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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 ended September 30, 2003
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: 001-16805
RCN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3498533
-------- ----------
(State of other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization)
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, 2003.
Common Stock 111,198,474
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the 1934 Securities and Exchange Act):
(X) Yes ( ) No
RCN CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
2
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)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales $ 114,991 $ 108,380 $ 347,047 $ 322,722
Costs and expenses, excluding non-cash stock based
compensation, depreciation and amortization
Direct expenses 41,080 41,577 123,291 130,814
Operating and selling, general and
administrative 74,608 89,301 225,520 275,390
Non-cash stock based compensation 3,123 10,902 7,970 25,304
Impairments and special charges, net 25,371 (20) 31,948 889,745
Depreciation and amortization 52,689 54,854 148,357 212,130
------------ ------------ ------------ ------------
Operating loss (81,880) (88,234) (190,039) (1,210,661)
Investment income 1,724 2,593 5,418 11,739
Interest expense 43,496 47,099 138,401 126,718
Gain on early extinguishment of debt 45,733 - 45,733 13,073
Other income (expense), net 644 1,101 9,082 45
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (77,275) (131,639) (268,207) (1,312,522)
Income tax provision (benefit) (12) - - (880)
------------ ------------ ------------ ------------
Loss from continuing operations before equity
in unconsolidated entities and minority interest (77,263) (131,639) (268,207) (1,311,642)
Equity in income (loss) of unconsolidated entities 7,730 (48) 18,417 (23,964)
Minority interest in loss of consolidated entities - - - 36,650
------------ ------------ ------------ ------------
Net loss from continuing operations (69,533) (131,687) (249,790) (1,298,956)
Discontinued operations, net of tax of $0 (Note 5)
Income from discontinued operations, (including net
gain on disposal of $166,144, in the nine months
ended September 30, 2003) 2,704 3,404 174,125 7,319
------------ ------------ ------------ ------------
Net loss (66,829) (128,283) (75,665) (1,291,637)
Preferred dividend and accretion requirements 43,705 40,871 128,946 120,589
------------ ------------ ------------ ------------
Net loss to common shareholders $ (110,534) $ (169,154) $ (204,611) $ (1,412,226)
============ ============ ============ ============
Basic and diluted loss per common share
Net loss from continuing operations $ (1.02) $ (1.57) $ (3.42) $ (13.47)
============ ============ ============ ============
Net income from discontinued operations 0.02 0.03 1.57 0.07
------------ ------------ ------------ ------------
Net loss to common shareholders $ (1.00) $ (1.54) $ (1.85) $ (13.40)
============ ============ ============ ============
Weighted average shares outstanding, basic and diluted 111,401,962 109,798,588 110,712,231 105,354,946
============ ============ ============ ============
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
September 30, December 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and temporary cash investments $ 46,939 $ 49,365
Short-term investments - 227,641
Accounts receivable from related parties 13,269 10,068
Accounts receivable, net of reserve for
doubtful accounts of $6,577 and $10,653 50,534 55,120
Unbilled revenues 473 770
Interest and dividends receivable 1,274 1,595
Prepayments and other current assets 31,218 17,757
Short-term restricted investments (Note 7) 142,565 34,920
Current assets of discontinued operations 3,524 5,985
---------- ----------
Total current assets 289,796 403,221
Property, plant and equipment, net of
accumulated depreciation of $916,121 and $777,580 1,097,490 1,213,383
Investments in joint ventures and equity securities 241,874 228,231
Intangible assets, net of accumulated
amortization of $18,217 and $64,912 1,551 1,741
Goodwill, net 6,130 6,130
Long-term restricted investments (Note 7) 100,000 -
Deferred charges and other assets 40,862 43,595
Noncurrent assets of discontinued operations 26,315 93,980
---------- ----------
Total assets $1,804,018 $1,990,281
========== ==========
4
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 44,229 $ 37,417
Accounts payable 22,531 27,273
Accounts payable to related parties 7,670 13,833
Advance billings and customer deposits 26,983 26,770
Accrued exit costs 38,575 30,667
Accrued expenses 142,509 174,632
Current liabilities of discontinued operations 3,826 7,723
----------- -----------
Total current liabilities 286,323 318,315
----------- -----------
Long-term debt 1,623,758 1,706,997
Other deferred credits 4,927 4,166
Minority interest - 791
Commitments and contingencies
Redeemable preferred stock, Series A, convertible,
par value $1 per share; 708,000 shares
authorized, 335,372 and 323,934 shares issued and
outstanding, respectively 334,153 316,342
Redeemable preferred stock, Series B, convertible,
par value $1 per share; 2,681,931 shares
authorized, 2,080,297 and 2,009,335 shares issued and
outstanding, respectively 2,099,220 1,988,084
Shareholders' deficit:
Preferred stock, par value $1 per share,
21,610,069 authorized, none issued
and outstanding - -
Class A Common stock, par value $1 per share,
500,000,000 shares authorized, 111,881,341
and 110,795,577 shares issued and 111,198,474
and 110,112,710 shares outstanding, respectively 111,881 110,796
Class B Common stock, par value $1 per share,
400,000,000 shares authorized, none issued
and outstanding - -
Additional paid-in-capital 1,460,077 1,451,744
Cumulative translation adjustments (11,907) (5,134)
Unearned compensation expense (1,288) (4,336)
Unrealized appreciation on investments 454 1,484
Treasury stock, 682,867 shares at cost (9,583) (9,583)
Accumulated deficit (4,093,997) (3,889,385)
----------- -----------
Total shareholders' deficit (2,544,363) (2,344,414)
Total liabilities, redeemable preferred stock and ----------- -----------
shareholders' deficit $ 1,804,018 $ 1,990,281
=========== ===========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the For the
Nine months ended Nine months ended
September 30, 2003 September 30, 2002
------------------ ------------------
Cash flows from operating activities
Net loss $ (75,665) $(1,291,637)
Income from discontinued operations (7,981) (7,319)
Gain on sale of discontinued operation (166,144) -
----------- -----------
Net loss from continuing operations (249,790) (1,298,956)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Accretion of discounted debt 13,386 57,054
Amortization of financing costs 13,410 12,986
Non-cash stock based compensation expense 7,970 25,304
Gain on sale of assets (8,118) -
Gain on early extinguishment of debt (45,733) (13,073)
Depreciation and amortization 148,357 212,130
Deferred income taxes, net (2,503) (880)
Provision for losses on accounts receivable 11,248 9,685
Write down on non-marketable investment - 2,250
Equity in (income) loss of unconsolidated entities (18,417) 23,964
Impairments and special charges 31,948 889,745
Minority interest - (36,650)
----------- -----------
(98,242) (116,441)
Net change in working capital (62,301) (72,741)
----------- -----------
Net cash used in continuing operations (160,543) (189,182)
Cash provided by discontinued operations 1,906 16,290
----------- -----------
Net cash used in operating activities (158,637) (172,892)
----------- -----------
6
Cash flows from investing activites:
Additions to property, plant and equipment (49,499) (99,896)
Short-term investments 227,641 99,497
Investment in unconsolidated joint venture - (7,500)
Proceeds from sale of assets 2,628 17,636
Proceeds from sale of discontinued operations 242,844 -
Discontinued operations (2,191) (1,536)
Increase in restricted cash - (12,757)
Increase in investments restricted for debt service (224,156) -
----------- -----------
Net cash provided by (used in) investing activities 197,267 (4,556)
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (53,493) (195,281)
Repayment of capital lease obligations (1,427) (2,311)
Payments made for debt financing costs (13,995) (12,077)
Proceeds from the issuance of long-term debt 27,806 -
Proceeds from the exercise of stock options 53 4
Contribution from minority interest - (88)
----------- -----------
Net cash used in financing activities (41,056) (209,753)
----------- -----------
Net decrease in cash and temporary
cash investments (2,426) (387,201)
Cash and temporary cash investments at beginning of period 49,365 476,220
----------- -----------
Cash and temporary cash investments at end of period $ 46,939 $ 89,019
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of $681 and $8,040 capitalized as of
September 30, 2003 and 2002, respectively) $ 104,582 $ 50,903
=========== ===========
Income taxes $ 86 $ 1,113
=========== ===========
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
7
RCN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
(Dollars in Thousands, Except Share and Per Share Data)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of RCN
Corporation and its consolidated subsidiaries, ("RCN" or the "Company") have
been prepared in accordance with requirements of the Securities and Exchange
Commission ("SEC") for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and footnote disclosures required by generally accepted
accounting principles for complete financial statements have been condensed or
omitted.
In the opinion of management, the unaudited condensed consolidated financial
statements include all adjustments, which consist of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company for the periods presented.
The results of operations for the period ended September 30, 2003 are not
necessarily indicative of operating results expected for the full year or future
interim periods. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's December 31, 2002 Annual Report on Form 10-K
filed with the SEC.
2. OPERATIONS AND LIQUIDITY
At September 30, 2003, the Company had approximately $46,939 in cash, temporary
cash and short-term investments and $242,565 in restricted cash. The Company
believes that current cash, including available restricted cash, cash
equivalents, short-term investments and proceeds from revenues will be
sufficient to meet its anticipated cash needs for working capital, capital
expenditures and other activities into the second quarter of 2004.
As of September 30, 2003, the Company was in compliance with the covenants
contained in all of the Company's outstanding debt agreements. However, in order
for the Company to meet its liquidity needs and continue complying with all debt
covenants, through mid-2004 and beyond, the Company will have to do a
combination of the following: (i) outperform its business plan, (ii) improve
operational efficiencies, (iii) raise additional capital through issuance of
equity or debt securities, (iv) further amend the Credit Facility, (v)
restructure the balance sheet, (vi) significantly reduce capital deployment
plans and new product introductions and (vii) consummate additional asset sales.
The Company can offer no assurances that it will be able to implement one or
more of these actions on acceptable terms or, if it is able to implement such
actions, that the implementation will allow the Company to comply with its debt
covenants or obtain relief from the obligations to comply with those covenants
at which point, the Company will implement further austerity programs which will
limit the Company's ability to operate in the normal course of business. The
Company's ability to raise additional capital at this time may be dependent upon
numerous factors beyond the control of the Company including, without
limitation, market conditions and the possibility that the necessary capital
will not be available or will be available only upon terms that are unacceptable
to the Company. Failure to obtain such capital or otherwise sufficiently
implement a combination of the actions will result in a violation of one or more
of the covenants contained in the Credit Agreement. Violation of one or more
covenants under the Credit Facility would be an event of default under the terms
of the Credit Agreement. Absent a material change in the Company's financial
condition, the Company believes that it will fail to comply with one or more of
its covenants under the Credit Agreement in the second quarter of 2004. The
Company also has been discussing and providing information with respect to the
Company's capital structure and operations with various consultants retained by
its bank lenders and certain holders of its publicly held Senior Notes and its
Preferred stock, as well as with potential new sources of capital. Although the
foregoing discussions continue to be in the early stages and the Company cannot
predict at this time the results of the foregoing efforts, the Company believes
that such discussions may ultimately result in significant amounts of Senior
Notes and/or Preferred stock being converted into Common stock of the Company.
If the Company were (i) unable to implement any additional actions as described
above, (ii) adversely impacted by any unforeseen business conditions and/or
(iii) unable to comply with the financial and negative covenants of the Credit
Agreement, the lenders under the Credit Facility would be entitled to declare
the outstanding borrowings under the Credit Facility immediately due and payable
and exercise any or all 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 have a material adverse effect on
8
the Company. The obligations are currently classified as long-term debt. The
Company does not have sufficient cash resources to repay its outstanding
indebtedness if it is declared immediately due and payable.
The Company has retained Merrill Lynch as a financial advisor to review its
financial alternatives and capital structure and to explore possible capital
raising opportunities. As previously announced, on August 18, 2003, the Company
repurchased approximately $75 million in principal amount of its publicly held
Senior Notes for a price of approximately $28 million pursuant to a cash tender
offer for such notes. As part of its ongoing efforts to improve its capital
structure and reduce the amount of its debt, the Company has begun preliminary
discussions with certain holders of its publicly held senior notes and the
holders of its Preferred stock concerning a possible repurchase, exchange or
retirement of the securities held by such holders. Such discussions are in the
very preliminary stages and the Company cannot predict at this time the results
of the foregoing efforts.
See Note 5, Discontinued Operations and Note 7, Long-Term Debt, for further
discussion relating to the definitive agreement to sell the Company's Carmel,
New York cable system and the Company's completed cash tender offer,
respectively.
3. 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
is effective for fiscal years beginning after June 15, 2002, and 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 the asset's useful life. The Company is
primarily subject to asset retirement obligations associated with its cable
franchise agreements, which are subject to the provisions of this statement.
Cable franchise agreements frequently contain clauses requiring that the Company
remove its facilities from the public rights of way upon the expiration or
termination of the agreement, creating an asset retirement obligation. Local
governments may choose not to exercise these rights as the facilities could be
considered useful improvements. The Company has concluded that the fair value of
these obligations cannot be reasonably estimated because neither the settlement
date of the asset retirement obligation nor the probability of enforcement of
the remediation clauses are currently determinable. The Company has insufficient
historical data to reasonably determine the probability of whether the
remediation terms of the agreements will be enforced and to what extent. In
addition, the Company is unable to estimate a potential range of settlement
dates due to its intent and ability to renew the franchise agreement after the
initial franchise expiration. A liability for the asset retirement obligation
associated with the Company's franchise agreement will be recorded if, and when,
a reasonable estimate of fair value can be determined. The Company adopted SFAS
No. 143 on January 1, 2003 and the adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements No.
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
15, 2002. Any gain or loss on the extinguishment of debt that was classified as
an extraordinary item will be reclassified upon adoption. The Company adopted
SFAS No. 145 on January 1, 2003. Accordingly in the condensed consolidated
statements of operations for the nine month period ended September 30, 2002, the
extraordinary gains on early retirement of debt has been reclassified. (See Note
7, Long-Term Debt, for additional discussion regarding the Company's adoption of
SFAS No. 145.) The adoption of this statement did not have a material impact on
the Company's financial position or results of operations.
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. 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. It also establishes fair value as the objective for initial
measurement of the liability. The Company adopted the provisions of SFAS No. 146
on January 1, 2003. (See Note 6, Impairment Charges and Accrued Exit Costs, for
discussion regarding the Company's adoption of SFAS No. 146.)
In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN 45"),
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation
9
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The adoption of the recognition and initial
measurement requirements of FIN 45 did not have a material impact on the
financial position, cash flows or results of operations of the Company.
In January 2003, the FASB issued Financial Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities", which expands upon and
strengthens existing accounting guidance concerning when a company should
include in its financial statements the assets, liabilities and activities of
another entity. Prior to the issuance of FIN 46, a company generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 now requires a variable interest
entity, as defined in FIN 46, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. FIN 46 also requires disclosures about variable interest entities that the
Company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003 and to older entities
in the first fiscal year or interim period beginning after June 15, 2003. The
Company does not have any interest in any entity that requires disclosure or
consolidation as a result of adopting the provisions of FIN 46.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 was adopted on July 1, 2003
and the adoption of SFAS No. 150 did not have a material impact on the Company's
financial position or results of operations.
4. CHANGE IN ESTIMATE FOR RECIPROCAL COMPENSATION REVENUE
The Company recognizes revenue when evidence of an arrangement exists, services
are rendered, the selling price is determinable and collectibility is reasonably
assured.
Reciprocal compensation revenue is the fee local exchange carriers pay to
terminate calls on each other's networks. The Company has historically
recognized such revenue as it was realized. This was due to the uncertainty of
various legal and regulatory rulings as well as the Company's inability to
accurately determine the amount of reciprocal compensation revenue to recognize
prior to the point in time such amounts were paid, principally due to the manner
in which the information was reported by the counterparty. Over the past year,
the FCC has ruled on various tariff/interconnect rules that have now permitted
the Company to accurately estimate the amount of reciprocal compensation revenue
to be earned for calls terminated on the Company's network in the period such
services are rendered. Accordingly, during the first nine months of 2003, the
Company recognized approximately $7,100 of incremental reciprocal compensation
revenue. Approximately $4,100 of this amount related to services rendered in
fiscal 2002.
5. DISCONTINUED OPERATIONS
a) In July 2003, the Company entered into a definitive agreement to sell its
Carmel, New York ("Carmel") cable system assets and customers serviced by this
network for an estimated cash sales price of approximately $120,000, subject to
adjustments. The Carmel network services approximately 30,000 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 working capital
items. 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 2004, and the Company expects to realize a gain of approximately
$85,000 to $90,000 on the transaction. In accordance with the Fifth Amendment to
the Credit Agreement, proceeds of approximately $66,000 will be applied as a
partial pay-down of the Company's senior secured bank facility. The Company will
continue to operate in Carmel until the asset sale is complete. In accordance
with SFAS No. 144, the results of operations for Carmel are reported as
discontinued operations.
The following are the summarized results of operations for the three and nine
months ended September 30, 2003 and 2002 for the Carmel operations:
10
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Sales $ 7,317 $ 6,115 $ 21,369 $ 17,410
Direct expenses 2,395 2,271 6,834 6,251
Operating and selling, general and
administrative, and depreciation
and amortization expense 2,447 2,807 9,143 8,222
Income before tax 2,513 1,028 5,445 2,227
Income after tax $ 2,513 $ 1,028 $ 5,445 $ 2,227
In accordance with SFAS No. 144, beginning July 2003, depreciation and
amortization is no longer recognized on assets to be sold.
The current and noncurrent assets and liabilities of the Carmel operation to be
sold as of September 30, 2003 and December 31, 2002 are as follows:
September 30, December 31,
2003 2002
------------- ------------
Current assets
Accounts receivable from related parties $ 30 $ 138
Accounts receivable, net of reserve 3,322 1,794
Other current assets 172 82
----------- ----------
Current assets of discontinued operations $ 3,524 $ 2,014
=========== ==========
Noncurrent Assets
Property, plant and equipment, net $ 26,315 $ 21,555
Other - 9
----------- ----------
Noncurrent assets of discontinued operations $ 26,315 $ 21,564
=========== ==========
Current liabilities
Accounts payable from related parties $ 224 $ 252
Account payable 224 216
Advance billings and customer deposits 826 453
Deferred revenue 410 716
Accrued liabilities 2,142 2,234
----------- ----------
Current liabilities of discontinued operations $ 3,826 $ 3,871
=========== ==========
b) During the first quarter of 2003, the Company closed the sale of its central
New Jersey cable system assets and customers serviced by this network for net
cash proceeds of approximately $242,844 after transaction fees and amounts paid
to acquire minority interests. In addition, the Company has been reimbursed for
certain post-signing expenditures related to upgrades to the central New Jersey
network performed by the Company. The central New Jersey network services
approximately 80,000 customers. The transaction was structured as an asset
purchase, with the buyer assuming certain liabilities related to the business.
The Company recorded a gain of approximately $166,144 from sale of the assets of
the discontinued operations net of taxes, transaction fees and minority
interest. At September 30, 2003, approximately $14,690 of the cash proceeds from
the sale of assets are being held in an escrow account for potential losses for
which the purchaser of the central New Jersey cable system and its affiliates
may be entitled to indemnification under the terms of the agreement governing
the sale of the central New Jersey cable system. This amount is included in
prepayments and other current assets on the balance sheet. This amount, less
any claims, is expected to be released to the Company by February 19, 2004.
11
In accordance with SFAS No. 144, the results of operations for central New
Jersey are reported as discontinued operations and depreciation and amortization
were no longer recognized on assets to be sold since the date of the agreement.
The following are the summarized results of the central New Jersey operations:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales $ - $ 13,500 $ 7,428 $ 40,387
Direct expenses - 4,964 2,912 14,020
Operating and selling, general and
administrative, and depreciation
and amortization expense 28 5,974 2,031 19,896
Income before tax 191 2,376 2,536 5,092
Income after tax $ 191 $ 2,376 $ 2,536 $ 5,092
The current and noncurrent assets and liabilities, at December 31, 2002, of the
central New Jersey operation were as follows:
December 31,
2002
------------
Current assets
Accounts receivable from related parties $ 154
Accounts receivable, net of reserve 3,817
--------
Current assets of discontinued operations $ 3,971
========
Noncurrent assets
Property, plant and equipment, net $ 72,304
Intangible assets, net 22
Goodwill 90
--------
Noncurrent assets of discontinued operations $ 72,416
========
Current liabilities
Advance billings and customer deposits $ 3,852
--------
Current liabilities of discontinued operations $ 3,852
========
c) In the first quarter of 2002, the Company completed the sale of a portion of
its business customer base that was not served by its broadband network. The
sale was based on certain contingencies outlined in the sales agreement. After
resolution of such contingencies, cash proceeds of the sale were $2,169. The
Company realized a gain of $1,147 on the transaction. The gain is included in
the other income (expense), net line item in the statement of operations.
6. IMPAIRMENT CHARGES AND ACCRUED EXIT COSTS
The total asset impairment and other charges are comprised of the following:
12
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- ----------
Impairment of property, plant
and equipment $ - $ - $ - $ 734,821
Abandoned assets 15,477 - 15,477 50,044
Construction materials - - - 61,322
Goodwill - - - 38,927
Franchises - - - 1,379
Exit costs for excess facilities - net 9,894 (20) 16,471 3,252
-------- -------- -------- ----------
Total impairment and other charges $ 25,371 $ (20) $ 31,948 $ 889,745
======== ======== ======== ==========
Due to the continued severe slowdown in the telecommunications industry, the
economy, and continued limited availability of capital, the Company revised its
growth plan during 2002. Under the revised plan, the Company decided to
substantially curtail future capital spending and network geographic expansion
in all existing markets, focus on customer growth in existing markets and reduce
operating expenses. As part of the revised growth plan, construction material
levels were assessed based on the build-out requirements of the Company's
revised plan. The assessment process resulted in the identification of excess
construction material that cannot be used for alternative use and which is
either to be returned to vendors, or resold to a secondary market.
In addition, the Company initiated discussions with the respective franchising
authorities to inform them of the Company's decision to stop or delay
construction. During the three months ended September 30, 2003 and 2002 the
Company recognized approximately $0 and $0, respectively, and during the nine
months ended September 30, 2003 and 2002, the Company recognized approximately
$250 and $3,251, respectively, in additional accrued costs and penalties which
are included in the operating and selling, general and administrative expenses
in the statement of operations. Additionally, during the three months ended
September 30, 2003 and 2002 the Company recognized approximately $0 and $2,075,
respectively, and during the nine months ended September 30, 2003 and 2002, the
Company recognized approximately $2,252 and $2,859, respectively, of recoveries
resulting from settlements and changes in estimates related to certain franchise
obligations primarily as a result of negotiations with franchise authorities.
A detailed review of facility requirements against lease obligations has been
continuously conducted by the Company to identify excess space. Along with the
revised expansion plans, the Company has also consolidated certain operating
activities, which has resulted in the Company exiting excess facilities. During
the three months ended September 30, 2003 and 2002, the Company recognized
approximately $10,201 and $168, respectively and during the nine months ended
September 30, 2003 and 2002, the Company recorded approximately $16,791 and
$14,365, respectively of additional accrued costs to exit excess facilities. In
accordance with the provisions of SFAS No. 146, the exit costs accrued in 2003
were made at the cease-use date and include estimated sublease rentals.
Additionally, during the three months ended September 30, 2003 and 2002, the
Company recognized approximately $307 and $188, respectively and during the nine
months ended September 30, 2003 and 2002, the Company recognized approximately
$320 and $11,099, respectively, of recoveries resulting from settlements and
changes in estimates related to certain lease obligations as a result of
negotiations with landlords and/or better than expected sublease rentals.
The total activity for the nine months ended September 30, 2003 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.
13
Exit Costs
Franchise Facility Total
--------------------------------------
Balance, December 31, 2002 $ 15,595 $ 15,072 $ 30,667
Additional accrued costs 250 16,791 17,041
Recoveries (2,252) (320) (2,572)
Payments (323) (6,238) (6,561)
--------------------------------------
Balance, September 30, 2003 $ 13,270 $ 25,305 $ 38,575
======================================
7. LONG-TERM DEBT
Long-term debt, including capital leases, outstanding at September 30, 2003 and
December 31, 2002 is as follows:
September 30, December 31,
2003 2002
----------------------------
Term Loans $ 521,250 $ 546,938
Evergreen Facility 25,702 -
Senior Notes 10% due 2007 160,879 161,116
Senior Discount Notes 11.125% due 2007 315,995 320,497
Senior Discount Notes 9.8% due 2008 290,289 322,481
Senior Discount Notes 11% due 2008 139,472 137,459
Senior Notes 10.125% due 2010 202,871 231,736
Capital Leases 11,530 24,187
----------------------------
Total 1,667,988 1,744,414
Current maturities of long-term debt, including capital leases 44,229 37,417
----------------------------
Total Long-Term Debt $ 1,623,758 $ 1,706,997
============================
Term Loans
In June 1999, the Company and certain of its subsidiaries (together, the
"Borrowers") entered into a $1,000,000 Senior Secured Credit Facility (the
"Credit Facility"). The collateralized facilities are comprised of a $250,000
seven-year Revolving Credit Facility (the "Revolver"), a $250,000 seven-year
multi-draw Term Loan Facility ("Term Loan A") and a $500,000 eight-year Term
Loan Facility ("Term Loan B"). All three facilities are governed by a single
credit agreement (as amended, the "Credit Agreement"). Since that time, the
Credit Agreement, including amounts available under the Credit Facility, has
been amended, including as described below.
The Company entered into an amendment to the Credit Agreement dated March 7,
2003 (the "Fifth Amendment"). The Fifth Amendment enabled the Company to incur
additional senior secured debt, adjusts the operating and financial covenants to
better reflect the Company's business plan and modifies certain other
restrictions. In connection with the Fifth Amendment, the Company paid certain
lenders fees of approximately $7,062. The Fifth Amendment also reduces the
amount available under the Revolver to $15,000, under which there were no
borrowings outstanding at September 30, 2003, and requires the Company to
maintain a cash collateral account of at least $100,000 for the benefit of the
lenders under its credit facility. At September 30, 2003 the Company maintained
cash collateral, relating to the Fifth Amendment, of approximately $212,000 (of
which $100,000 has been classified as long-term). By December 31, 2003, the
Company believes that substantially all of its cash will be subject to the terms
outlined in the cash collateral agreement as defined in the Credit Agreement.
The Fifth Amendment also calls for half of the first $100,000 in proceeds from
future asset sales, and 80% of proceeds from assets sales in excess of $100,000,
to be used to pay down the Company's senior secured term loans. Additionally,
the Company will increase amortization payments under its term loans by an
amount equal to 50% of interest savings from new repurchases of senior notes,
not to exceed $25,000. The Fifth Amendment also enables the Company to incur up
to $500,000 of new senior
14
indebtedness that may be secured by a second subordinated lien on the company's
assets. Up to $125,000 of existing cash and the proceeds of new indebtedness may
be used to repurchase outstanding senior notes. As a result of the Fifth
Amendment, the Company will not be able to borrow money that may otherwise have
previously been available to it under the Revolver. As adjusted by the Fifth
Amendment, on July 1, 2004, if the aggregate amount of outstanding loans exceeds
$415,875 (i.e., $75,000 less than the currently scheduled amount), the
Applicable Spread with respect to all loans shall be increased by 100 basis
points; provided, that such increase shall be eliminated if the aggregate amount
of outstanding Loans is equal to or less than $390,937 on or before December 31,
2004.
On March 25, 2002, the Company entered into an amendment to the Credit Agreement
(the "Fourth Amendment"). The Fourth Amendment amended certain financial
covenants, certain other negative covenants and certain other terms of the
Credit Agreement, including increases to the margins and commitment fee payable
thereunder. In connection with the Fourth Amendment, the Company paid certain
lenders a fee of approximately $12,900, repaid $187,500 of outstanding term
loans under the Credit Facility and permanently reduced the amount available
under the Revolver from $250,000 to $187,500. The Company also agreed that it
would not draw down additional amounts under the Revolver until the later of
March 31, 2004 or 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 ("EBITDA") was at least
$60,000 in the aggregate for the two most recent consecutive fiscal quarters. In
connection with the Fourth 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 Fourth Amendment.
As adjusted by the Fourth 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 EBITDA has
become positive and thereafter upon the ratio of debt to EBITDA. In the case of
the Revolver, the Company will pay a fee of 150 basis points on the unused
commitment accrued including a 350 basis points fee on up to $15,000 available
for letters of credits. 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 300 basis
points 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 Company 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.
The Credit Facility is collateralized by substantially all of the assets of the
Company and its subsidiaries.
As of September 30, 2003, the Company was in compliance with the covenants
contained in all of the Company's outstanding debt agreements and there were no
outstanding loans under the Revolver. However, as described in Note 2,
Operations and Liquidity, in order for the Company to meet its liquidity needs
and continue complying with all debt covenants, through mid-2004 and beyond, the
Company will have to do a combination of the following: (i) outperform its
business plan, (ii) improve operational efficiencies, (iii) raise additional
capital through issuance of equity or debt securities, (iv) further amend the
Credit Facility, (v) restructure the balance sheet, (vi) significantly reduce
capital deployment plans and new product introductions and (vii) consummate
additional asset sales. The Company can offer no assurances that it will be able
to implement one or more of these actions on acceptable terms or, if it is able
to implement such actions, that the implementation will allow the Company to
comply with its debt covenants or obtain relief from the obligations to comply
with those covenants at which point, the Company will implement further
austerity programs which will limit the Company's ability to operate in the
normal course of business. The Company's ability to raise additional capital at
this time may be dependent upon numerous factors beyond the control of the
Company including, without limitation, market conditions and the possibility
that the necessary capital will not be available or will be available only upon
terms that are unacceptable to the Company. Failure to obtain such capital or
otherwise sufficiently implement a combination of the actions will result in a
violation of one or more of the covenants contained in the Credit Agreement.
Violation of one or more covenants under the Credit Facility would be an event
of default under the terms of the Credit Agreement. Absent a material change in
the Company's financial condition, the Company believes that it will fail to
comply with one or more of its covenants under the Credit Agreement in the
second quarter of 2004. The Company also has been discussing and providing
information with respect to the Company's capital structure and operations with
various consultants retained by its bank lenders and certain holders of its
publicly held Senior Notes and its Preferred stock, as well as with potential
new sources of capital. Although the foregoing discussions continue to be in
the early stages and the Company cannot predict at this time the results of the
foregoing efforts, the Company believes that such discussions may ultimately
result in significant amounts of Senior Notes and/or Preferred stock being
converted into Common stock of the Company. In addition to being used to fund
working capital needs, general corporate purposes and to finance
telecommunications assets, the Revolver can also be utilized for letters of
credit. As of September 30, 2003, there was $15,000 in letters of credit
outstanding under the Revolver, none of which were drawn down.
15
In accordance with the Fourth Amendment, the Company prepaid $62,500 of Term
Loan A on March 25, 2002. At September 30, 2003, $150,000 of the Term Loan A was
outstanding. Amortization of Term Loan A commenced in September 2002 with
amounts being repaid in quarterly installments based on percentage increments of
Term Loan A that start at 3.75% per quarter in September 2002 and increase in
steps to a maximum of 10% per quarter in September 2005 through to maturity in
June 2006. For the nine months ended September 30, 2003, the Company repaid
approximately $23,438 of Term Loan A.
In accordance with the Fourth Amendment, the Company prepaid $125,000 of Term
Loan B on March 25, 2002. At September 30, 2003, $371,250 of Term Loan B was
outstanding. Amortization of Term Loan B commenced in September 2002 with
quarterly installments of $750 per quarter until September 2006 when the
quarterly installments increase to $90,750 per quarter through to maturity in
June 2007. For the nine months ended September 30, 2003, the Company repaid
approximately $2,250 of Term Loan B.
Evergreen Facility
In June 2003, the Company entered into a $41,500 Commercial Term Loan and Credit
Agreement (the "Evergreen Facility") with Evergreen Investment Management
Company, LLC and certain of its affiliates ("Evergreen"). Evergreen's commitment
initially expired September 4, 2003 but had been extended, and subsequently
expired, on November 3, 2003. Any term loans made under the Evergreen Facility
will mature on June 30, 2008. The interest rate on the Evergreen loans is 12.5%
per annum; however, no cash interest is payable until April 1, 2006. The
interest rate is subject to upward adjustment in the event the Company incurs
new indebtedness within 90 days after closing at a higher rate. In the event the
Company or certain of its subsidiaries receive net proceeds in respect of
certain prepayment events such as asset sales or casualty events and such net
proceeds are not applied to the repayment of amounts outstanding under the
Credit Facility, the Company must repay the Evergreen loans in an aggregate
amount equal to such net proceeds or use such proceeds to acquire
telecommunications assets, or for working capital. Following the termination of
the Credit Facility, the Company must apply 50% of the net proceeds from such
assets sales or casualty events to repay the Evergreen loans and not to
reinvestment. The Company must apply 50% of excess cash flow for each fiscal
year commencing on the earlier of (i) the fiscal year ending December 31, 2007
or (ii) the fiscal year in which all amounts outstanding under the Credit
Facility have been paid in full or the Credit Facility does not prohibit such
payment to prepay the Evergreen loans, provided that any lender may waive its
right to receive the amount of such mandatory prepayment, and any amount will be
applied to the mandatory prepayment of other Evergreen loans on a pro rata
basis. Evergreen has a second priority lien on substantially all assets of the
Company. The Evergreen Facility contains affirmative covenants, negative
covenants and events of default substantially similar to those set forth in the
Credit Facility. Upon closing, the Company paid a 4% or $1,660 funding fee to
Evergreen. As of September 30, 2003, $13,700 was available to be drawn down from
the Evergreen Facility and approximately $29,500 was outstanding.
In connection with the signing of the Evergreen Facility, the Company issued
warrants to Evergreen to purchase 4,150,000 shares of Common stock at an initial
exercise price of $1.25 per share. The warrants are exercisable any time
following three months from their issuance. The Company valued the warrants
using the Black-Scholes pricing model, applying an expected life of 5 years, a
weighted average risk-free rate of 3.5%, a volatility rate of 70% and a deemed
value of Common stock of $1.67 per share. The estimated value of the warrant,
$4,026 was recorded as a contra long-term debt liability to be amortized over
the next 5 years. The balance of the debt discount was $3,798 at September 30,
2003.
Capital Leases
During the nine months ended September 30, 2003, the Company completed a buyout
of certain of its capital lease obligations of approximately $12,655. The
Company recognized a gain of approximately $7,235 from the buyout net of asset
costs of $4,420 and payment of approximately $1,000. The gain is included in the
other income (expense), net line item on the statement of operations.
Contractual maturities of long-term debt, including capital leases, over the
remainder of 2003 and the next 4 fiscal years are as follows:
16
Aggregate Amount
----------------
For the period October 1, 2003 through
December 31, 2003 $ 10,710
For the year ended December 31, 2004 50,516
For the year ended December 31, 2005 69,210
For the year ended December 31, 2006 224,043
For the year ended December 31, 2007 649,037
During the quarter ended September 30, 2003, the Company completed a debt
repurchase for certain of its Senior Discount Notes. The Company retired
approximately $75,151 in book and face value of its Senior Discount Notes. The
Company recognized a gain of approximately $45,733 from the early retirement of
debt in which approximately $27,806 of cash was paid. In addition, the Company
incurred fees of approximately $970 and wrote off debt issuance costs of
approximately $642.
During the quarter ended March 31, 2002, the Company completed various debt
repurchases for certain of its Senior Discount Notes. The Company retired
approximately $24,037 in face amount of debt with a book value of approximately
$22,142. The Company recognized an extraordinary gain of approximately $13,073
from the early retirement of debt in which approximately $722 of cash was paid
and 2,589,237 shares of common stock with a value of approximately $7,875 were
issued. In addition, the Company incurred fees of approximately $180 and wrote
off debt issuance costs of approximately $292. The Company adopted SFAS No. 145
on January 1, 2003. Accordingly, in the condensed consolidated statements of
operations for the nine month period ended September 30, 2002, the extraordinary
gains on early retirement of debt of $13,073 have been reclassified and are
included in the results from continuing operations. The adoption of SFAS No. 145
did not have a material impact on the Company's financial statements, cash flows
or results from operations.
8. STOCK BASED COMPENSATION AND REDEEMABLE PREFERRED STOCK
The Company has followed the recognition provisions of SFAS No. 123 -
"Accounting for Stock-Based Compensation" since January 1, 2000. Under SFAS
No.123, the fair value of an option on the date of the grant is amortized over
the vesting period of the option in accordance with FASB Interpretation No. 28
"Accounting For Stock Appreciation Rights and Other Variable Stock Option or
Award Plans". As a result of the completion of the Company's Option Exchange
Program in the quarter ended December 31, 2001, all of the Company's options
from that date forward are now accounted for under the recognition provisions of
SFAS 123.
The table below reflects the fair value of Incentive Stock Option ("ISO") and
Outperform Stock Option ("OSO") grants during the three months ended September
30, 2003 .
Three Months Ending September 30,
2003 2002
-------------------- ---------------------
Granted Fair Value Granted Fair Value
-------------------- ---------------------
ISO - $ - 139,800 $ 164
OSO - $ - - $ -
As of September 30, 2003 the Company had not reflected approximately $1,708 of
unamortized compensation expense in its financial statements for ISO's granted
as of September 30, 2003. The unamortized compensation expense is recognized
over the ISO's vesting period, which is three years.
As of September 30, 2003 the Company had not reflected approximately $4,417 of
unamortized compensation expense in its financial statements for OSO's granted
as of September 30, 2003. The unamortized compensation expense is recognized
over the OSO's vesting period, which is five years.
Non-cash stock based compensation was recognized in connection with the
following plans in the following amounts during the periods ended:
17
Three Months Ending September 30, Nine Months Ending September 30,
2003 2002 2003 2002
-------- -------- -------- --------
ISO $ 636 $ 3,485 $ 1,895 $ 10,551
OSO 1,197 5,776 3,719 17,307
Employee Stock Purchase 101 255 330 726
Restricted Stock 1,189 1,386 2,026 (3,280)
-------- -------- -------- --------
Total $ 3,123 $ 10,902 $ 7,970 $ 25,304
======== ======== ======== ========
As of September 30, 2003, the Company had unearned compensation costs of
approximately $1,288 related to restricted stock which is being amortized to
expense over the restriction period.
Redeemable Preferred Stock
At September 30, 2003, the Company had paid cumulative dividends in the amount
of $91,241 in the form of additional Series A Preferred stock. At September 30,
2003, the number of common shares that would be issued upon conversion of the
Series A Preferred stock was 8,815,572.
At September 30, 2003, the Company had paid cumulative dividends in the amount
of $466,702 in additional shares of Series B Preferred stock. At September 30,
2003, the number of common shares that would be issued upon conversion of the
Series B Preferred stock was 34,277,360.
9. LOSSES 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 before giving effect to gains
from the sale of the discontinued operations is not assumed since the effect is
anti-dilutive. The number of shares of preferred stock and stock options that
would have been assumed to be converted and have a dilutive effect if the
Company had income from continuing operations during the three and nine months
ended September 30, 2003 is 44,039,666 and 43,190,580, respectively. The number
of shares of preferred stock and stock options that would have been assumed to
be converted and have a dilutive effect if the Company had income from
continuing operations in the three and nine months ended September 30, 2002 is
28,691,810 and 39,353,035, respectively.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share calculations:
18
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------ ------------- ------------
Net loss from continuing operations $ (69,533) $ (131,687) $ (249,790) $ (1,298,956)
Income from discontinued operations, net of tax 2,704 3,404 174,125 7,319
------------- ------------ ------------- ------------
Net loss (66,829) (128,283) (75,665) (1,291,637)
Preferred dividend and accretion requirements 43,705 40,871 128,946 120,589
Net loss to common shareholder $ (110,534) $ (169,154) $ (204,611) $ (1,412,226)
============= ============ ============= ============
Basic and diluted loss per average common share:
Weighted average shares outstanding 111,401,962 109,798,588 110,712,231 105,354,946
============= ============ ============= ============
Loss per average common share from
continuing operations $ (1.02) $ (1.57) $ (3.42) $ (13.47)
============= ============ ============= ============
Gain from discontinued operations 0.02 0.03 1.57 0.07
------------- ------------ ------------- ------------
Net loss to common shareholders $ (1.00) $ (1.54) $ (1.85) $ (13.40)
============= ============ ============= ============
10. COMPREHENSIVE LOSS
The Company primarily has two components of comprehensive loss: cumulative
translation adjustments and unrealized appreciation (depreciation) on
investments. The following table reflects the components of comprehensive loss
and its effect on net loss.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ----------- -------------
Net loss $ (66,829) $ (128,283) $ (75,665) $ (1,291,637)
Cumulative foreign currency translation
gain (loss) - - (6,773) 3,074
Unrealized appreciation (depreciation)
on investments (925) 231 (1,030) (1,003)
------------ ------------ ----------- -------------
Comprehensive loss $ (67,754) $ (128,052) $ (83,468) $ (1,289,566)
============ ============ =========== =============
11. 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. The Company does not allocate shared expenses incurred on a
single network to our multiple revenue streams as any such allocation would be
costly, impractical and arbitrary. The Company's chief decision-makers do,
however, monitor operating results in a way different from that depicted in the
historical general purpose financial statements. These measurements include the
consolidation of Starpower, which is not consolidated under generally accepted
accounting principles, ("GAAP"). Such information, however, does not meet the
criteria for segment reporting under GAAP and therefore it is not separately
disclosed.
WHERE YOU CAN FIND MORE INFORMATION
19
RCN Corporation and its consolidated subsidiaries, ("We, Us, Our") as a
reporting company, are subject to the informational requirements of the Exchange
Act and accordingly file our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, proxy statements and other information
with the SEC. You may read and copy any materials filed with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at (800) SEC-0330 for further information on the Public
Reference Room. As an electronic filer, our public filings are maintained on the
SEC's Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of that website is http://www.sec.gov. In addition, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act may be accessed free of charge through our website as
soon as reasonably practicable after we have electronically filed such material
with, or furnished it to, the SEC. The address of that website is
http://www.rcn.com/investor/secfilings.php. Since March 31, 2003, all reports
pursuant to the Exchange Act that we have filed with, or furnished to, the SEC
have been timely posted on our website.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes for the periods ended September 30, 2003, and
with the audited financial statements and notes included in our December 31,
2002 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
You should carefully review the information contained in the 2002 Annual Report
on Form 10-K and particularly consider the "Risk Factors" and "Critical
Accounting Policies" that we set forth in the Annual Report and other reports or
documents that we file from time to time with the SEC. Some of the statements
made by us in these documents discuss future expectations, contain projections
of results of operations or financial condition or state other forward-looking
information. Those statements 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 various factors and was derived using numerous
assumptions. 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, our
failure to:
Achieve and sustain profitability based on the implementation of its
advanced 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 regulatory approvals; meet the requirements contained in our
franchise agreements and debt agreements; achieve adequate customer
penetration of our services to offset the fixed 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.
Except as discussed in Note 4, Change in Estimate for Reciprocal Compensation
Revenue, to the Unaudited Condensed Consolidated Financial Statements, there has
been no change to our critical accounting policies and use of estimates that are
reported in our December 31, 2002 Annual Report on Form 10-K.
INTRODUCTION
We are a leading facilities-based competitive provider of bundled phone, cable
television and high-speed Internet services to some of the most densely
populated markets in the U.S. We had approximately 868,600 average connections
during the three months ended September 30, 2003. We provide services in Boston,
including 18 surrounding communities, New York City, the Philadelphia suburbs,
Chicago, San Francisco and several of its suburbs, along with two communities in
the Los Angeles area. We also serve the Lehigh Valley in Pennsylvania and
communities in and around Carmel, NY. (See Note 5, Discontinued Operations, to
the Unaudited Condensed Consolidated Financial Statements.) We are also a party
to the Starpower Communications, LLC ("Starpower") joint venture with Pepco
Communications, Inc. ("Pepco"), a subsidiary of Pepco Holdings, Inc.
("Potomac"). Starpower
20
serves the Washington, D.C. metropolitan market with approximately 223,000 total
service connections at September 30, 2003. We were the incumbent franchised
cable operator in many communities in central New Jersey until these operations
were sold on February 19, 2003.
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 past operating losses.
We do not anticipate positive cash flow from operations in the foreseeable
future. To accomplish positive cash flow, we will need to continue to increase
the number of customers on our network and increase the number of services per
customer while lowering the costs associated with new subscribers and reducing
the costs of providing services by capturing economies of scale.
GENERAL
Our primary business is delivering bundled communications services, including
local and long distance telephone, video programming (including digital cable
television and high definition television) 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 consumers in some of
the most densely populated markets in the U.S.
ResiLink(SM) and Essentials(SM) are the brand names of our two families of
bundled service offerings, offered for a flat monthly price to residential
customers of cable television, phone, and high-speed Internet. In addition to
our bundled package offerings, we sell cable television, phone and high-speed
cable modem and dial-up Internet to residential customers on an a-la-carte
basis. We also provide communication services to commercial customers.
We are working to leverage the capacity of our broadband network to allow us to
expand our offering of new services. In 2002, we launched RCN MegaModem(SM)
which provides 3Mbps of speed for customers looking to download movie videos,
MP3 music files, and other Web-based forms of entertainment in as little as half
the time it would take with a standard 1.5 Mbps cable modem or DSL connection.
We believe MegaModem(SM) is the fastest Internet connection available to
residential customers in our markets. Also, in 2002, we expanded our launch of
Video-on-Demand ("VOD") in the Philadelphia market. We continue to launch VOD,
Subscription VOD and high definition television in certain markets during 2003.
Our services are typically delivered over our predominantly owned high-speed,
high-capacity, fiber-optic network. Our network is a hybrid broadband
fiber-optic platform. This architecture allows us to bring our state-of-the-art
broadband network within approximately 900 feet of our customers, with fewer
electronics than existing incumbent cable companies. 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.
JOINT VENTURES
To increase our market entry and gain access to Right of Ways, we formed key
alliances in two strategic markets.
We are a party to the RCN-Becocom, LLC 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. At December 31, 2002, following NSTAR's exchanges of their joint venture
ownership interest for RCN's stock, the Company had a profit/(loss) sharing
ratio of 100% and an investment percentage of 70.24% in the RCN-Becocom joint
venture. The investment percentage represents the amount of any additional
future capital investment in the venture that RCN has the right to invest.
Results of operations of RCN-Becocom are consolidated in our financial
statements.
We are also a party to the Starpower joint venture with Pepco, a subsidiary of
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. RCN and Pepco each own a 50% membership interest
in Starpower. The Starpower joint venture is accounted for in our financial
statements under the equity method of accounting and our pro-rata portion of
Starpower's operating results is included in the equity (loss) in income of
unconsolidated entities line in our unaudited condensed consolidated statements
of operations.
21
SEGMENT REPORTING
We believe that we operate as one reportable operating segment, which contains
many shared expenses generated by the various revenue streams. We do not
allocate shared expenses incurred on a single network to our multiple revenue
streams, as any such allocation would be costly, impractical and arbitrary. Our
chief decision-makers do, however, monitor operating results in a way different
from that depicted in the historical general purpose financial statements. These
measurements include the consolidation of results of operations of Starpower,
which is not consolidated under generally accepted accounting principles
("GAAP"). Such information, however, does not represent a separate segment under
GAAP and, therefore, it is not separately disclosed.
For the purposes of measuring the financial and operational performance of the
Company, we consolidate the results of operations of all joint ventures
including Starpower, the results of which are not consolidated when our
statements of financial position, cash flows and results of operations are
presented under GAAP. The use of non-GAAP financial disclosures represents our
view of the total consolidated, operational results.
The following unaudited non-GAAP financial summary, highlights our results of
operations on a consolidated basis for the three and nine months ended September
30, 2003, had the results of operations of the Starpower joint venture been
consolidated with ours for the same period:
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
-------------------------------------------- --------------------------------------------
RCN RCN
Including Less RCN Including Less RCN
Starpower (1) Starpower (2) GAAP Starpower (1) Starpower (2) GAAP
------------- ------------- ---------- ------------- ------------- ----------
Total sales $ 135,631 $ 20,640 $ 114,991 $ 410,372 $ 63,325 $ 347,047
Total direct costs 46,375 5,295 41,080 140,066 16,775 123,291
--------- --------- --------- --------- --------- ---------
Margin 89,256 15,345 73,911 270,306 46,550 223,756
Total operating and
selling, general and
administrative costs 86,810 12,202 74,608 262,305 36,785 225,520
--------- --------- --------- --------- --------- ---------
Adjusted EBITDA (3) 2,446 3,143 (697) 8,001 9,765 (1,764)
Non-cash stock-based
compensation 3,180 57 3,123 8,045 75 7,970
Impairment and special
charges 25,371 - 25,371 31,948 - 31,948
Depreciation and
amortization 57,746 5,057 52,689 163,416 15,059 148,357
--------- --------- --------- --------- --------- ---------
Operating loss $ (83,851) $ (1,971) $ (81,880) $(195,408) $ (5,369) $(190,039)
========= ========= ========= ========= ========= =========
(1) Excludes results of central New Jersey operations which was sold February
19, 2003 and Carmel, New York operations both of which are included as
discontinued operations for GAAP purposes. (See Note 5, Discontinued Operations,
to the Unaudited Condensed Consolidated Financial Statements.)
(2) We own 50% of Starpower, a joint venture in the Washington, D.C. market,
which is accounted for as an equity investment in our condensed consolidated
financial statements. Results of operations of Starpower have been presented
here, net of related party transactions with us.
(3) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") - Non GAAP measure calculated as net income (loss) before interest,
tax, depreciation and amortization, stock based compensation, extraordinary
gains and special charges that we and our chief decision-makers use to measure
performance and liquidity. Adjusted EBITDA is a meaningful indicator of
profitability for capital-intensive businesses, and is a key
22
valuation metric in the investment community. Other companies may calculate and
define EBITDA differently than RCN.
OVERVIEW OF OPERATIONS
Approximately 94.4% of our revenue for the nine months ended September 30, 2003
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 5.6% of revenue is derived mostly from
reciprocal compensation, which is the fee local exchange carriers pay to
terminate calls on each other's networks.
We have historically recognized reciprocal compensation revenue, which is the
fee local exchange carriers pay to terminate calls on each other's networks, as
it was realized. This was due to the uncertainty of various legal and regulatory
rulings that affected our ability to accurately determine the amount of
reciprocal compensation revenue to recognize prior to the point in time such
amounts were paid. Over the past year, the FCC has ruled on various
tariff/interconnect rules that have now permitted us to accurately estimate the
amount of reciprocal compensation revenue to be earned for calls terminated on
our network in the period such services are rendered. Accordingly, during the
nine months ended September 30, 2003, we recognized approximately $7,100 of
incremental reciprocal compensation revenue. Approximately $4,100 of this amount
related to services rendered in calendar 2002.
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.
During the nine months ended September 30, 2003, we have continued our
initiative begun in 2002 to reduce costs, increase operational efficiencies, and
realign resources to focus on core opportunities and product offerings. The most
significant decrease in operating, selling, general and administrative expenses
was due to reduced labor costs as a result of increased operational efficiencies
and the elimination of costs as a result of the reduction and elimination of
construction in new markets.
During the first nine months of 2003, we continued our review of expansion plans
in existing markets to achieve higher growth with lower incremental capital
spending. Capitalized construction material levels also continued to be assessed
based on the build-out requirements of our expansion plans. The assessment
process includes the identification of excess construction material that cannot
be used for alternative use and which is either to be returned to vendors, or
resold to a secondary market. During the nine months ended September 30, 2003,
there were no write downs of excess construction material. We are aware that the
secondary market for construction materials is changing, which could negatively
affect our salvage value.
In 2003, we will continue to conduct detailed reviews of facility requirements
against lease obligations to identify excess space. We are continuing the
process of consolidating space and exiting or subleasing excess facilities and
will recognize exit costs accordingly. We recorded approximately $9,894 and
$16,471 in exit costs in the three and nine months ended September 30, 2003,
respectively. (See Note 6, Impairment Charges and Accrued Exit Costs, to the
Unaudited Condensed Consolidated Financial Statements.)
Prior to the adoption of SFAS No. 145, we historically recorded gains upon the
early retirement of debt as an extraordinary item. In the first quarter of 2002,
we recorded an extraordinary gain of $13,073 from the early retirement of debt
in which approximately $722 of cash was used. In accordance with SFAS No. 145,
this gain has been reclassified. (See Note 7, Long-Term Debt, to the Unaudited
Condensed Consolidated Financial Statements.)
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Sales:
23
Total sales increased $6,611 or 6.1% to $114,991 for the three months ended
September 30, 2003 from $108,380 for the three months ended September 30, 2002.
Sales by service offerings, which reflect certain internal allocations made for
bundled product sales, are as follows:
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
-------- -------- -------- -----
Voice $ 36,264 $ 34,435 $ 1,829 5.3%
Video 50,123 45,118 5,005 11.1%
Data - high speed 19,732 15,238 4,494 29.5%
Data - dial up 3,577 6,524 (2,947) -45.2%
Reciprocal compensation 2,735 2,640 95 3.6%
Other 2,560 4,425 (1,865) -42.1%
-------- -------- -------- -----
Total $114,991 $108,380 $ 6,611 6.1%
======== ======== ======== =====
About 60.5% of the increase in sales by service offering, excluding reciprocal
compensation and other, was the result of a higher number of average
connections, which increased by 131 connections to 868,566 at September 30, 2003
from 868,435 at September 30, 2002. Average connections by service offering are
as follows:
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 # %
------- ------- -------- -------
Voice 239,518 225,984 13,534 6.0%
Video 365,180 360,061 5,119 1.4%
Data - high speed 161,684 123,630 38,054 30.8%
Data - dial up 102,184 158,760 (56,576) -35.6%
------- ------- ------- -----
Total 868,566 868,435 131 0.0%
======= ======= ======= =====
We anticipate additional decreases in data - dial up connections as customers
continue to migrate to our data - high speed service offering.
The change in average connections resulted in the following volume related
revenue variances for the three months ended September 30, 2003 for each service
offering:
Voice $ 2,062
Video 641
Data - high speed 4,690
Data - dial up (2,325)
-------
Total connections volume variance $ 5,068
=======
Another 39.5% of the increase in sales by service offering, excluding reciprocal
compensation and other, was the result of higher average monthly video revenue
per connection, offset by lower average monthly revenue per connection for our
other service offerings as follows:
24
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
--------- --------- --------- ------
Voice $ 50.47 $ 50.79 $ (0.32) -0.6%
Video $ 45.75 $ 41.77 $ 3.98 9.5%
Data - high speed $ 40.68 $ 41.08 $ (0.40) -1.0%
Data - dial up $ 11.67 $ 13.70 $ (2.03) -14.8%
Increased promotional activity during the three months ended September 30, 2003
resulted in a reduction in the average monthly revenue per connection for data -
high speed and video.
The change in average monthly revenues per connection resulted in the following
revenue variances for the three months ended September 30, 2003 for each service
offerings:
Voice $ (233)
Video 4,364
Data - high speed (196)
Data - dial up (622)
-------
Total rate volume variance $ 3,313
=======
For the three months ended September 30, 2003, reciprocal compensation increased
3.6% due to a change in estimate related to these revenues. Due to the
uncertainty of various regulatory rulings that had affected the collectibility
of reciprocal compensation, we had recognized this revenue as it was realized in
periods prior to 2003. In 2003, based on regulatory changes and our experience
of realizing reciprocal compensation revenues, we changed our estimate of
reciprocal compensation revenues in the period reported. This change resulted in
our recording approximately $7,100 in additional reciprocal compensation for the
quarter ended March 31, 2003 of which approximately $4,100 related to services
provided in 2002.
Other sales decreased $1,865 or 42.1% to $2,560 for the three months ended
September 30, 2003 from $4,425 for the quarter ended September 30, 2002. The
decrease was due primarily to lower television production revenues.
Costs and Expenses, Excluding Stock-Based Compensation, Depreciation and
Amortization:
Direct expenses are comprised of the costs of providing services. Following is a
table of direct costs by service type for the three months ended September 30,
2003 as compared to the same period of 2002:
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
------- ------- --------- ------
Voice $ 8,272 $10,788 $ (2,516) -23.3%
Video 29,201 23,892 5,309 22.2%
Data 3,140 3,766 (626) -16.6%
Other 467 3,131 (2,664) -85.1%
------- ------- -------- -----
Total Direct Costs $41,080 $41,577 $ (497) -1.2%
======= ======= ======== =====
The decrease in direct expenses, was due primarily to lower voice and data
network operating costs resulting from network optimization and were largely
offset by higher video costs resulting from increases in video connections,
franchise fees and increases in basic and premium programming rates. The
decrease in other direct costs was primarily due to lower television production
costs.
25
Operating and selling and general and administrative costs decreased $14,693 or
16.5% to $74,608 for the three months ended September 30, 2003 from $89,301 for
the three months ended September 30, 2002. Components of operating, selling and
general and administrative costs for the three months ended September 30, 2003
and 2002, respectively, are as follows:
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
--------- -------- --------- ------
Customer service $ 8,790 $ 13,020 $ (4,230) -32.5%
Network operations
and construction 10,187 12,558 (2,371) -18.9%
Marketing
and advertising 5,452 5,615 (163) -2.9%
Sales 8,458 8,424 34 0.4%
Operating, general
and administration 41,721 49,684 (7,963) -16.0%
-------- -------- -------- -----
$ 74,608 $ 89,301 $(14,693) -16.5%
======== ======== ======== =====
Customer service costs decreased for the three months ended September 30, 2003
over the comparable 2002 period. This decrease was primarily due to reduction in
staff and temporary labor costs of approximately $2,779. Other decreases of
approximately $830 and $582 were due to a reduction of outside agents handling
customer service calls and lower costs for facilities and related operating
expenses such as utilities and telephone, respectively.
Network operations and construction costs decreased for the three months ended
September 30, 2003 over the same comparable 2002 period. This decrease was
primarily due to reductions in staff labor costs of approximately $1,732.
Another decrease of approximately $600 was due to lower costs for facilities.
Marketing and advertising costs decreased $163 for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002. A
decrease of approximately $306 was due to reduced staff labor costs and was
offset by an increase of approximately $157 relating to higher advertising
agency fees during the three months ended September 30, 2003.
Selling expenses increased $34 for the three months ended September 30, 2003
compared to the three months ended September 30, 2002. An increase of
approximately $520 was due to increased sales commissions. These increases were
primarily offset by a reduction of outside telemarketing costs of approximately
$486.
Operating, general and administrative expenses decreased for the three months
ended September 30, 2003 over the comparable period in 2002. The major component
was the result of staff reductions and personnel related costs of approximately
$5,841. An additional decrease of approximately $2,524 resulted from the
implementation of computer systems for automated billing and data processing and
related reductions in maintenance costs. Another decrease of approximately
$1,082 was due to lower costs for facilities and facilities operating expenses
such as utilities and telephone. A decrease of approximately $2,723 for the
three months ended September 30, 2003 was due to a non-recurring decrease in
incentive compensation plan expense resulting from a plan amendment. These
decreases were partially offset by higher legal fees of approximately $4,071
principally associated with increased franchise litigation during the period.
Non-cash Stock-Based Compensation:
The non-cash stock-based compensation decreased $7,779 for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
The decrease was largely due to the effect of restricted stock cancellations and
the attribution of expense associated with fewer stock option grants with lower
fair values.
Depreciation and Amortization:
26
Depreciation and amortization expense decreased $2,165 or 3.9% to $52,689 for
the three months ended September 30, 2003 from $54,854 for the three months
ended September 30, 2002. The decrease is due to the disposition and impairment
in the value of network construction materials, equipment and leasehold
improvements as we curtailed our network expansion plans to preserve capital.
The table below details the changes in the investment income, interest expense,
gain on early extinguishment of debt and other income (expense) net accounts.
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
-------- -------- --------- ------
Investment income $ 1,724 $ 2,593 $ (869) -33.5%
Interest expense $ 43,496 $ 47,099 $ (3,603) -7.6%
Gain on early extinguisment of debt $ 45,733 $ - $ 45,733 n/a
Other income (expense), net $ 644 $ 1,101 $ (457) -41.5%
Investment Income:
The decrease in investment income 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, 2003 compared to September 30, 2002.
Cash, temporary cash investments, short-term investments, and restricted
investments were $289,504 at September 30, 2003, of which $228,154 has been
received in cash proceeds from the sale of the central New Jersey assets between
February 19, 2003 and September 30, 2003, compared to $387,223 at September 30,
2002.
Interest Expense:
The decrease in interest expense for the period presented is primarily due to
less interest being capitalized associated with capital expenditures during the
current periods and to a lesser extent the debt extinguishment during the third
quarter of 2003. (See Note 7, Long-Term Debt, to the Unaudited Condensed
Consolidated Financial Statements.)
Gain on Early Extinguishment of Debt:
During the quarter ended September 30, 2003, we completed a debt repurchase for
certain of our Senior Discount Notes. We retired approximately $75,151 in book
and face value of our Senior Discount Notes. We recognized a gain of
approximately $45,733 from the early retirement of debt in which approximately
$27,806 of cash was paid. In addition, we incurred fees of approximately $970
and wrote off debt issuance costs of approximately $642. (See Note 7, Long-Term
Debt, to the Unaudited Condensed Consolidated Financial Statements.)
Other income (expense), net:
Other income (expense), net decreased $457 or 41.5% to $644 for the three months
ended September 30, 2003 from $1,101 for the three months ended September 30,
2002. The decrease was principally due to write-offs of certain assets due to
system upgrades.
Income Tax:
Our effective income tax rate was a benefit of 0.02% on losses from continuing
operations for the three months ended September 30, 2003. For the three months
ended September 30, 2002, the effective rate was 0.0% of net losses for the
period. The tax effect of our cumulative losses has exceeded the tax effect of
accelerated deductions, primarily depreciation, which we have taken for federal
income tax purposes. As a result of the uncertainty regarding the use of these
losses, 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 Income (Loss) of Unconsolidated Entities:
Equity in income of unconsolidated entities increased $7,778 or 16204.2% to
income of $7,730 for the three months ended September 30, 2003 from a loss of
$48 for the three months ended September 30, 2002. The components of income or
(loss) are shown in the table below.
27
Three Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 ($) (%)
-------- -------- -------- ------
Megacable $ 8,277 $ 1,545 $ 6,732 n/a
Starpower (547) (1,668) 1,121 67.2%
J2 Interactive - 75 (75) 100.0%
------- ------- ------- -----
Total equity in income (loss) of
unconsolidated entities $ 7,730 $ (48) $ 7,778 n/a
======= ======= ======= =====
Discontinued Operations:
During the third quarter 2003, we entered into a definitive agreement to sell
our Carmel, New York ("Carmel") cable system assets and customers serviced by
this network for an estimated cash sales price of approximately $120,000,
subject to adjustments. The Carmel network services approximately 30,000
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 working
capital items. 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 2004, and we expect to realize a gain of approximately
$85,000 to $90,000 on the transaction. In accordance with the Fifth Amendment to
the Credit Agreement (see Liquidity and Capital Resources for discussion
regarding the Fifth Amendment), proceeds of approximately $66,000 will be
applied as a partial pay-down of our senior secured bank facility. We will
continue to operate in Carmel until the asset sale is complete. In accordance
with SFAS No. 144, the results of operations for Carmel are reported as
discontinued operations.
On February 19, 2003, we completed the previously announced sale of our central
New Jersey cable system assets to Patriot Media & Communications CNJ, LLC
("Patriot"). The cash proceeds of the sale received by us were $242,844
including $14,690, net of purchase price adjustments of approximately $(355),
that remain in escrow. After taking into account the net assets of the system,
transaction fees and amounts paid to acquire the minority interest, we recorded
a gain on the sale of approximately $166,144 net of taxes. In addition, we
recorded net income of $2,830 from operations of the system from January 1, 2003
to February 19, 2003. In accordance with the Credit Agreement, an amount equal
to the net cash proceeds of the sale of the central New Jersey cable system
assets in excess of $5,000 was deposited into a cash collateral account. Other
than the minimum $100,000 required to be maintained on deposit in the cash
collateral account under the Fifth Amendment, (see Liquidity and Capital
Resources for discussion regarding the Fifth Amendment) proceeds on deposit in
the cash collateral account may be used (i) to repay any loans outstanding under
the Credit Agreement, or (ii) to purchase telecommunications assets and/or for
working capital if we do not have other available cash on hand to fund such
expenditures. In accordance with SFAS No. 144, the results of operations for
central New Jersey cable system have been reported as discontinued operations.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Sales:
Total sales increased $24,325 or 7.5% to $347,047 for the nine months ended
September 30, 2003 from $322,722 for the nine months ended September 30, 2002.
Sales by service offerings, which reflect certain internal allocations made for
bundled product sales, are as follows:
28
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
-------- -------- --------- ------
Voice $109,540 $ 99,104 $ 10,436 10.5%
Video 149,384 132,405 16,979 12.8%
Data - high speed 55,140 44,505 10,635 23.9%
Data - dial up 13,493 20,549 (7,056) -34.3%
Reciprocal compensation 13,586 12,415 1,171 9.4%
Other 5,904 13,744 (7,840) -57.0%
-------- -------- -------- -----
Total $347,047 $322,722 $ 24,325 7.5%
======== ======== ======== =====
About 60.6% of the increase in sales by service offering, excluding reciprocal
compensation and other, was the result of a higher number of average
connections, which increased 1.0% to 865,553 at September 30, 2003 from 856,830
at September 30, 2002. Average connections by service offering are as follows:
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 # %
------- ------- -------- ------
Voice 234,382 217,387 16,995 7.8%
Video 361,356 354,336 7,020 2.0%
Data - high speed 152,529 114,412 38,117 33.3%
Data - dial up 117,286 170,695 (53,409) -31.3%
------- ------- ------- -----
Total 865,553 856,830 8,723 1.0%
======= ======= ======= =====
We anticipate additional decreases in data - dial up connections as customers
continue to migrate to our data - high speed service offering.
The change in average connections resulted in the following volume related
revenue variances for the nine months ended September 30, 2003 for each service
offering:
Voice $ 7,748
Video $ 2,623
Data - high speed $ 14,827
Data - dial up $ (6,430)
--------
Total connections volume variance $ 18,768
========
Another 39.4% of the increase in sales by service offering, excluding reciprocal
compensation and other, was the result of higher average monthly video revenue
per connection, offset by lower average monthly revenue per connection for our
other service offerings as follows:
29
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
------ ------ -------- ------
Voice $51.93 $50.65 $ 1.28 2.5%
Video $45.93 $41.52 $ 4.41 10.6%
Data - high speed $40.17 $43.22 $ (3.05) -7.1%
Data - dial up $12.78 $13.38 $ (0.60) -4.5%
Increased promotional activity during the nine months ended September 30, 2003
resulted in a reduction in the average monthly revenue per connection for data -
high speed and video.
The change in average monthly revenues per connection resulted in the following
revenue variances for the nine months ended September 30, 2003 for each service
offering:
Voice $ 2,688
Video 14,356
Data - high speed (4,192)
Data - dial up (626)
--------
Total rate volume variance $ 12,226
========
For the nine months ended September 30, 2003 reciprocal compensation increased
9.4%, due to a change in estimate related to these revenues. Due to the
uncertainty of various regulatory rulings that had affected the collectibility
of reciprocal compensation, we had recognized this revenue as it was realized in
periods prior to 2003. In 2003, based on regulatory changes and our experience
of realizing reciprocal compensation revenues, we changed our estimate of
reciprocal compensation revenues in the period reported. This change resulted in
our recording approximately $7,100 in additional reciprocal compensation for the
quarter ended March 31, 2003 of which approximately $4,100 related to services
provided in 2002.
For the nine months ended September 30, 2003 other sales decreased $7,840, or
57.0% to $5,904 from $13,744 for the nine months ended September 30, 2002. The
decrease was due primarily to lower television production revenues.
Costs and Expenses, Excluding Stock-Based Compensation, Depreciation and
Amortization:
Direct expenses are comprised of the costs of providing services. Following is a
table of direct costs by service type for the nine months ended September 30,
2003 as compared to the same period of 2002:
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
-------- -------- -------- -----
Voice $ 28,402 $ 32,075 $ (3,673) -11.5%
Video 83,627 73,425 10,202 13.9%
Data 10,141 15,223 (5,082) -33.4%
Other 1,121 10,091 (8,970) -88.9%
-------- -------- -------- -----
Total Direct Costs $123,291 $130,814 $ (7,523) -5.8%
======== ======== ======== =====
The decrease in direct expenses was due primarily to lower voice and data
network operating costs resulting from network optimization and were partially
offset by higher video costs resulting from increases in video connections,
franchise fees and increases in basic and premium programming rates. The
decrease in other direct costs was primarily due to lower television production
costs.
30
Operating, selling and general and administrative costs decreased $49,870 or
18.1% to $225,520 from $275,390 for the nine months ended September 30, 2002.
Components of operating, selling and general and administrative costs for the
nine months ended September 30, 2003 and 2002, respectively, are as follows:
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
--------- --------- ---------- ------
Customer service $ 29,539 $ 40,186 $ (10,647) -26.5%
Network operations and construction 31,143 38,734 (7,591) -19.6%
Marketing and advertising 15,202 16,118 (916) -5.7%
Sales 24,612 24,990 (378) -1.5%
Operating, general and administration 125,024 155,362 (30,338) -19.5%
--------- --------- --------- -----
$ 225,520 $ 275,390 $ (49,870) -18.1%
========= ========= ========= =====
Customer service costs decreased for the nine months ended September 30, 2003
over the comparable 2002 period. This decrease was due to reduction in staff and
temporary labor costs of approximately $5,791. A decrease for the nine months
ended September 30, 2003 of approximately $1,910 was due to lower costs for
facilities and related operating expenses such as utilities and telephone and
approximately $2,471 was due to a reduction of outside agents handling customer
service calls.
Network operations and construction costs decreased for the nine months ended
September 30, 2003 over the same comparable 2002 period. This decrease was
primarily due to reductions in staff labor costs of approximately $7,284.
Marketing and advertising costs decreased for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002. A decrease of
approximately $641 was due to reduction in staff labor costs. An additional
reduction of approximately $598 for the nine months ending September 30, 2003
was due to lower market research costs offset by an increase of approximately
$246 due to an increase in advertising agency fees.
Selling expenses decreased for the nine months ended September 30, 2003 compared
to the nine months ended September 30, 2002. An increase of approximately $850
was due to increased sales headcount. This increase was offset by a reduction of
outside telemarketing costs of approximately $1,358.
Operating, general and administrative expenses decreased for the nine months
ended September 30, 2003 over the comparable period in 2002. The major component
was the result of staff reductions and personnel related costs of approximately
$15,307. An additional decrease of approximately $5,206 resulted from the
implementation of computer systems for automated billing and data processing and
related reductions in maintenance costs. Another decrease of approximately
$3,604 was due to lower costs for facilities and facilities operating expenses
such as utilities and telephone. A decrease of approximately $3,622 was due to
lower than expected costs to exit municipal franchise agreements. A decrease of
approximately $8,923 for the nine months ended September 30, 2003 was due to a
non-recurring decrease in compensation plan expense resulting from a plan
amendment. These decreases were partially offset by an increase in bad debt
expense of approximately $1,562 principally due to an increase of the reserve on
dial up receivables and higher legal fees of approximately $2,221 principally
due to recoveries associated with franchise litigation during the prior period.
Non-cash Stock-Based Compensation:
The non-cash stock-based compensation decreased $17,334 for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
The decrease was largely due to the effect of restricted stock cancellations and
the attribution of expense associated with fewer stock option grants with lower
fair values.
Depreciation and Amortization:
31
Depreciation and amortization expense decreased $63,773 or 30.1% for the nine
months ended September 30, 2003 to $148,357 from $212,130 for the nine months
ended September 30, 2002. The decreases are due to the effect of previous
disposition and impairment in the value of network construction materials,
equipment and leasehold improvements as we curtailed our network expansion plans
to preserve capital.
The table below details the changes in the investment income, interest expense,
gain on early extinguishment of debt and other income (expense), net accounts.
Nine Months Ended September 30,
Increase (Decrease)
-------------------
2003 2002 $ %
--------- --------- ---------- ------
Investment income $ 5,418 $ 11,739 $ (6,321) -53.8%
Interest expense $ 138,401 $ 126,718 $ 11,683 9.2%
Gain on early extinguisment of debt $ 45,733 $ 13,073 $ 32,660 n/a
Other income (expense), net $ 9,082 $ 45 $ 9,037 n/a
Investment Income:
The decrease in investment income 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, 2003 compared to September 30, 2002.
Cash, temporary cash investments, short-term investments, and restricted
investments were $289,504 at September 30, 2003, of which $228,154 was received
in cash proceeds from the sale of the central New Jersey assets between February
19, 2003 and September 30, 2003, compared to $387,223 at September 30, 2002.
Interest Expense:
The increase in interest expense is primarily due to less interest being
capitalized associated with capital expenditures during the current period
coupled with the expensing of previously capitalized debt issuance costs and
commitment fees incurred resulting from securing the Fifth Amendment to our
Credit Agreement. (See Note 7, Long-Term Debt, to the Unaudited Condensed
Consolidated Financial Statements.) These increases were partly offset by the
debt extinguishment during the third quarter of 2003 and the first quarter of
2002.
Additionally, on July 2, 2003, we announced an investigation into
inconsistencies in the terms of the indenture governing our 11% Senior Discount
Notes due 2008 ("the 11% Notes"), which resulted in an additional $7,976
interest payment made on the 11% Notes on July 1, 2003. Approximately $3,755 of
interest expense has been recorded in the nine months ending September 30, 2003
with the remaining $4,221 amortized over the remaining life of the notes.
Gain on Early Extinguishment of Debt:
During the quarter ended September 30, 2003, we completed a debt repurchase for
certain of our Senior Discount Notes. We retired approximately $75,151 in book
and face value of our Senior Discount Notes. We recognized a gain of
approximately $45,733 from the early retirement of debt in which approximately
$27,806 of cash was paid. In addition, we incurred fees of approximately $970
and wrote off debt issuance costs of approximately $642.
A gain of $13,073 for the nine months ended September 30, 2002 resulted from us
repurchasing certain of our long-term debt. We 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. The
2002 gain was originally recorded as an extraordinary gain, however, with the
adoption of SFAS No. 145 in 2003, the gain was reclassified to an ordinary gain
and is now reflected in loss from continuing operations before income taxes.
(See Note 7, Long-Term Debt, to the Unaudited Condensed Consolidated Financial
Statements.)
Other income (expense), net:
Other income (expense), net increased $9,037 or 20082.2% to $9,082 for the nine
months ended September 30, 2003 from $45 for the nine months ended September 30,
2002. The increase resulted primarily from a gain of approximately $7,235
recorded from the buyout of a capital lease.
32
Income Tax:
Our effective income tax rate was 0.0% on losses from continuing operations for
the nine months ended September 30, 2003. For the nine months ended September
30, 2002, the effective rate was a benefit of 0.07% of net losses for the
period. The tax effect of our cumulative losses has exceeded the tax effect of
accelerated deductions, primarily depreciation, which we have taken for federal
income tax purposes. As a result of the uncertainty regarding the use of these
losses, 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 Income (Loss) of Unconsolidated Entities:
Equity in income of unconsolidated entities increased $42,381 or 176.9% to
income of $18,417 for the nine months ended September 30, 2003 from a loss of
$23,964 for the nine months ended September 30, 2002. The components of income
or (loss) are shown in the table below.
Nine Months Ended September 30,
Increase (Decrease)
2003 2002 ($) (%)
--------- --------- --------- ------
Megacable $ 21,113 $ 14,782 $ 6,331 42.8%
Starpower (2,696) (38,794) 36,098 93.1%
J2 Interactive - 48 (48) 100.0%
-------- -------- -------- -----
Total equity in income (loss) of
unconsolidated entities $ 18,417 $(23,964) $ 42,381 n/a
======== ======== ======== =====
Minority Interest in Loss of Consolidated Entities:
Minority interest primarily represents the interest of NSTAR Communications,
Inc. in the results of RCN-Becocom. As discussed earlier, following NSTAR's
exchange of their joint venture ownership interest for RCN's stock, our profit
(loss) sharing ratio in the RCN-Becocom joint venture as of December 31, 2002
was 100%. As a result, no minority interest was recorded for the three and nine
months ended September 30, 2003. Accordingly minority interest in loss of
consolidated entities decreased $36,650 or 100.0% in the nine months ended
September 30, 2003.
Discontinued Operations:
During the third quarter 2003, we entered into a definitive agreement to sell
our Carmel cable system assets and customers serviced by this network for an
estimated cash sales price of approximately $120,000, subject to adjustments.
The Carmel network services approximately 30,000 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 working capital items. 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 2004, and we
expect to realize a gain of approximately $85,000 to $90,000 on the transaction.
In accordance with the Fifth Amendment to the Credit Agreement (see Liquidity
and Capital Resources for discussion regarding the Fifth Amendment), proceeds of
approximately $66,000 will be applied as a partial pay-down of our senior
secured bank facility. We will continue to operate in Carmel until the asset
sale is complete. In accordance with SFAS No. 144, the results of operations for
Carmel are reported as discontinued operations.
On February 19, 2003, we completed the previously announced sale of our central
New Jersey cable system assets to Patriot. The cash proceeds of the sale
received by us were $242,844 including $14,690, net of purchase price
adjustments of approximately $(355), that remain in escrow. After taking into
account the net assets of the system, transaction fees and amounts paid to
acquire the minority interest, we recorded a gain on the sale of approximately
$166,144 net of taxes. In addition, we recorded net income of $2,830 from
operations of the system from January 1, 2003 to February 19, 2003. In
accordance with the Credit Agreement, an amount equal to the net cash proceeds
of the
33
sale of the central New Jersey cable system assets in excess of $5,000 was
deposited into a cash collateral account. Other than the minimum $100,000
required to be maintained on deposit in the cash collateral account under the
Fifth Amendment, (see Liquidity and Capital Resources for discussion regarding
the Fifth Amendment) proceeds on deposit in the cash collateral account may be
used (i) to repay any loans outstanding under the Credit Agreement, or (ii) to
purchase telecommunications assets and/or for working capital if we do not have
other available cash on hand to fund such expenditures. In accordance with SFAS
No. 144, the results of operations for central New Jersey cable system have been
reported as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, temporary cash investments, and short-term investments decreased to
$46,939 at September 30, 2003 from $277,009 at December 31, 2002. The change
resulted primarily from $158,637 used in operating activities, $41,056 used in
financing activities and $197,267 provided by investing activities.
Net cash of $158,637 used in operating activities consisted of approximately
$83,646 in net losses from continuing operations before preferred dividends and
accretion adjusted for non-cash items which included $148,357 in depreciation
and amortization, $13,386 in accretion of discounted debt, and $11,248 in
provision for losses on accounts receivable. In addition, $62,302 was used in
working capital consisting mostly of decreases in accounts payable, related
party payables, and accrued expenses of $49,189 as well as increases in accounts
receivable and related party receivables of $10,841.
Net cash of $197,267 provided by investing activities resulted from proceeds for
the sale of discontinued operations of $242,844 and decreases of short term
investments of $227,641 and reclassification of $224,156 to restricted cash
which includes $242,844 from the sale of discontinued operations in accordance
with the Credit Agreement, which requires an amount equal to the net cash
proceeds of the sale in excess of $5,000 be deposited into a cash collateral
account. These increases were offset by additions to property, plant, equipment
and construction materials of $49,499 for continuing operations and $2,191 for
discontinued operations.
Cash used in financing activities of $41,056 consisted primarily of $53,493 in
repayment under our long-term borrowings, $1,427 in capital lease principal and
buyout payments and $13,995 of payments made for debt financing costs made
primarily to secure the Fifth Amendment to our Credit Agreement. These uses were
offset by $27,806 in proceeds from the issuance of long-term debt. (See Note 7,
Long-Term Debt, to the Unaudited Condensed Consolidated Financial Statements.)
We have historically met our liquidity requirements through cash and short-term
investments on hand, amounts available under our Credit Facility, issuances of
high-yield debt securities in the capital markets and convertible preferred
stock and common stock to strategic investors. At September 30, 2003, we had
approximately $46,939 in cash, temporary cash and short-term investments and
$242,565 in restricted cash. We believe that current cash, including available
restricted cash, cash equivalents, short-term investments and proceeds from
revenues will be sufficient to meet its anticipated cash needs for working
capital, capital expenditures and other activities into the second quarter of
2004.
As of September 30, 2003, we were in compliance with the covenants contained in
all of our outstanding debt agreements. However, in order for us to meet our
liquidity needs and continue complying with all debt covenants, through mid-2004
and beyond, we will have to do a combination of, the following: (i) outperform
our business plan, (ii) improve operational efficiencies, (iii) raise additional
capital through issuance of equity or debt securities, (iv) further amend the
Credit Facility, (v) restructure the balance sheet, (vi) significantly reduce
capital deployment plans and new product introductions and (vii) consummate
additional asset sales. We can offer no assurances that we will be able to
implement one or more of these actions on acceptable terms or, if we are able to
implement such actions, that the implementation will allow us to comply with our
debt covenants or obtain relief from the obligations to comply with those
covenants at which point, we will implement further austerity programs which
will limit our ability to operate in the normal course of business. Our ability
to raise additional capital at this time may be dependent upon numerous factors
beyond our control including, without limitation, market conditions and the
possibility that the necessary capital will not be available or will be
available only upon terms that are unacceptable to us. Failure to obtain such
capital or otherwise sufficiently implement one or a combination of the actions
will result in a violation of one or more of the covenants contained in the
Credit Agreement. Violation of one or more covenants under the Credit Facility
would be an event of default under the terms of the Credit Agreement. Absent a
material change in our financial condition, we believe that we will fail to
comply with one or more of our covenants under the Credit Agreement in the
second quarter of 2004. We also have been discussing and providing information
with respect to our capital structure and operations with various consultants
retained by our bank lenders and certain holders of our publicly held Senior
Notes and our Preferred stock, as well as with potential new sources of capital.
Although the foregoing discussions continue to be in the early stages and we
cannot predict at this time the results of the foregoing efforts, we believe
that such discussions may ultimately result in significant amounts of Senior
Notes and/or Preferred stock being converted into our Common stock.
34
If we were (i) unable to implement any additional actions as described above,
(ii) adversely impacted by any unforeseen business conditions and/or (iii)
unable to comply with the financial and negative covenants of the Credit
Agreement, the lenders under the Credit Facility would be entitled to declare
the outstanding borrowings under the Credit Facility immediately due and payable
and exercise any or all 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 our Senior Notes, entitle holders
of the 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 the Senior Notes would have a material adverse effect on us. The
obligations are currently classified as long-term debt. We do not have
sufficient cash resources to repay our outstanding indebtedness if it is
declared immediately due and payable.
We continue to seek to raise capital to pay for capital expenditures, working
capital, debt service requirements and, anticipated future operating losses. We
may experience difficulty in raising capital in the future, as both the equity
and debt capital markets continue to experience periods of significant
volatility, particularly for securities issued by telecommunications and
technology companies. Further, the ability of telecommunications companies to
access those markets as well as their ability to obtain financing provided by
bank lenders and equipment suppliers remains restricted while financing costs
continue to increase. Capital markets remain largely unavailable to new issues
of securities by telecommunications companies. Our public equity and debt
securities are trading at or near all time lows, which together with our
substantial leverage, means we may have limited access to certain of our
historic sources of capital.
We have used and continue to use capital raised from debt and equity offerings
to implement our business plan. In addition to raising capital through the debt
and equity markets, we may sell or dispose of existing businesses or investments
to fund portions of our business plan. We may not be successful in producing
sufficient cash flow, reducing debt or raising sufficient debt or equity
capital. In addition, proceeds from dispositions of our assets may not be
sufficient to support operations or debt service.
During the third quarter 2003, we entered into a definitive agreement to sell
our Carmel cable system assets and customers serviced by this network for an
estimated cash sales price of approximately $120,000, subject to adjustments.
The Carmel network services approximately 30,000 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 working capital items. 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 2004, and we
expect to realize a gain of approximately $85,000 to $90,000 on the transaction.
In accordance with the Fifth Amendment to the Credit Agreement proceeds of
approximately $66,000 will be applied as a partial pay-down of our senior
secured bank facility. We will continue to operate in Carmel until the asset
sale is complete. In accordance with SFAS No. 144, the results of operations for
Carmel are reported as discontinued operations.
On February 19, 2003, we consummated a previously announced sale of our central
New Jersey cable system assets to Patriot. The cash proceeds of the sale
received by us, after taking into account the amount paid by Patriot to acquire
the minority interest in the portion of central New Jersey cable systems that
was not owned by us and other closing adjustments, was approximately $242,844
including approximately $14,690 that remains in escrow. We realized a net gain
of approximately $166,144 on the transaction. In accordance with the Credit
Agreement, an amount equal to the net cash proceeds of the sale of the central
New Jersey cable system assets in excess of $5,000 was deposited into a cash
collateral account. Other than the minimum $100,000 required to be maintained on
deposit in the cash collateral account under the Fifth Amendment, proceeds on
deposit in the cash collateral account may be used to repay loans outstanding,
to purchase telecommunications assets, or working capital, if we do not have
other available cash on hand to fund such expenditures. In accordance with SFAS
No. 144, the results of operations for central New Jersey cable system have been
reported as discontinued operations.
Changes in the cable television, Internet and voice services markets may also
affect our ability to execute our business plan and achieve our revenue growth
and spending objectives. Changes that may impact our business include
regulatory, competitive and technological factors discussed in more detail in
the preceding business and risk factors sections of our 2002 Annual Report on
the Form 10-K filed with the SEC.
In June 1999, we and certain of our subsidiaries together, (the "Borrowers")
entered into a $1,000,000 Senior Secured Credit Facility (the "Credit Facility")
with the JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) and
certain other lenders. 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
35
term loan facility (the "Term Loan B"). All three facilities are governed by a
single credit agreement dated as of June 3, 1999 (as amended, the "Credit
Agreement"). Since such time, the Credit Agreement, including the amounts
available under the Credit Facility, has been amended as described below.
We entered into an amendment to the Credit Agreement dated March 7, 2003 (the
"Fifth Amendment"). The Fifth Amendment enables us to incur additional senior
secured debt, adjusts the operating and financial covenants to better reflect
our business plan and modifies certain other restrictions. In connection with
the Fifth Amendment, we paid certain lenders fees of approximately $7,062. The
Fifth Amendment also reduces the amount available under the Revolver to $15,000,
under which there were no borrowings outstanding at September 30, 2003, and
requires us to maintain a cash collateral account of at least $100,000 for the
benefit of the lenders under its credit facility. At September 30, 2003, we
maintained cash collateral, relating to the Fifth Amendment, of approximately
$212,000 (of which $100,000 has been classified as long-term). The Fifth
Amendment also calls for half of the first $100,000 in proceeds from future
asset sales, and 80% of proceeds from assets sales in excess of $100,000, to be
used to pay down our senior secured term loans. Additionally, we will increase
amortization payments under our term loans by an amount equal to 50% of interest
savings from new repurchases of senior notes, not to exceed $25,000. The Fifth
Amendment also enables us to incur up to $500,000 of new senior indebtedness
that may be secured by a second subordinated lien on our assets. Up to $125,000
of existing cash and the proceeds of new indebtedness may be used to repurchase
outstanding senior notes. As a result of the Fifth Amendment, we will not be
able to borrow money that may otherwise have previously been available to it
under the Revolver. As adjusted by the Fifth Amendment, on July 1, 2004, if the
aggregate amount of outstanding loans exceeds $415,875 (i.e., $75,000 less than
the currently scheduled amount), the Applicable Spread with respect to all loans
shall be increased by 100 basis points; provided, that such increase shall be
eliminated if the aggregate amount of outstanding Loans is equal to or less than
$390,937 on or before December 31, 2004.
At September 30, 2003, there were no loans outstanding under the Revolver. In
accordance with the Amendment, the Revolver can also be utilized for letters of
credit up to a maximum of $15,000. At September 30, 2003, there were $15,000 in
letters of credit outstanding under the Revolver. At September 30, 2003, we also
had letters of credit outside the Revolver of $21,985 collateralized by
restricted cash in escrow accounts. As of September 30, 2003, a total of
$521,250 was outstanding under Terms loans A and B.
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 our assets
and our subsidiaries.
Our ability to maintain our liquidity and maintain compliance with the covenants
under the Credit Agreement is dependent upon our ability to achieve the
covenants in the recently amended Credit Agreement. We can make no assurances
that we will be able to achieve or modify the new covenants. We can make no
assurances that our business will generate sufficient cash flow from operations
or that existing available cash or future financings will be available to us in
an amount sufficient to enable us to pay our indebtedness or to fund our other
liquidity needs.
In June 2003, we entered into a $41,500 Commercial Term Loan and Credit
Agreement (the "Evergreen Facility") with Evergreen Investment Management
Company, LLC and certain of its affiliates ("Evergreen"). Evergreen's commitment
initially expired September 4, 2003 but had been extended, and subsequently
expired, on November 3, 2003. Any term loans made under the Evergreen Facility
will mature on June 30, 2008. The interest rate on the Evergreen loans is 12.5%
per annum; however, no cash interest is payable until April 1, 2006. The
interest rate is subject to upward adjustment in the event we incur new
indebtedness within 90 days after closing at a higher rate. In the event we or
certain of our subsidiaries receive net proceeds in respect of certain
prepayment events such as asset sales or casualty events and such net proceeds
are not applied to the repayment of amounts outstanding under the Credit
Facility we must repay the Evergreen loans in an aggregate amount equal to such
net proceeds or use such proceeds to acquire telecommunications assets,
including working capital. Following the termination of the Credit Facility, we
must apply 50% of the net proceeds from such assets sales or casualty events to
repay the Evergreen loans and not to reinvestment. We must apply 50% of excess
cash flow for each fiscal year commencing on the earlier of (i) the fiscal year
ending December 31, 2007 or (ii) the fiscal year in which all amounts
outstanding under the Credit Facility have been paid in full or the Credit
Facility does not prohibit such payment to prepay the Evergreen loans, provided
that any lender may waive its right to receive the amount of such mandatory
prepayment, and any amount will be applied to the mandatory prepayment of other
Evergreen loans on a pro rata basis. Evergreen will have a second priority lien
on substantially all of our assets. Upon closing, we paid a 4% or $1,660 funding
fee to Evergreen. As of September 30, 2003, approximately $29,500 was
outstanding under the Evergreen Facility.
36
In connection with the signing of the Evergreen Facility with Evergreen, we
issued warrants to Evergreen to purchase 4,150,000 shares of Common stock at an
initial exercise price of $1.25 per share. The warrants are exercisable any time
following three months from their issuance. We valued the warrants using the
Black-Scholes pricing model, applying an expected life of 5 years, a weighted
average risk-free rate of 3.5%, a volatility rate of 70% and a deemed value of
Common stock of $1.67 per share. The estimated value of the warrant, $4,026 was
recorded as a contra long-term debt liability to be amortized over the next 5
years.
We may be required to seek additional modifications to the Credit Agreement or
new modification to the Evergreen Facility in order to satisfy or comply with
the financial and negative covenants of the Credit Agreement, as amended by the
Amendment and the Evergreen Facility. In addition to the potential uncertainty
of our ability to obtain additional modifications, if necessary, we may incur
additional costs in the form of fees or interest expense for any such
modifications. In the event that we fail to satisfy or comply with any of the
financial or negative covenants of the amended Credit Agreement and the
Evergreen Facility and are unable to obtain additional modifications or a waiver
with respect thereto, the lenders under the Credit Facility and the Evergreen
Facility would be entitled to declare the outstanding borrowings under the
Credit Facility and the Evergreen Facility immediately due and payable and
exercise any or all of their other rights and remedies. In addition, any such
acceleration of amounts due under the Credit Facility and the Evergreen Facility
would, due to cross default provisions in the indentures governing our 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 the Evergreen Facility and/or holders of the Senior Notes
would have a material adverse effect on us. We do not have sufficient cash
resources to repay our outstanding indebtedness if it is declared immediately
due and payable.
We are aware that the various issuances of Senior Notes and Senior Discount
Notes continue to trade at significant discounts to their respective face or
accreted amounts. In accordance with the Amendment, and in order to continue to
reduce future cash interest payments, as well as future amounts due at maturity,
we may from time to time acquire certain of these outstanding debt securities
for cash or in exchange for shares of 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.
We have retained Merrill Lynch as a financial advisor to review our financial
alternatives and capital structure and to explore possible capital raising
opportunities. As previously announced, on August 18, 2003, we repurchased
approximately $75 million in principal amount of our publicly held Senior Notes
for a price of approximately $28 million pursuant to a cash tender offer for
such notes. As part of our ongoing efforts to improve our capital structure and
reduce the amount of our debt, we have begun preliminary discussions with
certain holders of our publicly held senior notes and the holders of our
Preferred stock concerning a possible repurchase, exchange or retirement of the
securities held by such holders. Such discussions are in the very preliminary
stages and we cannot predict at this time the results of the foregoing efforts.
We have indebtedness that is substantial in relation to the shareholders'
deficit and cash flow. At September 30, 2003, we had an aggregate of
approximately $1,667,987 of indebtedness outstanding including capital lease
obligations. We also have cash, cash equivalents and short-term investments
aggregating approximately $46,939. We had the following contractual obligations
as of September 30, 2003:
Payments Due by Period
----------------------------------------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ---------------------------------- ----------------------------------------------------------------------
Senior Notes $ 1,109,506 $ - $ - $ 906,635 $ 202,871
Term Loans 522,904 46,637 211,836 264,431 -
Capital Leases 11,530 1,619 3,105 902 5,904
Operating Lease Commitments 288,818 28,442 49,073 62,708 148,595
----------------------------------------------------------------------
Total Contractual Cash Obligations $ 1,932,757 $ 76,698 $ 264,014 $ 1,234,675 $ 357,370
======================================================================
At September 30, 2003, we had the following other commercial commitments:
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Amount of Commitment Expiration Per Period
-------------------------------------------------------------
Total
Amounts Less than 1-3 4-5 Over 5
Other Commercial Commitments Committed 1 Year Years Years Years
- ---------------------------------- -------------------------------------------------------------
Letters of Credit - Collateralized
by Revolver $ 15,000 $ 15,000 $ - $ - $ -
Letters of Credit - Collateralized
by Restricted Cash 21,985 20,585 1,400 - -
-------------------------------------------------------------
Total Other Commercial Commitments $ 36,985 $ 35,585 $ 1,400 $ - $ -
=============================================================
As a result of our substantial indebtedness, our fixed charges are expected to
exceed our earnings for the foreseeable future. Our leveraged nature could limit
our ability to effect future financing or may otherwise restrict our business
activities. The extent of our leverage may have the following consequences: (i)
limit our ability to obtain necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes; (ii)
require that a substantial portion of our cash flows from operations be
dedicated to the payment of principal and interest on our indebtedness and
therefore not be available for other purposes; (iii) limit our flexibility in
planning for, or reacting to, changes in our business; (iv) place us at a
competitive disadvantage as compared with less leveraged competitors; and (v)
render us more vulnerable in the event of a downturn in our business.
We have two tranches of redeemable preferred stock, Series A and Series B. At
September 30, 2003 we had paid cumulative dividends in the amount of $557,943 in
the form of additional Series A and B Preferred stock. At September 30, 2003,
the number of common shares that would be issued upon conversion of the Series A
and B Preferred stock was 43,092,932.
We have an investment portfolio. The objective of our "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.
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
is effective for fiscal years beginning after June 15, 2002, and 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 the asset's useful life. We adopted SFAS No.
143 on January 1, 2003 and the adoption of this statement did not have a
material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements No.
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
15, 2002. Any gain or loss on the extinguishment of debt that was classified as
an extraordinary item will be reclassified upon adoption. The Company adopted
SFAS No. 145 on January 1, 2003. Accordingly in the condensed consolidated
statements of operations for the nine-month period ended September 30, 2002, the
extraordinary gains on early retirement of debt have been reclassified. (See
Note 7, Long-Term Debt, to the Unaudited Condensed Consolidated Financial
Statements, for discussion regarding our adoption of SFAS No. 145.) The adoption
of this statement did not have a material impact on our financial position or
results of operations.
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. 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. It also establishes fair value as the objective for initial
measurement of the liability. We adopted the provisions of SFAS No. 146 on
January 1, 2003. (See Note 6, Impairment Charges and Accrued Exit Costs, to the
Unaudited Condensed Consolidated Financial Statements, for discussion regarding
our adoption of SFAS No. 146.)
38
In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN 45"),
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement requirements of FIN
45 are effective prospectively for guarantees issued or modified after December
31, 2002. The adoption of the recognition and initial measurement requirements
of FIN 45 did not have a material impact on our financial position, cash flows
or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities", which expands upon and strengthens existing accounting guidance
concerning when a company should include in its financial statements the assets,
liabilities and activities of another entity. Prior to the issuance of FIN 46, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46 now
requires a variable interest entity, as defined in FIN 46, to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. FIN 46 also requires disclosures about
variable interest entities that we are not required to consolidate but in which
it has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003
and to older entities in the first fiscal year or interim period beginning after
June 15, 2003. We do not have any interest in any entity that requires
disclosure or consolidation as a result of adopting the provisions of FIN 46.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with both liabilities and equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 was adopted on July 1, 2003 and the
adoption of this statement did not have a material impact on our financial
position or results of operations.
OTHER MATTERS
The Audit Committee consists of the following four (4) directors who are not our
employees: Alfred Fasola, Chairman, Thomas P. O'Neill, III, Richard R. Jaros and
Thomas J. May. Mr. May is Chairman and Chief Executive Officer of NSTAR and its
wholly owned subsidiary, NSTAR Communications, Inc. We pay NSTAR Communications
for network construction in its Boston area market. NSTAR Communications is a
party to a joint venture with RCN Telecom Services, Inc., our subsidiary. Our
Board of Directors has determined that Mr. May's membership on the Audit
Committee is in our best interests and the best interests of our shareholders,
despite his relationship with us for the following reasons:
Mr. May is a Certified Public Accountant and has extensive background in
accounting, including previously as Chief Financial Officer of Boston Edison, a
predecessor of NSTAR. He has been an actively involved member of the Audit
Committee for four years and regularly provides needed insight and diligence. As
Chief Executive Officer of NSTAR Communications, Mr. May brings financial
sophistication and knowledge regarding financial controls. Mr. May also has a
good understanding of our business through his relationship with us, thereby
enhancing the Committee's ability to provide financial oversight to us.
The Company intends to transition the function of its Principal Financial
Officer, Timothy Stoklosa, to Patrick Hogan during the fourth quarter. This
transition has begun, including having the Chief Accounting Officer now
reporting to Mr. Hogan. Although Mr. Stoklosa has been spending an increasing
amount of time on the financial alternatives surrounding the Company's balance
sheet, he will continue to stay involved in accounting and financial reporting
matters during the transition.
39
Item 3. Quantitative & Qualitative Disclosures About Market Risk.
We have 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. We currently have no items that relate
to "trading portfolios". Under the "other than trading portfolios" we do have
four short-term investment portfolios categorized as available for sale
securities that are stated at cost, which approximates market, and which are
re-evaluated at each balance sheet date and one portfolio that is categorized as
held to maturity which is an escrow account against a defined number of future
interest payments related to the our 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. We
believe 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, our internal investment policies have set
maturity limits, concentration limits, and credit quality limits to minimize
risk and promote liquidity. We 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 our "other than trading portfolio" is to invest in high quality
securities and seeks to preserve principal, meet liquidity needs, and deliver a
suitable return in relationship to these guidelines.
Item 4. Controls and Procedures.
(a.) Disclosure Controls and Procedures
We have performed an evaluation, under the supervision and with the
participation of management, including the Chief Executive and Principal
Financial officers, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities
and Exchange Act of 1934) as of the end of the period covered by this report.
Based on this evaluation, the Chief Executive Officer and Principal Financial
Officer have concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act.
(b.) Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
40
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
10.19 Cash Collateral Agreement
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b.) Reports on Form 8-K
On July 2, 2003, the Company announced it was investigating
inconsistencies in the terms of the indenture governing its 11% Senior
Discount Notes due 2008 ("the 11% Notes"), which it had uncovered in
connection with an approximately $8 million interest payment made on
the 11% Notes on July 1, 2003. The press release with respect thereto
was filed with an 8-K as Exhibit 99.1 and is incorporated herein by
reference.
On July 10, 2003, the Company announced that it intended to commence on
July 11, 2003 a cash tender offer to purchase up to approximately
$290,000 aggregate principal amount of its outstanding Senior Notes
with cash not to exceed $92,500. Additionally, on July 10, RCN Telecom
Services, Inc., a wholly owned subsidiary of RCN Corporation, reached a
definitive agreement to sell its cable system located in Carmel, New
York, to Susquehanna Cable Co. for approximately $120 million in cash,
subject to certain purchase price adjustments. The agreement and press
release with respect thereto were filed with an 8-K as Exhibits 10.1
and 99.1 and are incorporated herein by reference.
On August 8, 2003, the Company announced it had extended its tender
offer for up to between approximately $250,000 and $290,000 aggregate
principal amount of its outstanding Senior Notes without distinguishing
between the issues, from 11:59 p.m. New York City time on August 7,
2003 to 5:00 p.m. New York City time, on August 15, 2003. The press
release with respect thereto was filed with an 8-K as Exhibit 99.1 and
is incorporated herein by reference.
On August 11, 2003, the Company announced its financial results for the
quarter ended June 30, 2003. The press release with respect thereto was
filed with an 8-K as Exhibit 99.1 and is incorporated herein by
reference.
On August 18, 2003, the Company announced that it had extended its
tender offer for up to between approximately $250,000 and $290,000
aggregate principal amount of its outstanding Senior Notes, without
distinguishing between the issues, from 5:00 p.m., New York City time
on August 15, 2003 to 5:00 p.m., New York City time, on August 18,
2003. On August 19, 2003, RCN announced that it had closed the Offer
and disclosed the results thereof. The press release with respect
thereto was filed with an 8-K as Exhibit 99.1 and 99.2, respectively,
and is incorporated herein by reference.
On October 7, 2003 the Company announced that it had retained Merrill
Lynch as a financial advisor to review its financial alternatives and
capital structure and to explore possible capital raising
opportunities. As previously announced, on August 18, 2003 RCN
repurchased $75 million in principal amount of its publicly held senior
notes for a price of $28 million pursuant to a cash tender offer for
such notes. As part of its ongoing efforts to improve its capital
structure and reduce the amount of its debt, RCN has begun preliminary
discussions with certain holders of its publicly held senior notes and
the holders of its preferred stock concerning a possible repurchase,
exchange or retirement of the securities held by such holders. Such
discussions are in the very preliminary stages and RCN cannot predict
at this time the results of the foregoing efforts. RCN has appointed
Mr. Doug Bradbury, who had been acting as a consultant to RCN, as an
executive vice president to lead such discussions on behalf of RCN. Mr.
Bradbury recently retired as vice chairman, and was previously chief
financial officer, of Level 3 Communications.
41
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 12, 2003
/s/ Timothy J. Stoklosa
--------------------------
Timothy J. Stoklosa
Executive Vice President
42