fees, and cash flow valuation assumptions in performing asset impairment tests
of long-lived assets.
JOINT VENTURES
To increase our market entry and gain access to rights of way, we formed key
alliances in strategic markets.
The Company is party to the RCN-Becocom, LLC joint venture with NSTAR
Communications, Inc. ("NSTAR Communications"), a subsidiary of NSTAR, regarding
24
construction of our broadband network and operation of our telecommunications
business in the Boston metropolitan area. NSTAR is a holding company that,
through its subsidiaries, provides regulated electric and gas utility services
in the Boston area. At September 30, 2002, following NSTAR's exchanges of their
joint venture ownership interest for the Company's stock (see note 3 of the
notes to condensed consolidated financial statements for the quarter ended
September 30, 2002), the Company had a sharing ratio of 100% and an investment
percentage of 70.24% in the RCN-Becocom joint venture. The investment percentage
represents the percent of each capital call that RCN has the right to invest.
RCN-Becocom is consolidated in our financial statements.
The Company is party to the Starpower joint venture with Pepco Communications,
Inc. ("Pepco"), a subsidiary of Potomac Electric Power Company ("Potomac"),
regarding construction of our broadband network and operation of our
telecommunications business in the Washington, D.C. metropolitan area, including
parts of Virginia and Maryland. Through its subsidiaries, Potomac is engaged in
regulated utility operations and in diversified competitive energy and
telecommunications businesses. The Company and Pepco each own a 50% membership
interest in Starpower. Starpower is reflected in our financial statements under
the equity method of accounting.
USE OF PRO-FORMA DISCLOSURES
The Company's management measures financial and operational performance, which
includes the consolidation of all joint ventures including Starpower, which is
not consolidated under generally accepted accounting principles ("GAAP"). The
use of pro-forma financial disclosures represents management's view of the total
RCN consolidated operation.
The following financial highlights for the nine months ended September 30, 2002
reflect the consolidation of Starpower and the Company's Central New Jersey
market operations, which is reported as a discontinued operation under GAAP:
Financial Highlights RCN Central Consolidated
dollars in thousands) Corporation Starpower** New Jersey Pro-Forma
- -------------------- ----------- ----------- ----------- ------------
Total sales $340,131 $62,397 $40,387 $442,915
Total direct costs $137,074 $15,556 $14,012 $166,642
Margin $203,057 $46,841 $26,375 $276,273
Total operating, selling
and general and
administrative costs $280,943 $37,013 $14,016 $331,972
Adjusted EBITDA* $(77,886) $ 9,828 $12,359 $(55,699)
*Adjusted EBITDA - Non GAAP measure calculated as net loss before interest, tax,
depreciation and amortization, stock based compensation, extraordinary gains and
special charges. Other companies may calculate and define EBITDA differently
than RCN.
** Net of related party transactions with RCN Consolidated
SEGMENT REPORTING
Management believes that the Company operates as one reportable operating
segment, which contains many shared expenses generated by the Company's various
revenue streams. Any segment allocation of these shared expenses that were
25
incurred on a single network to multiple revenue streams would be impractical
and arbitrary. In addition, 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.
OVERVIEW
Approximately 92% of the Company's revenue for the nine months ended September
30, 2002 is attributable to monthly telephone line service charges, local toll,
special features and long-distance telephone service fees, monthly subscription
fees for basic, premium, and pay-per-view cable television services, and
Internet access fees through high-speed cable modems, dial up telephone modems,
web hosting and dedicated access. The remaining 8% of revenue is derived from
reciprocal compensation which is the fee local exchange carriers pay to
terminate calls on each other's networks, and the Company's long distance
wholesale operation. Because of the uncertainty of various regulatory rulings
that affect the collectibility of reciprocal compensation, the Company
recognizes this revenue as cash is received. We have generated increased
revenues over the past quarters and years, primarily through internal growth of
our broadband network, internal customer growth, and revenues from new services
per customer.
Our expenses primarily consist of direct expenses, operating, selling and
general and administrative expenses, stock-based compensation, depreciation and
amortization, and interest expense. Direct expenses primarily include cost of
providing services such as cable programming, franchise costs and network access
fees. Operating, selling and 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.
The Company has had a history of net losses as we built and expanded our
network. In 2001, due to the slowdown in the economy and specifically in the
telecommunications industry, the Company reprioritized the capital spending and
began certain initiatives to increase operational efficiencies and to reduce
costs. As a result of these actions, the Company has reduced its workforce by
626 employees in 2002 and 1,462 employees in 2001. The total headcount at
September 30, 2002 is 3,972, which includes Starpower. For the nine months ended
September 30, 2002, our operating, selling and general administrative expenses
decreased $68,374 or 19.6% to $280,943 from $349,317 for the nine months ended
September 30, 2001.
During the third quarter of 2002, the Company entered into an agreement to sell
its central New Jersey cable system assets and customers serviced by this
network for an estimated cash sales price of approximately $245,000, subject to
adjustments. The central New Jersey network services approximately 80,000
customers. The Company did not build the central New Jersey cable system, but
inherited the system on October 1, 1997 when the Company was spun off from the
former C-TEC Corporation. The Company's core business plan was founded on
building our own network in major metropolitan markets and bundling phone,
high-
26
speed Internet and cable television. The sale of the cable system assets is
expected to be finalized during the first quarter of 2003.
As a response to the severe slowdown in the telecommunications industry and
economy, the limited available capital resources for our industry, and following
the completion of the Amendment to the Company's Credit Agreement with JPMorgan
Chase dated March 25, 2002, we revised our growth plan accordingly during the
second quarter 2002. Under the revised plan, the Company has substantially
curtailed future capital spending and network geographic expansion in all
existing markets, focuses on the continuation of customer acquisition growth,
and has reduced operating expenses. During the second quarter 2002, we also
performed a comprehensive review of our network capacity and current network
utilization levels for the purpose of identifying underutilized network-related
assets and assets not in use. The review consisted of a detailed assessment of
the current network infrastructure, ongoing network optimization activities,
usage projections based on target future customer levels, and available capital
resources for completion of construction in progress and future expansion. As a
result, the Company recognized an asset impairment during 2002 of approximately
$888,520, of which $884,193 was recognized in the second quarter 2002. In
addition, the Company recognized approximately $3,266 of special charges, net of
recoveries for exiting excess facilities, during 2002 as a result of the
curtailing of construction and expansion, and the consolidation of certain
operating activities. The Company can make no assurances that future impairments
on our long-lived assets will not be realized.
The total asset impairment and special charges for the nine months ended
September 30, 2002 is as follows:
Nine Months Ended
September 30, 2002
------------------
Impairment on property plant, and equipment $734,821
Abandoned assets 52,071
Construction materials 61,322
Goodwill 38,927
Franchises 1,379
--------
Total asset impairment 888,520
Exit costs for excess facilities 3,266
--------
Total asset impairment and special charges $891,786
========
When we developed our network, we built our network capacity to meet
expectations regarding rapid expansion of demand, including in connection with
anticipated growth of new technology that would demand higher levels of capacity
to service customers in the future. In accordance with our revised plan, we have
substantially curtailed future capital spending and network geographic
expansion. The second quarter review compared the net book value of each
reporting unit with undiscounted future cash flow projections based on the
Company's current operating plan. The results indicated that certain assets and
capitalized costs associated with the building and constructing our network in
all of our overbuild reporting units were not recoverable. To determine the
impairment loss of those assets to be held and used, the Company performed a
fair value test, using the "best-estimate" approach on the primary asset group
of each reporting unit by comparing the carrying value to the present value of
estimated future cash flows for the remaining useful life of the asset group.
The amount by which the carrying value of the assets exceeded the present value
of estimated cash flows was approximately $734,821. The impairment loss
27
affected all of our overbuild reporting units and none of our incumbent
reporting units. Concurrent with the assessment of the asset impairment, we
began a review of the useful life estimates of our long-lived assets. We
anticipate the study to be completed in the fourth quarter 2002.
Based on our revised business plan, certain construction projects in progress
were stopped and other previous planned expansion projects were abandoned. This
stoppage is deemed to be other than temporary. In addition, certain capitalized
costs and assets related to the subscriber gaining access to the Company's
network were stranded based on the cost of retrieving the assets. The Company
also abandoned certain corporate assets including leasehold improvements in
certain facilities that were exited. The cost related to these stranded assets
was approximately $52,071.
Construction material levels were also assessed based on the revised business
plan and stoppage of certain construction projects. The assessment process
resulted in the identification of excess construction material that cannot be
used for alternative purpose and which is either to be returned to vendors, or
resold to a secondary market. The carrying values of the construction materials
that were identified to be used in operations were written down to market value,
which was lower than carrying value. The carrying values of the identified
excess construction materials that will be sold were written down to the
anticipated recovery rate or salvage value. The total amount of charges to
dispose of inventory determined to be in excess was approximately $61,322.
In conjunction with the asset impairment test and review, the Company also
performed a test to identify any potential impairment on the carrying value of
goodwill on each identified reporting unit of the Company. The results of the
test indicated that the carrying amount of goodwill on certain reporting units
was impaired. During the second quarter 2002, the Company measured the
impairment loss by the amount the carrying value exceeded the implied fair value
of the goodwill on the reporting unit. During the second quarter 2002, a
goodwill impairment loss of $38,927 was recognized in the Company's reporting
units. The fair value of the reporting units was estimated using the expected
present value of future cash flows.
As a result of the change in expansion plans, management has been in contact
with the relevant franchising authorities to inform them of the Company's
decision to stop construction and expansion. Based on the revised business plan
and the curtailing of expansion, the Company wrote off the value of certain
franchise licenses of approximately $1,379.
Over the past year, a detailed review of facility requirements against lease
obligations has been continuously conducted to identify excess space. Along with
the stoppage of certain construction projects and expansion, the Company has
also consolidated certain operating activities, which resulted in exiting excess
facilities. Costs to exit excess facilities in the amount of $3,266 were accrued
in 2002. This amount represents future lease obligations less estimates of net
sublease income at prevailing market rates.
RESULTS OF OPERATIONS
Quarter and Nine Months Ended September 30, 2002 Compared to Quarter and Nine
Months Ended September 30, 2001
For the quarter ended September 30, 2002 and 2001, net loss from continuing
operations was $130,659 and $149,633, respectively, or $(1.56) and $(1.93) per
28
average common share. For the nine months ended September 30, 2002 and 2001, net
loss from continuing operations was $1,309,821 and $1,014,318 respectively, or
$(13.57) and $(12.23) per average common share.
Sales:
Total sales increased $10,792 or 10.4% to $114,494 for the quarter ended
September 30, 2002 from $103,702 for the quarter ended September 30, 2001. Total
sales increased $44,253 or 15.0% to $340,131 for the nine months ended September
30, 2002 from $295,878 for the nine months ended September 30, 2001.
Sales by service offerings are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
2002 2001 Change 2002 2001 Change
-------- -------- -------- -------- -------- --------
Voice $ 35,097 $ 30,129 $ 4,968 $100,601 $ 81,461 $ 19,140
Video 49,834 42,148 7,686 146,315 117,098 29,217
Data - Cable modem 13,614 8,431 5,183 36,744 19,750 16,994
Data - Dial up 6,524 10,224 (3,700) 20,549 31,548 (10,999)
Data - Other 2,254 5,789 (3,535) 9,423 20,711 (11,288)
Other 7,171 6,981 190 26,499 25,310 1,189
-------- -------- -------- -------- -------- --------
$114,494 $103,702 $ 10,792 $340,131 $295,878 $ 44,253
======== ======== ======== ======== ======== ========
The increase in sales by service offering was primarily due to an increase in
average connections. Average connections by service offering are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
% %
2002 2001 Change Change 2002 2001 Change Change
------- ------- ------ ------ ------- ------- ------ ------
Voice 240,314 210,847 29,467 14.0% 234,388 196,756 37,632 19.1%
Video 390,308 354,498 35,810 10.1% 384,588 343,715 40,873 11.9%
Data - Cable Modem 130,806 79,810 50,996 63.9% 120,454 69,003 51,451 74.6%
Data - Dial Up 148,078 200,823 (52,745) (26.3%) 161,092 211,449 (50,357) (23.8%)
------- ------- ------ ----- ------- ------- ------ -----
Total 909,506 845,978 63,528 7.5% 900,522 820,923 79,599 9.7%
======= ======= ====== ===== ======= ======= ====== =====
The increase in average voice connections resulted in additional voice sales for
the quarter and the nine months ended September 30, 2002 of $4,304 and $16,152,
respectively. The increase in average video connection resulted in additional
video sales for the quarter and nine months ended September 30, 2002 of $4,572
and $15,550 respectively. The increase in average cable modem connections
resulted in additional data sales of $5,308 and $15,695 for the quarter and nine
months ended September 30, 2002. The decrease in average dial up connections
resulted in lower data sales for the quarter and the nine months ended September
30, 2002 of $2,324 and $6,424, respectively.
In addition to the increase (decrease) in average connections, average monthly
revenue per connection increased (decreased) as follows by service offering:
29
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------------- ----------------------------------
$ % $ %
2002 2001 Change Change 2002 2001 Change Change
------- ------- ------- ------ ------- ------- ------- ------
Voice $ 48.68 $ 47.63 $ 1.05 2.2% $ 47.69 $ 46.00 $ 1.69 3.7%
Video $ 42.56 $ 39.63 $ 2.93 7.4% $ 42.27 $ 37.85 $ 4.42 11.7%
Data-Cable Modem $ 34.69 $ 35.21 $ (.52) (1.5%) $ 33.89 $ 31.80 $ 2.09 6.6%
Data-Dial Up $ 14.69 $ 16.97 $ (2.28) (13.4%) $ 14.17 $ 16.58 $ (2.41) (14.5%)
Total $ 38.88 $ 37.23 $ 1.65 4.4% $ 38.30 $ 35.62 $ 2.68 7.5%
The increase in average monthly voice revenue per connection resulted in $664
and $2,988, of additional voice sales for the quarter and nine months ended
September 30, 2002, respectively. The increase in average monthly video revenue
per connection resulted in $3,114 and $13,667 of additional video sales for the
quarter and nine months ended September 30, 2002, respectively. The decrease in
average monthly cable modem revenue per connection resulted in $125 of lower
cable modem sales for the quarter ended September 30, 2002. The increase in
average monthly cable modem revenue per connection resulted in $1,299 of
additional cable modem sales for the nine months ended September 30, 2002. The
decrease in average monthly dial up revenue per connection resulted in $1,376
and $4,575 of lower dial up sales for the quarter and nine months ended
September 30, 2002, respectively.
The decrease in data-other sales was due to the sale or disconnection of
approximately 3,600 resold high-speed connections not served by our broadband
network.
Other sales increased in the quarter and nine months ended September 30, 2002,
compared to the same period in 2001 primarily due to higher reciprocal
compensation in 2002. Due to lower FCC rates, the Company expects the reciprocal
compensation to decline in the future.
Costs and Expenses, Excluding Stock-Based Compensation, Depreciation and
Amortization:
Direct expenses, comprised of costs of providing services, decreased $3,192 or
6.8% to $43,848 for the quarter ended September 30, 2002 from $47,040 for the
quarter ended September 30, 2001. Direct expenses decreased $7,921 or 5.5% to
$137,074 for the nine months ended September 30, 2002 from $144,995 for the nine
months ended September 30, 2001.
Direct expenses by service offering are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
2002 2001 Change 2002 2001 Change
-------- -------- -------- -------- -------- --------
Voice $ 10,827 $ 12,521 $(1,694) $ 32,103 $ 40,243 $ (8,140)
Video 25,995 21,918 4,077 79,322 62,833 16,489
Data 3,895 10,051 (6,156) 15,557 33,256 (17,699)
Other 3,131 2,550 581 10,092 8,663 1,429
-------- -------- -------- -------- -------- --------
$ 43,848 $ 47,040 $ (3,192) $137,074 $144,995 $ (7,921)
======== ======== ======== ======== ======== ========
The decrease in Direct expenses was principally the result of lower cost per
connection, which was offset by higher average connections and lower margin on
video sales due to higher franchise fees and programming rates. The Company also
recognized a higher margin on data sales due to network optimization and a
30
reduction of expenses due to the sale and disconnection of digital subscriber
lines not served by our broadband network.
For the quarter and nine months ended September 30, 2002, Operating, selling and
general and administrative costs decreased 9.4% and 19.6%, respectively,
compared to the same period in 2001. Components of Operating, selling and
general and administrative costs are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
2002 2001 Change 2002 2001 Change
-------- -------- -------- -------- -------- --------
Customer service $ 13,379 $ 14,797 $ (1,418) $ 41,156 $ 48,630 $ (7,474)
Network operations
and construction 12,703 13,284 (581) 39,163 43,600 (4,437)
Sales and marketing 10,919 15,379 (4,460) 32,573 57,353 (24,780)
Advertising costs 3,441 97 3,344 9,399 6,463 2,936
Operating, general and
administrative 50,776 57,139 (6,363) 158,652 193,271 (34,619)
-------- -------- -------- -------- -------- --------
$ 91,218 $100,696 $ (9,478) $280,943 $349,317 $(68,374)
======== ======== ======== ======== ======== ========
Customer service costs decreased for the quarter and nine months ended September
30, 2002 compared to the same period in 2001. The major components of the
decreases were primarily due to lower staff and personnel costs as a result of
lower average headcount.
Network operations and construction costs increased for the quarter and the nine
months ended September 30, 2002 compared to the same period in 2001. The
decreases for the quarter and nine months ended September 30, 2002 were
primarily due to lower rental costs relating to the network. In addition, for
the nine months ended September 30, 2002 the Company had lower repairs and
maintenance costs relating to the network, which also contributed to the
decrease in costs from the same period in 2001.
Sales and marketing costs decreased for the quarter and nine months ended
September 30, 2002 compared to the same period in 2001 primarily as a result of
the improvements in efficiencies and sales distribution management. The
Company's sales and marketing efforts are now more focused on direct mail and
telemarketing versus direct sales, resulting in lower overall cost per acquired
connection than in 2001.
Advertising costs increased for the quarter and nine months ended September 30,
2002 compared to the same period in 2001 primarily due to higher direct mail and
newspaper advertising costs relating to advertising campaigns introducing
several new service combination offerings in 2002.
Operating, general and administrative expenses decreased for the quarter and
nine months ended September 30, 2002 compared to the same period in 2001
primarily due to staff reductions and personnel related costs, and a decrease in
legal expense. For the quarter and nine months ended September 30, 2002, staff
reductions and personnel related costs decreased approximately $2,520 and
$3,845, respectively. Legal expense decreased approximately $7,977 and $26,610,
respectively, primarily representing a reduction in litigation and legal costs
for franchise related exit costs. For the quarter and nine months ended
September 30, 2002, compared to the same periods in 2001, building facility
costs decreased approximately $2,060 and $9,010, and building repairs and
maintenance decreased approximately $649 and $1,458 primarily as a result of the
Company's efforts to reduce excess space and consolidate operations. For the
31
quarter and nine months ended September 30, 2002, the decrease in expenses was
partially offset by higher computer system and maintenance contract costs
associated with the new customer care and billing system of approximately $2,329
and $4,318, and higher pole rental charges of $482 and $1,259. For the quarter
ended September 30, 2002, compared to the quarter ended September 30, 2001, bad
debt expense increased approximately $719, primarily as the result of a detailed
review of old customer balances and billed but not collected revenue, and
casualty insurance increased $741 as the result of higher claims activity.
Non-cash Stock-Based Compensation:
Non-cash stock-based compensation decreased for the quarter and nine months
ended September 30, 2002 compared to the same periods in 2001, due to the
cancellation of restricted stock grants in 2002 as a result of a reduction in
the Company's work force. For the quarter ended September 30, 2002, non-cash
stock-based compensation decreased by approximately $4,191, or 27.8%, to $10,902
from $15,093 for the quarter ended September 30, 2001. For the nine months ended
September 30, 2002, non-cash stock based compensation decreased $20,548 or 44.8%
to $25,304 from $45,852 for the nine months ended September 30, 2001. The
Company cancelled restricted stock grants of 96,541 and 794,376 grants, for the
quarter and nine months ended September 30, 2002, respectively.
Depreciation and Amortization:
For the quarter ended September 30, 2002, depreciation and amortization expense
decreased $15,110 or 21.3%, to $55,745 from $70,855 for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, depreciation
and amortization decreased $27,521 or 11.4% to $214,809 from $242,330 for the
nine months ended September 30, 2001. These decreases are the result of lower
carrying value of property, plant and equipment which were reduced as the result
of the asset impairment in the second quarter 2002, and also the decrease in
amortization of goodwill in 2002. For the quarter and nine months ended
September 30, 2001, goodwill amortization was $4,266 and $49,919, respectively.
There was no goodwill amortization expense in 2002 due to the Company's adoption
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". This pronouncement changes the accounting for goodwill and
intangible assets with indefinite lives from an amortized method to an
impairment approach.
Asset Impairment and Special Charges:
As described and discussed in detail in the Overview section, the total Asset
impairment and special charges for the nine months ended September 30, 2002 was
approximately $891,786.
The asset impairment and special charges for the quarter ended September 30,
2002 was a credit of approximately $20. This credit was the result of net
recoveries for exiting excess real estate facilities.
The Asset impairment and special charges for the nine months ended September 30,
2001 was $470,880. This impairment primarily consisted of goodwill recognized
from prior business combinations. Beginning in the fourth quarter of 2000, in
light of the declining economic environment, the Company began planning to
modify its growth trajectory in light of the available capital and anticipated
availability of capital. The Company also began planning to undertake certain
initiatives to effect operational efficiencies and reduce cost.
32
Accordingly, during the second quarter of 2001, management concluded its
planning and revised its strategic and fundamental plans in order to achieve
these objectives. Based on these revisions to its plans, management took actions
during the second quarter of 2001 to realign resources to focus on core
opportunities and product offerings. The Company also shifted focus from
beginning construction in new markets to its existing markets where the Company
could achieve higher growth with lower incremental capital spending.
Specifically, expansion to new markets was curtailed and expansion plans for
existing markets over the subsequent 24 to 36 months were curtailed in some
markets, delayed in some markets and shifted in other markets as deemed
appropriate.
As a result, during the nine months ended September 30, 2001, the Company
assessed the recoverability of its investment in each market, which led to the
recognition of an impairment to goodwill and the recording of special charges
aggregating approximately $471,000. The special charge of $471,000 comprised the
impairment of identifiable intangible and goodwill assets in the amount of
$256,000, and the impairment of property and equipment in the amount of
$114,000. In addition, charges to dispose of excess construction materials were
approximately $70,000 and estimated costs to exit excess facilities were
approximately $31,000.
Investment Income:
For the quarter ended September 30, 2002, Investment income decreased
approximately $13,592 or 84.0%, to $2,593 from $16,185 for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, Investment
income decreased $59,577 or 82.6% to $12,509 from $72,086 for the nine months
ended September 30, 2001. The decrease was a result of lower interest rates and
a decrease in average cash, temporary cash investments, short-term investments
and restricted investments at September 30, 2002 compared to September 30, 2001.
Cash, temporary cash investments, short-term investments, and restricted
investments were $387,223 at September 30, 2002 compared to $1,154,314 at
September 30, 2001. The decrease in average cash was primarily attributable to
long-term debt repayments, capital expenditures, and working capital
requirements.
Interest Expense:
Interest expense decreased for the quarter and nine months ended September 30,
2002 compared to the same period in 2001 primarily due to lower interest
accretion on discount notes and the extinguishment of debt. For the quarter
ended September 30, 2002, interest expense decreased $1,049 or 2.2%, to $47,106
from $48,155 for the quarter ended September 30, 2001. For the nine months ended
September 30, 2002, interest expense decreased $25,571 or 16.8% to $126,704 from
$152,275 for the nine months ended September 30, 2001. The decrease resulted
primarily from lower accretion on the 11.125%, 9.8% and 11.0% senior discount
notes issued in October 1997, February 1998 and September 1998, respectively,
and the debt extinguishment from the tender offers during the second half of
2001 and quarter ended March 31, 2002. The total debt of the Company decreased
$731,191 or 29.6% from $2,471,106 at September 30, 2001 to $1,739,915 at
September 30, 2002.
Income Tax:
The Company's effective income tax rate was a benefit of 0.0% and 0.07%,
respectively, for the quarter and nine months ended September 30, 2002 as
33
compared to a provision of 0.02% and a benefit of 0.32%, respectively, for the
same period in 2001. 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.
Equity in Loss of Unconsolidated Entities:
For the third quarter ended September 30, 2002, Equity in loss of unconsolidated
entities decreased $4,448 to a loss of $48 from a loss of $4,496 for the quarter
ended September 30, 2001. For the nine months ended September 30, 2002, Equity
in loss of unconsolidated entities increased $19,139 to a loss of $23,964 from a
loss of $4,825 for the nine months ended September 30, 2001. The loss from
unconsolidated entities, primarily represents the Company's investments in
Starpower, Mega Cable, MCM Holding, and J2 Interactive. The losses for the nine
months ended September 30, 2002, includes the Company's portion of our
identified asset impairment on Starpower.
The Company has imbedded goodwill in the investment in Mega Cable, which is no
longer amortized in accordance with SFAS No. 142. The estimated amortization of
goodwill in Mega Cable was approximately $1,800 per quarter.
Minority Interest in Loss of Consolidated Entities:
For the quarter ended September 30, 2002, Minority interest in loss of
consolidated entities decreased $6,047 to $0 from $6,047 for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, Minority
interest in loss of consolidated entities increased $18,518 to $36,650 from
$18,132 for the nine months ended September 30, 2001. The minority interest
primarily represents the interest of NSTAR Communications, Inc. in the loss of
RCN-Becocom. The loss for the quarter and nine months ended September 30, 2002
is primarily due to the asset impairment and special charges related to
RCN-Becocom.
Discontinued Operations:
The income from discontinued operations represents the net operating results of
the central New Jersey cable system operations.
Extraordinary Item:
Extraordinary item decreased to $13,073 for the nine months ended September 30,
2002 from $75,482 for the same period in 2001. During the nine months ended
September 30, 2002, the Company retired approximately $24,037 in face value of
debt with a book value of approximately $22,142 for approximately $722 in cash
and approximately 2,589,237 shares of common stock with a value of $7,875, plus
fees of $180 and the write-off of debt issuance costs of $292.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and short-term investments decreased
$487,701 to $350,790 at September 30, 2002 from $838,491 at December 31, 2001.
The decrease resulted primarily from $171,365 used in operating activities,
34
$105,579 used in investing activities, $209,753 used in financing activities,
and the decrease in unrealized appreciation in short-term investments of $1,004.
Net cash of $171,365 used in operating activities consisted primarily of
$109,389 net loss adjusted for non-cash items and $75,388 used in working
capital. Net cash used in working capital and other activities resulted in
decreases in accounts payable, accrued expenses and other deferred credits of
approximately $76,013, offset by a net decrease in accounts receivable,
receivables from related parties and other of approximately $625. Net cash
provided by discontinued operations was $13,412.
Net cash of $105,579 used in investing activities resulted primarily from
additions to property, plant and equipment, and construction materials of
$101,422, investment and advances in unconsolidated joint ventures of $7,500 and
an increase to restricted short-term investments of $12,757. This cash used was
offset by the proceeds from the sale of assets of $17,636. The increase to
property, plant, and equipment was primarily due to the Company's expansion of
its network in its current markets. Net cash used for discontinued operations
was $1,536.
Cash used in financing activities of $209,753 consisted primarily of the
repayment of long-term borrowings of $195,281, payments of capital lease
obligations of $2,311, payments made for debt financing costs of $12,077, and a
distribution to minority interest of $88. These applications of cash were offset
by proceeds from the exercise of stock options of $4.
The Company has indebtedness that is substantial in relation to its
shareholders' equity, its assets and cash flow. At September 30, 2002 the
Company had an aggregate of approximately $1,739,915 of indebtedness
outstanding. The Company also has cash, temporary cash investments, short-term
investments, and restricted short-term investments aggregating approximately
$387,223.
Long-term debt outstanding at September 30, 2002 and December 31, 2001 is as
follows:
September 30, December 31,
2002 2001
------------- -----------
Term Loans $ 554,719 $ 750,000
Senior Notes 10% due 2007 161,116 161,116
Senior Discount Notes 11.125% due 2007 319,090 316,351
Senior Discount Notes 9.8% due 2008 314,872 293,073
Senior Discount Notes 11% due 2008 133,874 123,499
Senior Notes 10.125% due 2010 231,736 231,736
Capital Leases 24,508 20,373
---------- ----------
Total 1,739,915 1,896,148
Due within one year 35,054 22,532
---------- ----------
Total Long-Term Debt $1,704,861 $1,873,616
========== ==========
Contractual maturities of long-term debt over the next 5 years are as follows:
35
Aggregate Amounts
For the period October 1, 2002 through
December 31, 2002 $ 8,354
For the year ended December 31, 2003 $ 38,466
For the year ended December 31, 2004 $ 46,471
For the year ended December 31, 2005 $ 64,813
For the year ended December 31, 2006 $221,468
As a result of the substantial indebtedness of the Company, the Company's fixed
charges, which includes interest, amortization of debt, and capital
expenditures, are expected to exceed its earnings for the foreseeable future.
The leveraged nature of the Company could limit its ability to effect future
financing or may otherwise restrict the Company's business activities.
The Company entered into an Amendment to the Credit Agreement dated March 25,
2002 (the "Amendment"). The Amendment amended certain financial covenants and
certain other negative covenants to reflect the Company's revised business plan
and amended certain other terms and adds certain covenants of the Credit
Agreement, including increases to the margins and commitment fee payable
thereunder. The Company can make no assurances that it would have been able to
satisfy and comply with the covenants under the Credit Agreement if it had not
negotiated and entered into the Amendment, which could have resulted in an event
of default under the Credit Agreement. In connection with the Amendment, the
Company agreed to pay to certain lenders an aggregate fee of approximately
$12,126 to repay $187,500 of outstanding term loans under the Credit Facility,
and to permanently reduce the amount available under the revolving loan from
$250,000 to $187,500. The Company has also agreed that it may not draw down
additional amounts under the revolving loan until the later of the date on which
the Company delivers to the lenders financial statements for the period ending
March 31, 2004 and the date on which the Company delivers to the lenders a
certificate with calculations demonstrating that the Company's EBITDA was at
least $60,000 in the aggregate for the two most recent consecutive fiscal
quarters. Together, these provisions place substantial limitations on the
Company's ability to borrow money under the Revolver, and there can be no
assurance that the Company will be able to satisfy these conditions or be able
to draw under the Revolver. In connection with the Amendment, each of the
lenders party thereto also agreed to waive any default or event of default under
the Credit Agreement that may have occurred prior to the date of the Amendment.
In accordance with the Amendment, the Company prepaid $62,500 of the Term Loan A
on March 25, 2002. At September 30, 2002, $180,469 of the Term Loan A was
outstanding. Amortization of the Term Loan A starts on September 3, 2002 and
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 September 3, 2006.
In accordance with the Amendment, the Company prepaid $125,000 of the Term Loan
B on March 25, 2002. At September 30, 2002, $374,250 of the Term Loan B was
outstanding. Amortization of the Term Loan B starts on September 3, 2002 with
quarterly installments of $750 per quarter until September 3, 2006 when the
quarterly installments increase to $90,750 per quarter through to maturity at
June 3, 2007.
The Revolver can also be utilized for letters of credit up to a maximum of
$15,000. At September 30, 2002 there were $15,000 in letters of credit
outstanding under the Revolver. At September 30, 2002 the Company also had
letters of credit outside the Revolver along with restricted cash of
approximately $36,433, which were collateralized by cash.
36
In accordance with the Amendment, the Company is permitted to contribute the
assets of the its California operations to a joint venture. Entering into a
joint venture could help the Company to leverage our assets, improve revenue
growth, and reduce the amount of expenditures required by the Company to develop
and maintain our network.
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.
In the event that the Company fails to satisfy or comply with any of the
financial or negative covenants of the amended Credit Agreement and is unable to
obtain additional modifications or a waiver with respect thereto, the lenders
under the Credit Facility would be entitled to declare the outstanding
borrowings under the Credit Facility immediately due and payable and exercise
all or any of their other rights and remedies. In addition, any such
acceleration of amounts due under the Credit Facility would, due to cross
default provisions in the indentures governing the Company's Senior Notes,
entitle holders of Senior Notes to declare the Senior Notes and any accrued and
unpaid interest thereon immediately due and payable. Any such acceleration or
other exercise of rights and remedies by lenders under the Credit Facility
and/or holders of Senior Notes would likely have a material adverse effect on
the Company. The Company does not have sufficient cash resources to repay its
outstanding indebtedness if it is declared immediately due and payable. The
Company can make no assurance that in the future, it will be able to satisfy and
comply with the covenants under the Amendment to the Credit Agreement.
The Company is permitted to make purchases of indebtedness of the Company solely
with equity proceeds of, or solely in exchange for, Common Stock of the Company
or Non-Cash Pay Preferred stock (as defined therein) of the Company provided
that, among other things, the amount of such purchases made with equity proceeds
does not exceed $300,000 in the aggregate. In June 2001 the Company completed a
private equity offering of 7,661,074 shares of common stock in exchange for
$50,000 in proceeds.
During the first quarter ended March 31, 2002, the Company completed two debt
repurchases for certain of its Senior and Senior Discount Notes. The Company
retired approximately $24,037 in face amount of debt with a book value of
$22,142. The Company recognized an extraordinary gain of approximately $13,073
from the early retirement of debt in which approximately $722 in cash was paid
and approximately 2,589,237 shares of common stock with a value of $7,875 were
issued to retire the debt. In addition, the Company incurred fees of $180 and
wrote off debt issuance costs of $292. There were no debt repurchases during
either of the quarters ended June 30 or September 30, 2002.
The Company is aware that the various issuances of Senior Notes and Senior
Discount Notes continue to trade at discounts to their respective face or
accreted amounts. In order to continue to reduce future cash interest payments,
as well as future amounts due at maturity, the Company may from time to time
acquire certain of these outstanding debt securities in exchange for shares of
RCN common stock pursuant to the exemption provided by Section 3(a)(9) of the
Securities Act of 1933, as amended, in open market or privately negotiated
transactions. We will evaluate any such transactions in light of then existing
market conditions. The amounts involved in any such transactions, individually
or in the aggregate, may be material.
37
The Company has two tranches of redeemable preferred stock, Series A and Series
B. At September 30, 2002 the Company had paid cumulative dividends in the amount
of $68,363 in the form of additional Series A Preferred Stock. At September 30,
2002 the number of common shares that would be issued upon conversion of the
Series A Preferred Stock was 8,163,154. At September 30, 2002 the Company had
paid cumulative dividends in the amount of $324,796 in the form of additional
shares of Series B Preferred Stock. At September 30, 2002 the number of common
shares that would be issued upon conversion of the Series B Preferred Stock was
31,851,549. The Series A Preferred Stock issued on April 7, 1999 is subject to a
mandatory redemption on March 31, 2014. The Series B Preferred Stock issued on
February 28, 2000 is mandatorily convertible into the Company's Common Stock no
later than February 28, 2007.
The Company has an investment portfolio. 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.
The Company's successful debt and equity offerings have given the Company the
ability to partially implement the business plan. However, the Company may be
required to secure additional financing in the future. The Company can make no
assurances that we will have sufficient funds to meet or refinance our debt when
it becomes due.
The Company currently expects to fund expenditures for capital requirements as
well as liquidity needs for operations from a combination of available cash
balances, proceeds from revenues and financing arrangements. However, expenses
may exceed the Company's estimates and the financing needed may be higher than
estimated. During the third quarter 2002, the Company entered into a definitive
agreement to sell a portion of our network assets and customer base in central
New Jersey for an estimated cash sales price of approximately $245,000, subject
to adjustments. The purchase price is subject to certain adjustments based on
minimum subscriber levels and profitability measures, and working capital items.
In addition, the Company will be reimbursed for certain post-signing
expenditures related to ongoing upgrades to the central New Jersey network being
performed by the Company. In accordance with the Amendment to the Credit
Agreement, proceeds from the sale of the central New Jersey assets in excess of
$250,000 are to be applied to the two outstanding Term Loans on a pro-rata
basis. All proceeds below $250,000 may be used in connection with the Company's
acquisition of telecommunications assets (as defined in the Credit Agreement).
In accordance with the Amendment to the Credit Agreement dated March 25, 2002,
certain current covenants will be adjusted to reflect the sale of the New Jersey
network assets upon the closing of the sale. In the event that the sale of our
central New Jersey operations is not completed by the end of the first quarter
of 2003, there can be no assurance that the Company will continue to be in
compliance with the covenants in the Credit Agreement. At September 30, 2002,
the Company had approximately $387,223 in cash, short-term investments, and
restricted short-term investments.
The Company may experience difficulty raising capital in the future, as both the
equity and debt capital markets have recently been difficult to access on
reasonable terms, particularly for securities issued by telecommunications and
technology companies. The ability of telecommunications companies to access
those markets as well as their ability to obtain financing provided by bank
lenders and equipment suppliers has become more restricted and financing costs
have increased. During some recent periods, the capital markets have been
largely unavailable for new issues of securities by telecommunications
companies. The Company's public equity and debt securities are trading at or
near all time lows, which together with its substantial leverage, means it may
have limited access to certain of its historic sources of capital.
38
In addition to raising capital through the debt and equity markets, the Company
may continue to sell or dispose of existing businesses or investments to fund
portions of the business plan. The Company may not be successful in producing
sufficient cash flow, raising sufficient debt or equity capital on terms that it
will consider acceptable. The Company can make no assurances that we will have
sufficient funds to meet or refinance our debt when it becomes due.
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 three 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 return which surpasses average overnight investment returns in
relationship to these guidelines.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the filing of this Quarterly Report on
Form 10-Q, the Company, under the supervision, and with the participation
of its management, including its principal executive officer and principal
financial officer, performed an evaluation of the Company's disclosure
controls and procedures, as contemplated by Securities Exchange Act Rule
13a-15. Based on that evaluation, the Company's principal executive
officer and principal financial officer concluded that such disclosure
controls and procedures are effective to ensure that material information
relating to the Company, including its consolidated subsidiaries, is made
known to them, particularly during the period for which the periodic
reports are being prepared.
(b) Changes in Internal Controls
No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of the evaluation performed pursuant to Securities Exchange Act
Rule 13a-15 referred above.
39
PART II - OTHER INFORMATION
Item 5. Other Information
During the quarterly period covered by this filing, the Audit Committee
approved the engagement of PricewaterhouseCoopers for tax consultation to RCN
regarding certain Mega Cable transactions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99.2) Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports of Form 8K
On August 7, 2002 RCN filed a Current Report on Form 8-K including the RCN
Corporation 2nd Quarter Earnings Release.
On August 29, 2002 RCN filed a Current Report on Form 8-K announcing that
RCN Corporation had reached a definitive agreement to sell its central New
Jersey cable system to Patriot Media & Communications CNJ, LLC for $245 million
in cash.
40
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: November 14, 2002
/s/ Jeffrey M. White
----------------------------
Vice Chairman and
Chief Financial Officer
(Principal Financial Officer)
41
CERTIFICATIONS
I, David C. McCourt, Chairman and Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of RCN Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ David C. McCourt
--------------------------------------------
David C. McCourt
Chairman and Chief Executive Officer
November 14, 2002
42
I, Jeffrey White, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of RCN Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Jeffrey White
--------------------------------------------
Jeffrey White
Chief Financial Officer
November 14, 2002
43