RCN CORP /DE/ - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES x NO ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock ($1.00 par value), as of October 31, 2004.

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

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

RCN Corporation (referred to, together with its subsidiaries, unless the context requires otherwise, as “RCN” or the “Company”), Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation, TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. (collectively “the Debtors”) have filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United Sates Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation and TEC Air, Inc. each filed Chapter 11 petitions on May 27, 2004. RCN Cable TV of Chicago, Inc. filed its Chapter 11 petition on August 5, 2004. RCN Entertainment, Inc., ON TV, Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. each filed Chapter 11 petitions on August 20, 2004. The cases of all of the Debtors are jointly administered under case number 04-13638 (RDD). The Debtors are currently operating their business as debtors-in-possession pursuant to the Bankruptcy Code.

As debtors-in-possession under Chapter 11, the Debtors are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. The Company can offer no assurances that in the future, additional subsidiaries will not file Chapter 11.

In connection with the Chapter 11 filings, RCN obtained a waiver from its existing senior secured lenders (“Lenders”) that waives any events of default caused by the Chapter 11 filings and amends the minimum cash requirements under its existing senior secured credit facility. The Debtors have also obtained Bankruptcy Court authorization to use the existing Lenders’ cash collateral to fund ongoing operations and administrative expenses, subject to certain terms and conditions agreed upon with the existing Lenders, which include the following: unrestricted cash must be used first based on a 13 week cash flow budget, a 13 week cash flow budget must be provided to the Administrative Agent for the Lenders monthly, certain minimum cash balance requirements must be met and additional reporting requirements to the Administrative Agent for the Lenders summarizing the results of operations. The current authorization to use cash collateral expires on November 19, 2004. The Company is currently in discussions with the Lenders to extend the authorization to use cash collateral on a consensual basis. There can be no assurance that the Company will be able to obtain authority to use cash collateral beyond November 19, 2004.

Under Section 362 of the Bankruptcy Code, actions to collect pre-petition indebtedness from the Debtors, as well as most other pending pre-petition litigation, are stayed. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to compromise under a plan of reorganization.

On August 20, 2004, RCN and certain other Debtors filed a Joint Plan of Reorganization (as amended, the “Plan”) and Disclosure Statement with respect to the Plan (as amended, the “Disclosure Statement”) with the Bankruptcy Court. On October 13, 2004, the Bankruptcy Court entered an order approving the Disclosure Statement, as amended, for all of the Debtors. In addition, on October 13, 2004, the Bankruptcy Court entered an order approving the Debtors’ solicitation procedures motion, which authorizes the Debtors to solicit votes pursuant to the Disclosure Statement to approve the Plan from certain creditors and interest holders. A copy of the Plan and Disclosure Statement is available at www.rcnplan.com or by contacting Financial Balloting Group LLC at (646) 282-1800.

As set forth in the Disclosure Statement, the Plan provides, for among other things, (i) the Lenders’ claims to be repaid in full in cash, (ii) the Evergreen Facility to be reinstated as modified pursuant to the terms of the restructured Evergreen Facility, (iii) the distribution to holders of RCN general unsecured claims of cash equal to no more that $12,500 (for those making the cash election) and 100% of the new common stock of reorganized RCN, subject to dilution by (a) the exercise of the management incentive options and the new warrants and (b) the conversion of any convertible second-lien notes, (iv) the distribution to holders of subsidiary general unsecured claims of cash equal to 100% of the amount of each allowed subsidiary general unsecured claim and (v) if the holders of RCN general unsecured claims as a class vote to accept the Plan, the distribution of (a) new warrants to purchase common stock of reorganized RCN in an amount equal to 1.75% of the new common stock to holders of preferred interests if the holders of preferred interests, voting as a class, vote to accept the plan and (b) new warrants to purchase common stock of reorganized RCN in an amount equal to .25% of the new common stock to holders of common stock equity interests. Thus, the new warrants will be exercisable into two percent of the new common stock of reorganized RCN (before giving effect to the management incentive options and conversion of any convertible second-lien notes) at a strike price of $34.16 per share. The foregoing summary is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan.

The confirmation and effectiveness of the Plan are subject to material conditions precedent. There can be no assurance that those conditions will be satisfied.

The Debtors presently intend to consummate the Plan promptly after confirmation of the Plan. There can be no assurance, however, as to when and whether confirmation of the Plan and the effective date actually will occur.

On May 27, 2004, RCN announced that it had entered into a commitment letter with Deutsche Bank Securities, Inc. (“Deutsche Bank”) pursuant to which Deutsche Bank has committed to provide the Company with new financing upon the consummation of a plan of reorganization. The specific terms of the financial commitment are discussed in Note 3, Operations and Liquidity, below. In addition, the financing to be provided by Deutsche Bank is subject to material conditions that must be satisfied as of December 31, 2004 and, include consummation of a plan of reorganization, no material adverse financial effect on the business, operations, financing or finances of RCN and its subsidiaries, no material change in market conditions or on the ability of Deutsche Bank to syndicate the new financing and the achievement of certain financial performance criteria. There can be no assurances that the conditions to the financing will be met.

The United States Trustee has appointed an official committee of unsecured creditors comprised of certain bondholders and the indenture trustee for the Senior Notes. The official committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court.

At this time, it is not possible to predict the effect of the Chapter 11 reorganization process on the Company’s business, various creditors and security holders, or when the Debtors will emerge from Chapter 11. The Company’s future results are dependent on its obtaining the Bankruptcy Court’s confirmation of, and the Company’s implementing, a plan of reorganization.

The ultimate recovery, if any, by creditors and shareholders will not be determined until confirmation of a plan of reorganization. No assurance can be given as to the value, if any, which will ultimately be ascribed in the bankruptcy proceedings to any of these constituencies. The restructuring, as currently contemplated in the Disclosure Statement approved by the Bankruptcy Court on October 13, 2004, will result in a conversion of the Company’s outstanding Senior Notes into equity and an extremely significant, if not complete, dilution of current equity. Accordingly, RCN urges appropriate caution be exercised with respect to existing and future investments in any of its securities.

The accompanying unaudited condensed consolidated financial statements of RCN have been prepared in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q (the “Report”). 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, 2004 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, 2003 Annual Report on Form 10-K and Amendment No. 1 thereto filed on Form 10-K/A with the SEC.

The accompanying interim unaudited condensed consolidated financial statement have been prepared in accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”. Accordingly, all pre-petition liabilities subject to compromise are separately classified. Additional pre-petition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. Revenues, expenses, realized gains and losses and provision for losses resulting from the reorganization are reported separately as Reorganization items in the unaudited condensed consolidated statements of operations.

Upon emergence from bankruptcy, the amounts reported in subsequent financial statements could materially change due to the restructuring of the Company’s assets and liabilities as a result of any plan of reorganization and the application of the provision of SOP 90-7 with respect to reporting upon emergence from Chapter 11. Changes in accounting principles required under GAAP within twelve months of emerging from bankruptcy are required to be adopted at the date of emergence. Additionally, the Company may choose to make changes in accounting practices and policies at that time. For all these reasons, the financial statements for periods subsequent to emergence from Chapter 11 may not be comparable with those of prior periods.

As a result of the current financial position of the Company, there are a number of material risks and uncertainties surrounding its operating results, including those associated with Chapter 11. There are also numerous material operational risks inherent in the telecommunications industry. Each of these risks and uncertainties could have a material adverse impact on the Company’s financial condition and operating results. The information contained in the Report, particularly the risk factors, should be carefully reviewed along with other documents filed with the SEC. Some of the statements and information contained in the Report are “forward-looking,” outlining future expectations or projections of results of operations or financial conditions. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those outlined in the Report. The forward-looking information is based on information currently available to the Company’s Management. Actual results could differ materially from anticipated results contained in any forward-looking statements in the Report.

As outlined in Note 1, Proceedings Under Chapter 11 of the Bankruptcy Code, at this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on the Company’s business. Although the Disclosure Statement has been approved by the Bankruptcy Court, the Plan remains subject to Bankruptcy Court approval and satisfaction of Bankruptcy Code requirements, including requisite stakeholder approval. Additionally, consummation of the Plan remains subject to a number of conditions typical in similar reorganizations, including closing of the Deutsche Bank credit facility.

On May 26, 2004, the Company entered into a commitment letter with Deutsche Bank pursuant to which Deutsche Bank has committed to provide the Company with new financing upon the consummation of the plan of reorganization. The new financing is expected to consist of (i) a $310 million first lien facility, including a $285 million term loan facility and a $25 million letter of credit facility, and (ii) a $150 million second lien facility. Each of the facilities will be guaranteed by all of RCN’s wholly owned domestic subsidiaries and secured by substantially all the assets of RCN and its wholly owned domestic subsidiaries. On October 22, 2004, RCN filed a motion with the Bankruptcy Court seeking approval of an amendment to the Deutsche Bank commitment to increase the new first lien term loan facility by $20 million. Each of the facilities will contain prepayment provisions, covenants and events of default customary for facilities of this nature. Closing and funding for each of the facilities is subject to satisfaction of customary conditions precedent for facilities of this nature. In addition, the financing to be provided by Deutsche Bank is subject to material conditions that must be satisfied as of December 31, 2004 and include consummation of a plan of reorganization, no material adverse effect on the business, operations, financing or finances of RCN and its subsidiaries, no material change in market conditions or on the ability of Deutsche Bank to syndicate the new financing and the achievement of certain financial performance criteria.

On November 3, 2004, the Company received commitments to purchase, subject to Bankruptcy Court approval, $150 million aggregate principle amount of its Convertible Second-Lien Notes (the “Second Lien Notes”) from D.E. Shaw Laminar Lending II, Inc. and certain members of the Company’s creditors’ committee. The Second Lien Notes will also be offered to creditors of the Company who are institutional “accredited investors” within the meaning of Rule 501 of the Securities Act. The term of the Second-Lien Notes will be 7 ½ years, provided, however, in no event will the maturity date occur on or after the maturity date of the Company’s restructured Evergreen credit facility (see Liquidity and Capital Resources for additional discussion regarding the restructured Evergreen credit facility). The interest rate on the Second lien Notes is 7.5%, payable semiannually on July 15 and January 15, commencing on July 15, 2005.

In addition, the financing to be provided by the Second Lien Note purchasers is subject to conditions that must be satisfied at funding and include consummation of a plan of reorganization, no material adverse effect on the business, operations, financing or finances of RCN and its subsidiaries and no material change in the ability of the Company and its subsidiaries to perform their obligations in connection with the Second Lien Notes.

Available cash and temporary cash investments was $28,003 at September 30, 2004. In addition, at September 30, 2004 approximately $100,000 of cash was restricted under the terms of the Company’s Credit Facility and approximately $31,014 was restricted as collateral for letters of credit and deposits related to insurance claims. Because the Company’s cash and cash equivalents at September 30, 2004 and projected 2004 cash flows from operations are not sufficient to meet its anticipated cash needs for working capital, capital expenditures and other activities for the next twelve months, there is substantial doubt about the Company’s ability to continue as a going-concern.

represents a change in accounting estimate. The change resulted in approximately $13,368 and $56,171 of additional depreciation expense for the three and nine months ended September 30, 2004, respectively.

In the first quarter of 2003, based on regulatory changes and the Company’s ability to estimate reciprocal compensation revenues, RCN changed its method for estimating reciprocal compensation revenues. Reciprocal compensation revenue is the fee local exchange carriers pay to terminate calls on each other’s networks. The Company had historically recognized such revenue as it was received 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. During 2002, the FCC ruled on various tariff/interconnect rules that enabled the Company to estimate the amount of reciprocal compensation revenue earned in the period such services are rendered. Accordingly, during the first three 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.

On March 8, 2004, the Company closed the sale of its Carmel, New York (“Carmel”) cable system assets and customers serviced by this network for net cash proceeds of approximately $120,203. The Carmel network served approximately 29,000 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 $89,778 from sale of the assets of the discontinued operations net of taxes and transaction fees, during the first quarter of 2004. In the second quarter the gain was reduced by $2,104 to $87,674 primarily due to establishing a reserve on the escrow based on claims made during the quarter by the buyer. During the third quarter of 2004 the gain was reduced by approximately $41 to $87,633. At September 30, 2004, approximately $5,007 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 Carmel cable system may be entitled to indemnification under the terms of the agreement governing the sale of the Carmel 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 March 9, 2005.

In accordance with SFAS No. 144, the results of operations for Carmel 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 Carmel operations:

The current and noncurrent assets and liabilities of the Carmel operation were as follows:

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 $239,644 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 served 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 $165,989 from sale of the assets of the discontinued operations net of taxes, transaction fees and minority interest. At December 31, 2003, approximately $14,690 of the cash proceeds from the sale of assets were 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. The Company agreed to accept $10,800 of the escrow and forego the remainder as a settlement of all purchase price adjustment claims. This amount was released to the Company on February 9, 2004.

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:

The total asset impairment (recoveries) and other charges are comprised of the following:

The Company reviews its facility requirements against lease obligations to identify excess space and opportunities to consolidate, exit or sublease excess facilities. As transactions occur, exit costs are recognized accordingly. Costs to exit excess real estate facilities during the three months ended September 30, 2004 and 2003, the Company recognized approximately $51 and $10,201 and during the nine months ended September 30, 2004 and 2003, the Company recognized approximately $3,471 and $16,791, respectively of additional accrued costs to exit excess real estate facilities. Additionally, during the nine months ended September 30, 2004, the Company abandoned approximately $2,627 in furniture and fixtures as additional consideration, as part of a real estate lease settlement. During the three months ended September 30, 2004 and 2003, the Company recognized approximately $1,501 and $307, and during the nine months ended September 30, 2004 and 2003, the Company recognized approximately

$9,469 and $320, 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 Company is continuing to review its obligations under the associated franchise agreements due to the decisions not to complete the development of certain markets. The estimated costs less recoveries associated to exit certain franchises for the three and nine months ended September 30, 2004 and 2003 were $(3,322), $0, $(6,284) and $(250) respectively, and were included in the Operating, selling, general & administrative expense line. Additionally, during the three months ended September 30, 2004, $7,268 was reclassified to liabilities subject to compromise related to Debtors that filed Chapter 11 during the quarter.

Based on the Company’s revised business plan, previously planned expansion projects were abandoned. This stoppage is deemed to be other than temporary. The cost related to these abandoned assets is $1,683, which was recorded during the three months ended June 30, 2004.

The total activity for the nine months ended September 30, 2004 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 or settlement agreements are executed at more favorable rates than originally anticipated or franchise issues are resolved for lower expense than anticipated.

Because the Company’s cash, cash equivalents and short-term investments at September 30, 2004 and projected 2004 cash flows from operations are not sufficient to meet its anticipated cash needs for working capital, capital expenditures and other activities for the next twelve months, there is substantial doubt about the Company’s ability to continue as a going-concern. Accordingly, the Company has classified all its outstanding debt that is not subject to compromise under Chapter 11 as current.

Long-term debt, including capital leases, outstanding at September 30, 2004 and December 31, 2003 is as follows:

In accordance with the Credit Agreement, the Company repaid approximately $62,400 in Term Loans from the proceeds from the sale of Carmel during the quarter ended March 31, 2004. As a result of the $62,400 repayment, the Company wrote down an additional $1,897 of unamortized debt issuance costs during the nine months ended September 30, 2004.

The Company follows the recognition provisions of SFAS No. 123 - “Accounting for Stock-Based Compensation”. 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”.

The table below reflects the fair value of Incentive Stock Option (“ISO”) and Outperform Stock Option (“OSO”) grants during the three and nine months ended September 30, 2004 and 2003, respectively.

As of September 30, 2004 the Company has not recorded approximately $326 of unamortized compensation expense in its financial statements for ISOs previously granted as of September 30, 2004. The unamortized compensation expense is recognized over the ISO’s vesting period, which is three years.

As of September 30, 2004 the Company has not recorded approximately $3,044 of unamortized compensation expense in its financial statements for OSOs previously granted as of September 30, 2004. 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:

As of September 30, 2004, the Company had unearned compensation costs of approximately $90 related to restricted stock which is being amortized to expense over the restriction period.

At September 30, 2004, the Company had paid cumulative dividends in the amount of $107,078 in the form of additional Series A Preferred stock. At September 30, 2004, the number of common shares that would be issued upon conversion of the Series A Preferred stock was 9,224,446.

At September 30, 2004, the Company had paid cumulative dividends in the amount of $544,894 in additional shares of Series B Preferred stock. At September 30, 2004, the number of common shares that would be issued upon conversion of the Series B Preferred stock was 24,119,622.

See Note 16, Preferred Dividends, for additional discussion relating to dividends on the Series A and B Preferred stock.

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, 2004 is 33,344,068. 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, 2003 is 44,039,666 and 43,190,580, respectively.

The following table is a reconciliation of the numerators and denominators of the basic and diluted per share calculations:

The Company primarily has three components of comprehensive loss: net 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.

The Company reports its results as one reportable operating segment, which contains many shared expenses generated by the various revenue streams. Shared expenses incurred on a single network are not allocated to the Company’s revenue streams, as any such allocation would be costly, impractical and arbitrary. Management monitors the financial and operational performance of the Company in a way that differs 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. The use of non-GAAP financial disclosures represents management’s view of the total consolidated, operational results.

Reorganization items, net represent amounts the Company incurred as a result of the Chapter 11 process and are presented separately in the unaudited condensed consolidated statements of operations.

Cash paid for reorganization items during the three and nine months ended September 30, 2004 was $485 and $15,829, respectively.

The following paragraphs provide additional information relating to the above reorganization items:

Under U.S. bankruptcy law, actions by creditors to collect indebtedness the Debtors owed prior to the Petition Date are generally stayed and certain other pre-petition contractual obligations may not be enforced against the Debtors. All pre-petition liabilities of the Debtors have been classified as liabilities subject to compromise in the unaudited condensed consolidated balance sheets. Adjustments to these amounts may result from negotiations, payments authorized by the Bankruptcy Court, and/or rejection of executory contracts and leases. Amounts recorded may ultimately be different than amounts filed by the creditors under the Bankruptcy Court claims reconciliation and resolution process.

Notices to creditors and equity holders of the commencement of the cases were mailed on June 10, 2004 and September 15, 2004. The Bankruptcy Court established August 11, 2004 as the general deadline for submission of proofs of claim for general unsecured claims against the Debtors that filed Chapter 11 petitions on May 27, 2004, and October 1, 2004 as the bar date for Debtors that filed Chapter 11 petitions thereafter. Separate bar dates for certain other government claims are November 23, 2004, February 1, 2005 and February 15, 2005 for the Debtors that filed Chapter 11 petitions on May 27, 2004, August 5, 2004 and August 20, 2004, respectively. In accordance with the bar date notices approved by the Bankruptcy Court, holders of certain pre-petition claims against the Debtors are required to file a proof of claim on or prior to the applicable bar date to be eligible to participate in any distribution of assets from the Debtors in connection with a plan of reorganization.

Over 2,000 claims totaling approximately $1,350,000 were filed prior to the general bar dates. Until such claims are investigated and resolved, the ultimate number and amount of allowed claims cannot be determined.

The Debtors have been engaged in the process of evaluating the proofs of claim filed in their Chapter 11 cases to determine whether objections seeking the disallowance, reclassification, or the reduction of certain asserted claims should be filed. As a result of this review, on September 21, 2004, the Debtors filed their first objection to claims (the “First Omnibus Objection”). Pursuant to the First Omnibus Objection, the Bankruptcy Court disallowed, expunged, or subordinated approximately 91.6% of the Claims filed in the Chapter 11 cases. A majority of the claims subject to the First Omnibus Objection related to the Debtors’ common stock or debt securities. Certain of the larger claims as to which objections have been or may be filed are proofs of claim filed by International Business Machines Corporation (“IBM”), the Kemper Insurance Companies (“Kemper Insurance”), and Merrill Lynch Pierce Fenner & Smith, Inc. (“Merrill”). The Debtors have determined that they will object to the majority of the remaining claims on the basis that such claims are claims against non-Debtor entities and, accordingly, were improperly asserted against one of the Debtors in the Chapter 11 cases.

On or about August 11, 2004, IBM filed proofs of claim (the “IBM Proofs of Claim”) in the Chapter 11 cases of each of RCN, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation, and TEC Air, Inc. (collectively, the “Initial Debtors”). The IBM Proofs of Claim filed in the Chapter 11 Case of RCN asserts a claim in the amount of $37.6 million. The remaining IBM Proofs of Claim are asserted in an unliquidated amount. The IBM Proofs of Claim assert that certain Debtors have been and continue to infringe one or more of IBM's patents. After a review of the IBM Proofs of Claim, the Debtors believe that the IBM Proofs of Claim relate to the internet operations of a non–Debtor affiliate. Accordingly, the Debtors believe that none of the Debtors, including the subsidiary Debtors, are potentially liable to IBM. Furthermore, the Debtors believe that IBM's alleged claims of patent infringement are without merit.

On or about August 9, 2004, Kemper Insurance (including its affiliated companies, American Motorists Insurance Company, Lumbermens Mutual Casual Company, American Protection Insurance Company, and American Manufacturing Mutual Company) filed proofs of claim in an unliquidated amount in the Chapter 11 Cases of each of the Initial Debtors (the “Kemper Proofs of Claim”). Through the Kemper Proofs of Claim, Kemper seeks an unliquidated amount for unpaid premiums and other charges in connection with certain insurance policies, claims processing agreements and other agreements between Kemper Insurance and one or more of the Debtors. The Debtors believe that claims alleged by the Kemper Proofs of Claim are without merit. To the extent that any money is in fact owed to Kemper, the Debtors further believe that such amounts are owed solely by RCN and that none of RCN’s subsidiaries are liable for such amounts. On September 28, 2004, the Debtors filed an objection to the Kemper Proofs of Claim. Since the filing of the objection, RCN and Kemper have engaged in discussions in an attempt to resolve the claims of Kemper. The hearing with respect to this objection is currently scheduled for November 16, 2004.

On or about August 11, 2004 and September 28, 2004, Merrill filed proofs of claim in the amount of $9.8 million in the Chapter 11 Cases of each of the Debtors (the “Merrill Proofs of Claim”). Through the Merrill Proofs of Claim, Merrill seeks $9.8 million, plus additional fees, costs, expenses, attorney’s fees, and other amounts related to potential losses that may accrue, on account of financial advisory fees allegedly due under an engagement agreement among Merrill and the Debtors (the “Engagement Agreement”). Merrill asserts that under the terms of the Engagement Agreement, Merrill became entitled to all fees which had been earned but were unpaid prior to the Petition Date of the Initial Debtors. The Debtors believe that claims alleged by the Merrill Proofs of Claim are without merit. Furthermore, the Debtors hold certain claims against Merrill in connection with the services Merrill provided pursuant to the Engagement Agreement. On, November 12, 2004, the Debtors and certain of RCN’s non-debtor subsidiaries initiated an action against Merrill in the Bankruptcy Court to, among other things, object to the Merrill Claims in their entirety, seek disgorgement of payments made to Merrill, and recover money damages.

In the event that the claims of IBM, Kemper and Merrill, together with other claims of creditors asserted against any of RCN’s debtor subsidiaries, exceed $500 in the aggregate, the confirmation of the plans of reorganization for the Debtors other than RCN could be delayed. In addition, IBM, Kemper and Merrill have all indicated that, to the extent their claims are not fully resolved and/or satisfied by the Debtors, they could pursue such claims against one or more non-Debtor subsidiaries of RCN.

The following table summarizes the components of the liabilities classified as Liabilities subject to compromise in the unaudited condensed consolidated balance sheets:

The unaudited condensed combined financial statements of the Debtors are presented below. These statements reflect the financial position, results of operations and cash flows of the combined Debtors, including certain amounts and activities between

the Debtors and non-Debtor subsidiaries of the Company which are eliminated in the Company’s unaudited condensed consolidated financial statements. The unaudited condensed combined financial statements of the Debtors are presented as follows:

RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation

TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV, Inc.

21st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc.

RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation

TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV, Inc.

21st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc.

RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation

TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV, Inc.

21st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc.

As of the Petition Date, the Company ceased accruing interest on certain unsecured pre-petition debt classified as Liabilities subject to compromise in the unaudited condensed consolidated balance sheets in accordance with SOP 90-7. Interest at the stated contractual amount on pre-petition debt that was not charged to results of operations for the three months ended September 30, 2004 was approximately $28,671 and the period May 27, 2004 through September 30, 2004 was approximately $39,670.

As of the Petition Date, the Company ceased accreting interest and recording dividends on its Series A and B Preferred stock in the unaudited condensed consolidated statement of operations in accordance with SOP 90-7. Interest and dividends at the stated contractual amount on the Series A and B Preferred stock that was not charged to results of operations for the three months ended September 30, 2004 was approximately $33,961 and the period May 27, 2004 through September 30, 2004 was approximately $46,890.

The Company is currently a party to various legal proceedings, including those noted below. While it currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s net loss in the period in which the ruling occurs. The estimate of the potential impact from the following legal proceedings on the Company’s financial position or overall results of operations could change in the future.

As previously reported, Newtown Borough, Pennsylvania (the “Borough”) has served notice on the Company’s subsidiary, RCN-Telecom Services of Philadelphia, Inc. (“RCN-Philadelphia”) alleging breach of the cable television franchise agreement between RCN-Philadelphia and the Borough, on the ground that RCN-Philadelphia failed to complete construction and fully activate the cable system within the time required pursuant to the franchise agreement and also failed to complete an Institutional Network pursuant to the agreement. As a result of the alleged breach, the Borough Council entered a judgment against RCN-Philadelphia in the amount of $2,530 representing the Borough’s alleged damages through the end of the franchise term. On June 29, 2004, RCN-Philadelphia and Newtown Borough executed a settlement agreement to settle all of the claims relating to the franchise agreement and related litigation. The settlement included termination of the franchise and payment of an amount, which is not material, to the Borough.

As previously reported, in November 2001, Newtown Township, Pennsylvania (the “Township”) served notice on the Company’s subsidiary, RCN-Philadelphia alleging breach of the cable television franchise agreement between RCN-Philadelphia and the Township, on the ground that RCN-Philadelphia failed to complete construction and fully activate the cable system within the time required pursuant to the franchise agreement and also failed to complete an Institutional Network pursuant to the agreement. As a result of the alleged breach, the Township’s Board of Supervisors entered a judgment against RCN-Philadelphia in the amount of $2,192 representing the Township’s alleged damages through the end of the franchise term. On September 13, 2004, RCN-Philadelphia and Newtown Township executed a settlement agreement to settle all of the claims relating to the franchise agreement and related litigation. The settlement included termination of the franchise and payment of an amount, which is not material, to the Township.

As previously reported, in December 2003, the Company’s subsidiary, RCN Cable TV of Chicago, Inc. (“RCN-Chicago”) filed a modification petition under the provisions of Section 625 of the Communications Act of 1934, 47 U.S.C. Section 545, with the City of Chicago’s Cable Television Commission (the “Commission”) seeking modification of certain of the franchise agreements with the City of Chicago (the “City”). Notwithstanding the filing of the modification petition, in February 2004, the Commission declared the Company in default of the obligations of the franchise agreements for failure to construct in certain areas of the City and to make certain payments to the Chicago Access Corporation (“CAC”). As a result of these alleged defaults, the Commission assessed multiple fines, some of which were retroactive to January 7, 2004, and some continuing through the end of the franchise terms in the year 2015. Although the precise calculation of the assessments is impossible to discern from the Commission’s resolutions, it has been reported that the Commission believes that they amount to approximately $1 million per day in the aggregate. In connection with these claims, the City has drawn down the RCN-Chicago’s letters of credit and demanded payment in full on the performance bonds posted pursuant to the franchise agreements.

On April 9, 2004, the Commission denied RCN-Chicago’s modification petition. On August 5, 2004, RCN-Chicago filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York. Concurrently, RCN and RCN-Chicago also sought relief, including injunctive relief, from the Bankruptcy Court under the Communications Act and the Bankruptcy Code. Specifically, RCN and RCN-Chicago have alleged that the Commission’s actions in assessing damages and fines and drawing down the letters of credit were illegal and improper under Section 625 of the Communications Act, that they constituted improper discrimination under Section 525 of the Bankruptcy Code, and that certain of the City’s actions violated applicable state law and the terms of the franchise agreements. RCN and RCN-Chicago have sought injunctive relief to compel the City to cease making demand on RCN-Chicago’s performance bonds and to restore the letters of credit. The complaint further seeks to reverse the improper denial by the Commission of the modification petition by seeking modification of the franchise agreements under the Communications Act.

The City, RCN and RCN-Chicago have agreed to a standstill with respect to the performance bonds pending a hearing before the Bankruptcy Court and have reached an agreement in principle with the City to settle the disputes. That settlement agreement will not be effective until a number of conditions are met, including approval by the Chicago City Council and the Bankruptcy Court, and a resolution of RCN-Chicago’s disputes with CAC. The RCN Companies cannot provide assurances that these conditions will be met. The Company therefore cannot provide assurances that it will reach a satisfactory resolution with the City or that, if it does not obtain satisfactory settlement of these disputes such relief would be obtained from the federal court proceedings. To the extent that the City is ultimately successful either in asserting a right to penalties at the level imposed by the Commission or in obtaining a judgment requiring RCN-Chicago to complete construction of the remaining areas of the City, such result(s) would have a material adverse effect on RCN-Chicago.

As previously reported, on June 1, 2004, the City of Daly City, California (“Daly City”) served a Notice to Correct Violation of Franchise Agreement and of Intent to Impose Liquidated Damages on the Company’s subsidiary, RCN Telecom Services, Inc. (“RCN-Telecom”), alleging breach of the cable television system franchise between Daly City and RCN-Telecom on the ground that RCN-Telecom had failed to complete construction of its cable network to all residents of Daly City by January 6, 2004. As a result of the breach, Daly City assessed liquidated damages in the amount of $200 for each day that the system was not completed commencing from January 6, 2004. On September 27, 2004, RCN-Telecom and Daly City entered into a Memorandum of Understanding to settle all claims arising out of RCN’s inability to meet the build-out obligations of the cable television franchise and related litigation. The settlement included release of all Daly City’s claims arising out of RCN-Telecom’s inability to meet the build-out obligations, including any and all rights to collect liquidated damages or other penalties, for the duration of the franchise agreement, and payment of an amount, which is not material, to Daly City.

The Company’s subsidiary, RCN-Chicago, like most if not all other cable providers, currently does not pay a franchise fee to the City on its high-speed data services on the basis that the FCC has determined that such Internet services are not “cable services” as defined in the Communications Act. RCN-Chicago’s position has been challenged by the City, which has brought suit against the Company, as well as AT&T Broadband (now Comcast), the incumbent cable operator in RCN-Chicago’s franchise service areas, and the other franchised cable television operator in the City (together the “Defendants”). The Defendants removed the action to federal court and succeeded in obtaining dismissal of the action on the ground that high-speed data service, as a matter of law, is not a “cable television service” within the scope of their franchise agreements with the City. Subsequently, the City successfully appealed the removal to federal District Court and the District Court’s dismissal of its case to the U.S. Seventh Circuit Court of Appeals, and the case has been remanded for further proceedings in the Circuit Court for Cook County, Illinois. RCN-Chicago will continue to vigorously defend its position in this action but can provide no assurances that the Defendants will prevail. In the event the City were ultimately to prevail on its complaint, RCN-Chicago would be required to pay the franchise fee on its high-speed data revenues and therefore to pass through the additional fees to its high-speed data service customers. Because any adverse result will affect all of RCN-Chicago’s facilities-based cable competitors in the Chicago market, such a ruling would likely not have any material adverse effect on RCN-Chicago’s ability to compete with those providers in the Chicago market. However, it would adversely affect RCN-Chicago’s ability to compete with satellite video distributors who are not subject to franchise fees. The Company also notes that this question is one of nationwide significance to local franchising authorities and cable television franchisees, and is the subject of litigation between other local franchising authorities and cable providers in other jurisdictions. Consequently, the ultimate result of all these actions, including the action brought by the City, will likely determine whether the Company’s high-speed data service fees are required to be included as cable service revenues for purposes of franchise fee payments.

Edward T. Joyce, as representative of former stockholders and warrant holders (including LaSalle options holders) of 21st Century Telecom Group, Inc. v. RCN Corporation and RCN Telecom Services of Illinois, Inc. Edward T. Joyce, as representative of the former stockholders and warrant holders of 21st Century Telecom Group, Inc. (“21st Century”) has sued RCN Corporation in the Delaware Court of Chancery. Mr. Joyce is a former member of the Board of Directors of 21st Century. RCN acquired the stock of 21st Century pursuant to an Agreement and Plan of Merger that closed in April 2000 (the “Merger Agreement”). Pursuant to the Merger Agreement, RCN held back 10% of its common stock consideration (the “10% Holdback”) for a period of one year to allow for any indemnity claims. The Merger Agreement stated that the 10% Holdback would be based upon RCN’s stock price at the time the Merger Agreement was executed. The suit seeks reformation of the Merger Agreement to reflect what Plaintiff alleges was actually negotiated and agreed to: that the 10% Holdback would be based upon RCN’s stock price as of the end of the one year holdback period. Because RCN’s stock had fallen in value during this period, if Plaintiff prevails RCN would have to distribute approximately 5 million additional shares in consideration of the Merger Agreement. RCN has filed a motion to dismiss this matter.

In February, 2000, RCN-BecoCom and Level 3 Communications, LLC entered into a participants agreement relating to construction of certain facilities in Boston, Massachusetts. RCN-BecoCom notified Level 3 that it was withdrawing from participation in certain of the segments prior to the commencement of construction of those segments. Level 3 has disputed RCN-BecoCom’s right to withdraw and has demanded payment for RCN-BecoCom’s share of the charges for that construction in the amount of $1.7 million. Negotiations between RCN-BecoCom and Level 3 to resolve this dispute have been unsuccessful. On July 12, 2004, Level 3 filed a demand for arbitration under the participants agreement. The parties are in the process of selecting arbitrators. RCN-BecoCom believes that it has valid defenses to the claims by Level 3, but can make no assurances that RCN-BecoCom will be successful in the arbitration proceeding.

On October 15, 2004, RCN Telecom Services of Washington D.C., Inc. elected to acquire the remaining 50% interest in Starpower Communications LLC (“Starpower”) that it did not already own from Pepco Communications, L.L.C. (“PEPCO”) for $29 million. On October 22, 2004, RCN filed a motion with the Bankruptcy Court seeking approval of an amendment to the Deutsche Bank commitment to increase the new first lien loan facility by $20 million, such increase is expected to be used in connection with the purchase of the Starpower interest from PEPCO.

Certain officers and directors have been named as defendants in three class action suits relating to alleged breach of fiduciary duties in relation to management of RCN’s Savings & Stock Ownership Plan (“401(k) Plan”) during the periods from April 1, 2000 to the present. The suits, styled Debra Craig v. John D. Filipowicz, et al, (Civil Action No. 04-CV-07875, U.S. District Court for the Southern District of New York), filed October 9, 2004, Stephanie Thomas v. David C. McCourt, et al, (Civil Action No. 04-5068, U.S. District Court for the District of New Jersey), filed October 15, 2004, Robert M. Maguire v. John D. Filipowicz, et al, (Civil Action No. 1:04-cv-08454, U. S. District Court for the Southern District of New York), filed October 27, 2004 and Harold Hill v. David C. McCourt, et al, (Civil Action No. 04-5368(SRC), U.S. District Court for the District of New Jersey), filed November 3, 2004, allege that the defendants, as fiduciaries of the 401(k) Plan, breached their duties as fiduciaries under the Employee Retirement and Income Security Act, 29 U.S.C. Section 1132. Many of the named defendants in these cases are officers and/or directors of RCN or its subsidiaries and as such may be entitled to indemnification from RCN for costs incurred in defense of such litigation and any award to the plaintiffs resulting from such litigation. The Company has tendered these cases to its insurance carrier for defense and expects to vigorously defend against these claims. At this time, RCN cannot predict the outcome of these cases or whether, if judgment were entered against some or all of the defendants in these cases, such an award to the plaintiffs would be material.

RCN Corporation and its consolidated subsidiaries, as a reporting company, are subject to the informational requirements of the Exchange Act and accordingly file an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K 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, the Company’s 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. The 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 the Company’s website as soon as reasonably practicable after these reports are electronically filed or furnished to the SEC. The address of that website is http://www.rcn.com/investor/secfilings.php. Additionally, the Company’s filings with the Bankruptcy Court can be accessed electronically. The address of that website is http://www.bsillc.com.

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes for the period ended September 30, 2004, and with the audited financial statements and notes included in the Company’s December 31, 2003 Annual Report on Form 10-K (the “Annual Report”) and Amendment No. 1 thereto filed on Form 10-K/A with the SEC.

RCN Corporation (referred to, together with its subsidiaries, unless the context requires otherwise, as “RCN” or the “Company”), Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation, TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. (collectively “the Debtors”) have filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation and TEC Air, Inc. each filed Chapter 11 petitions on May 27, 2004. RCN Cable TV of Chicago, Inc. filed its Chapter 11 petition on August 5, 2004. RCN Entertainment, Inc., ON TV, Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. each filed Chapter 11 petitions on August 20, 2004. The cases of all of the Debtors are jointly administered under case number 04-13638 (RDD). The Debtors are currently operating their business as debtors-in-possession pursuant to the Bankruptcy Code.

On August 20, 2004, RCN and certain other Debtors filed the Plan and Disclosure Statement with the Bankruptcy Court. On October 13, 2004 the Bankruptcy Court entered an order approving the Disclosure Statement as amended for all of the Debtors. In addition, on October 13, 2004, the Bankruptcy Court entered an order approving the Debtors’ solicitation procedures motion, which authorizes the Debtors to solicit votes pursuant to the Disclosure Statement to approve the Plan from certain creditors and interest holders. A copy of the Plan and Disclosure Statement is available at www.rcnplan.com or by contacting Financial Balloting Group LLC at (646) 282-1800.

At this time, it is not possible to predict the effect of the Chapter 11 reorganization process on the Company’s business, various creditors and security holders, or when the Debtors will emerge from Chapter 11. The Company’s future results are dependent on its obtaining the Bankruptcy Court’s confirmation of, and the Company’s implementing, a plan of reorganization.

On May 26, 2004, the Company entered into a commitment letter with Deutsche Bank pursuant to which Deutsche Bank has committed to provide the Company with new financing upon the consummation of the plan of reorganization. The new financing is expected to consist of (i) a $310 million first lien facility, including a $285 million term loan facility and a $25 million letter of credit facility, and (ii) a $150 million second lien facility. On October 22, 2004, RCN filed a motion with the Bankruptcy Court seeking approval of an amendment to the Deutsche Bank commitment to increase the new first lien term loan facility by $20 million. Each of the facilities will be guaranteed by all of RCN’s wholly owned domestic subsidiaries and secured by substantially all the assets of RCN and its wholly owned domestic subsidiaries, including the domestic subsidiary that owns the 49.83% interest in Megacable. Each of the facilities will contain prepayment provisions, covenants and events of default customary for facilities of this nature. Closing and funding for each of the facilities is subject to satisfaction of customary conditions precedent for facilities of this nature. In addition, the financing to be provided by Deutsche Bank is subject to material conditions that must be satisfied as of December 31, 2004 and include consummation of a plan of reorganization, no material adverse effect on the business, operations, financing or finances of RCN and its subsidiaries, no material change in market conditions or on the ability of Deutsche Bank to syndicate the new financing and the achievement of certain financial performance criteria.

On November 3, 2004, the Company received commitments to purchase, subject to Bankruptcy Court approval, the Second Lien notes from D.E. Shaw Laminar Lending II, Inc. and certain members of the Company’s creditors committee. The Second Lien Notes will also be offered to creditors of the Company who are institutional “accredited investor” within the meaning of Rule 501 of the Securities Act. The term of the Second-Lien Notes will be 7 ½ years, provided, however, in no event will the maturity date occur on or after the maturity date of the Company’s restructure Evergreen credit facility (see Liquidity and Capital Resources for additional discussion regarding the restructured Evergreen credit facility). The interest rate on the Second Lien Notes is 7.5%, payable semiannually on July 15 and January 15, commencing on July 15, 2005.

The restructuring, as currently contemplated in the Disclosure Statement approved by the Bankruptcy Court on October 13, 2004, will result in a conversion of the Company’s outstanding Senior Notes into equity and an extremely significant, if not complete, dilution of current equity.

As a result of the current financial position of the Company, there are a number of material risks and uncertainties surrounding its operating results, including those associated with Chapter 11. There are also numerous material operational risks inherent in the telecommunications industry. Each of these risks and uncertainties could have a material adverse impact on the Company’s financial condition and operating results. The information contained in the Report, particularly the risk factors, should be carefully reviewed along with other documents filed with the SEC. Some of the statements and information contained in the Report are “forward-looking,” outlining future expectations or projections of results of operations or financial conditions. Such forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those outlined in the Report. The forward-looking information is based on information currently available to Management. The risks and uncertainties described below can be summarized into three main areas: the Company’s present financial condition, operational issues inherent in the telecommunication industry and managing through the restructuring process. Actual results could differ materially from anticipated results contained in any forward-looking statements in the Report if the Company fails to do any of the following:

In addition, any restructuring of the Company may have an adverse effect on the Company’s ability to retain and utilize certain tax attributes, including net operating loss carry-forwards and certain built-in losses and deductions.

In addition to the above risk factors, the Company believes that there are risks associated with the remediation of significant deficiencies as defined under Section 404 of the Sarbanes-Oxley Act (“Section 404”). The Company has experienced recent turnover of key employees in positions responsible for maintaining its disclosure controls and internal controls over financial

reporting. Additionally, there were vacancies in key positions in the Company’s internal audit function at September 30, 2004. In updating the evaluation of disclosure controls and internal controls over financial reporting as of September 30, 2004, the Company identified certain significant deficiencies, as outlined in Item 4 (a.), that have remained unremediated after a period of time.

The Company is in the process of retaining the services of an outside consulting firm to assist in testing internal controls associated with the requirements delineated in Section 404. The Company also plans to retain the services of another independent registered public accounting firm to act as a consultant for fresh start accounting as well as Section 404 remediation. Additionally, the Company is about to engage a consulting firm to act as its internal audit function. Given the Company’s turnover of key employees, the work associated with completing a valuation of the business and application of fresh start accounting as it emerges from bankruptcy, work associated with completing the contemplated purchase of Starpower and the associated effort needed to remedy the significant deficiencies in disclosure and internal controls, the Company may not be able to fully remedy these deficiencies by December 31, 2004.

The Company is not obligated to publicly update any forward-looking statement due to new information or as the result of future events.

Except as discussed in Note 4, Change in Accounting Estimates, to the Unaudited Condensed Consolidated Financial Statements, there has been no change to the Company’s critical accounting policies and use of estimates that are reported in the December 31, 2003 Annual Report on Form 10-K.

The Company delivers bundled communication services, including local and long distance telephone, video programming (including digital cable and high definition television), and data services (including high speed and dial-up Internet access) primarily to residential customers over a broadband network predominantly owned by the Company. The Company reports its results as one reportable segment based on the manner in which it manages the business. The dollar amounts discussed in this section are in thousands, except where otherwise noted. Statistics and other disclosed non-dollar amounts are in whole numbers.

ResiLink^SM , Power^SMand Essentials^SM are the brand names of the bundled service offerings of cable television, phone and high-speed Internet available to residential customers for a flat monthly rate. MegaModem^SM is the brand name of the Company’s high capacity modem for customers looking to download movie videos, MP3 music files and other web-based forms of entertainment. In addition to bundled service offerings, the Company sells cable television, phone, high-speed cable modem and dial-up Internet to residential customers on an a-la-carte basis. The Company also provides communication services to commercial customers using the broadband network in markets where it serves residential customers. The Company’s business plan calls for continuing to improve customer profitability, by migrating customers to the Company’s higher margin products and services, and achieving further reductions in direct operating and general and administrative expenses through continuous improvements in operations.

The Company delivers its services over a predominantly owned high-speed, high-capacity, fiber-optic network. The network is a hybrid broadband fiber-optic platform. This fiber-rich architecture brings the Company’s broadband network to customers, with typically fewer electronics than existing incumbent cable companies.

The Company provides 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. The Company also serves the Lehigh Valley in Pennsylvania, and until March 8, 2004, served the communities in and around Carmel, NY. RCN was also the incumbent franchised cable operator in many communities in central New Jersey until these operations were sold on February 19, 2003. (See Note 5, Discontinued Operations, to the Unaudited Condensed Consolidated Financial Statements.) The Company holds 50% membership interest in Starpower, a joint venture with PEPCO, which serves the Washington D.C. metropolitan market.

To increase market entry and gain access to Right of Ways, the Company formed key alliances in the Boston and Washington D.C. markets.

RCN was one of the two members of RCN-BecoCom, LLC (“RCN-BecoCom”). NSTAR and certain of its subsidiaries (“NSTAR”), pursuant to an agreement with RCN, converted its ownership interest in RCN-BecoCom into shares of the Company’s Common stock as a result of three exchanges of NSTAR’s interest in RCN-BecoCom for that stock. As of December 24, 2003, a total of 11,597,193 shares, or 9.49%, of the Company’s common stock, were held by NSTAR. NSTAR’s profit and

loss sharing ratio in RCN-BecoCom was reduced to zero in 2002 upon the completion of the third exchange. However, NSTAR retained its investment percentage and the right to invest in future capital calls by RCN-BecoCom as if it owned a 29.76% interest. The investment percentage was also subject to decrease to the extent NSTAR failed to meet future capital calls or NSTAR disposed of any such RCN Common Stock. In connection with the exchange, NSTAR on behalf of itself and controlled affiliates, complied with the “standstill” restrictions for the period of one year from June 19, 2002, including refraining from further acquisitions of the Company’s Common stock beyond 10.75% in aggregate of the total number of voting shares and refraining from activities designed to solicit proxies or otherwise influence shareholders or management of RCN. On December 24, 2003 NSTAR notified the Company that it voluntarily and unconditionally waived, surrendered and discharged any and all ownership interest in both RCN-BecoCom and in the shares of the Company’s stock held by NSTAR.

RCN-BecoCom and NSTAR entered into a Construction and IRU Agreement dated as of June 17, 1997 and amended June 19, 2002. Under the agreement, NSTAR provides construction and construction management services to RCN-BecoCom and access to and use of portions of NSTAR’s broadband network, rights of way and certain equipment sites in the Boston metropolitan area. The cost of such services provided to RCN-BecoCom by NSTAR are believed to be equivalent to that which would be obtained from third party contractors.

Despite NSTAR’s surrendering its ownership interest in the joint venture and the Company’s Common stock, the shares of RCN Common stock previously held by NSTAR are treated as outstanding as of September 30, 2004, since NSTAR has not specifically assigned them to the Company. NSTAR’s contractual relationship with the Company under the IRU Agreement remains in effect.

RCN continues to own and operate RCN-BecoCom as a wholly owned subsidiary. The financial results of RCN-BecoCom are consolidated in the Company’s financial statements, and since June 19, 2002 the Company’s profit and loss sharing ratio in the joint venture has been 100%.

RCN and PEPCO are each 50% owners of Starpower, which constructs and operates a broadband network and telecommunications business in the Washington, D.C. metropolitan area, including parts of Virginia and Maryland. Through other subsidiaries, PEPCO is engaged in regulated utility operations and in diversified competitive energy and telecommunications businesses. The Starpower joint venture is accounted for in the financial statements under the equity method of accounting and the Company’s pro-rata portion of Starpower’s operating results is included in the equity in income (loss) of unconsolidated entities line.

On January 24, 2004, PEPCO announced its intention to sell its 50% percent interest in Starpower as part of its ongoing efforts to redirect its focus on energy related investments. On October 15, 2004, RCN Telecom Services of Washington D.C., Inc. elected to acquire the remaining 50% interest in Starpower that it did not already own from PEPCO for $29 million. On October 22, 2004, RCN filed a motion with the Bankruptcy Court seeking approval of an amendment to the Deutsche Bank commitment to increase the new first lien loan facility by $20 million, such increase is expected to be used in connection with the purchase of the Starpower interest from PEPCO. In 1997, Starpower and PEPCO entered into an agreement for the lease of certain portions of PEPCO’s fiber system and under which PEPCO provides construction and construction management services to Starpower. The costs of such services provided by RCN and PEPCO to Starpower are believed to be equivalent to those that would be obtained from third party contractors. Starpower’s agreement with PEPCO remains in effect.

The Company reports its results as one reportable operating segment, which contains many shared expenses generated by the various revenue streams. Shared expenses incurred on a single network are not allocated to the Company’s revenue streams, as any such allocation would be costly, impractical and arbitrary. Management monitors the financial and operational performance of the Company in a way that differs 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. The use of non-GAAP financial disclosures represents management’s view of the total consolidated, operational results.

The following unaudited non-GAAP financial summary, highlights the results of operations on a consolidated basis for the three and nine months ended September 30, 2004, had Starpower been consolidated with the Company’s financial statements for these periods:

RCN Corporation (referred to, together with its subsidiaries, unless the context requires otherwise, as “RCN” or the “Company”), Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation, TEC Air, Inc., RCN Cable TV of Chicago, Inc., RCN Entertainment, Inc., ON TV Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. (collectively “the Debtors”) have filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). RCN Corporation, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation and TEC Air, Inc. each filed Chapter 11 petitions on May 27, 2004. RCN Cable TV of Chicago, Inc. filed its Chapter 11 petition on August 5, 2004. RCN Entertainment, Inc., ON TV, Inc., 21^st Century Telecom Services, Inc. and RCN Telecom Services of Virginia, Inc. each filed Chapter 11 petitions on August 20, 2004. The cases of all of the Debtors are jointly administered under case number 04-13638 (RDD). The Debtors are currently operating their business as debtors-in-possession pursuant to the Bankruptcy Code.

On August 20, 2004, RCN and certain other Debtors filed the Plan, and Disclosure Statement with the Bankruptcy Court. On October 13, 2004, the Bankruptcy Court entered an order approving the Disclosure Statement, as amended, for all of the Debtors. In addition, on October 13, 2004, the Bankruptcy Court entered an order approving the Debtors’ solicitation procedures motion, which authorizes the Debtors to solicit votes pursuant to the Disclosure Statement to approve the Plan from certain creditors and interest holders.

election) and 100% of the new common stock of reorganized RCN, subject to dilution by (a) the exercise of the management incentive options and the new warrants and (b) the conversion of any convertible second-lien notes, (iv) the distribution to holders of subsidiary general unsecured claims of cash equal to 100% of the amount of each allowed subsidiary general unsecured claim and (v) if the holders of RCN general unsecured claims as a class vote to accept the Plan, the distribution of (a) new warrants to purchase common stock of reorganized RCN in an amount equal to 1.75% of the new common stock to holders of preferred interests if the holders of preferred interests, voting as a class, vote to accept the plan and (b) new warrants to purchase common stock of reorganized RCN in an amount equal to .25% of the new common stock to holders of common stock equity interests. Thus, the new warrants will be exercisable into two percent of the new common stock of reorganized RCN (before giving effect to the management incentive options and conversion of any convertible second-lien notes) at a strike price of $34.16 per share.

The confirmation and effectiveness of the Plan are subject to material conditions precedent. There can be no assurance that those conditions will be satisfied. The foregoing summary is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan.

On May 27, 2004, RCN announced that it had entered into a commitment letter with Deutsche Bank pursuant to which Deutsche Bank has committed to provide the Company with new financing upon the consummation of a plan of reorganization. The specific terms of the financial commitment are discussed in Note 3, Operations and Liquidity, below. In addition, the financing to be provided by Deutsche Bank is subject to material conditions that must be satisfied as of December 31, 2004 and, include consummation of a plan of reorganization, no material adverse financial effect on the business, operations, financing or finances of RCN and its subsidiaries, no material change in market conditions or on the ability of Deutsche Bank to syndicate the new financing and the achievement of certain financial performance criteria. There can be no assurances that the conditions to the financing will be met.

At this time, it is not possible to predict the effect of the Chapter 11 reorganization process on the Company’s business, various creditors and security holders, or when the Debtors will emerge from Chapter 11. The Company’s future results are dependent on its obtaining the Bankruptcy Court’s confirmation of, and the Company’s implementing, a plan of reorganization.

Approximately 97.4% of the Company’s revenue for the three months ended September 30, 2004 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 fees or high-speed data services, dial up telephone modems, web hosting and dedicated access. The remaining 2.6% of revenue is derived mostly from reciprocal compensation. For the nine months ended September 30, 2004, approximately 97.8% of the Company’s revenue is attributable to its primary services, while 2.2% is derived mostly from reciprocal compensation.

Expenses primarily consist of direct expenses, operating, selling and general and administrative expenses, stock-based compensation, depreciation and amortization, and interest expense. Direct expenses include the cost of providing services such as cable programming, franchise costs and network access fees. Operating, selling and general and administrative expenses 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.

In connection with the Company’s fourth quarter 2003 asset impairment assessment, the Company reviewed the useful life estimates of its long-lived assets. The Company capitalizes the cost of technical labor and material associated with the installation of new customers. Effective January 1, 2004, the Company changed the useful life of these assets to 5 years from 10. This represents a change in accounting estimate. The change resulted in $13,368 of additional depreciation expense for the three months ended September 30, 2004 and $56,171 for the nine months ended September 30, 2004.

The Company continually reviews its facility requirements against lease obligations to identify excess space and opportunities to consolidate, exit or sublease excess facilities. As transactions occur, exit costs are recognized accordingly. During three months ended September 30, 2004, the Company recorded net recoveries of $1,450 due to favorable settlements of lease commitments associated with exited facilities. For the nine months ended September 30, 2004, the Company recorded net recoveries of $3,371. (See Note 6, Impairment Charges and Accrued Exit Costs, to the Unaudited Condensed Consolidated Financial Statements.)

Three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003, presented in thousands:

Total revenues for the three months ended September 30, 2004 increased $6,367, or 5.5%, to $121,358 from $114,991 for the three months ended September 30, 2003. Revenues from residential customers receiving voice, video and high-speed data increased $6,536, or 6.3%, to $109,729 for the three months ended September 30, 2004 from $103,194 for the three months ended September 30, 2003. The rate of revenue growth in the current quarter represents a decline from the 12.3% and 8.0% increase reported for the three months ended March 31, 2004 and June 30, 2004, respectively, as the Company continues to face increased competition in all markets. While the average number of customers decreased slightly for the quarter, services per residential customer increased to 2.51 for the three months ended September 30, 2004, or 7.7% from 2.33 services per residential customer for the comparable period in 2003. The growth in services resulted from increases in network connections for voice, video and high-speed data of 2.9%, 0.6% and 17.6%, respectively. Additionally, video revenues reflect the benefit of rate increases implemented in the first quarter of 2004.

Total revenues for the nine months ended September 30, 2004 increased $16,852, or 4.9%, to $363,899 from $347,047 for the nine months ended September 30, 2003. Revenues from residential customers receiving voice, video and high-speed data increased $26,734, or 8.8%, to $329,592 for the nine months ended September 30, 2004 from $302,858 for the nine months ended September 30, 2003. While the average number of customers decreased slightly for the nine-month period, services per residential customer increased to 2.46 for the nine months ended September 30, 2004, or 7.0% from 2.30 services per residential customer for the comparable period in 2003. The growth in services resulted from increases in network connections for voice, video and high-speed data of 4.7%, 1.7% and 24.6%, respectively.

Dial-up revenues for the three and nine months ended September 30, 2004 declined 10.0% and 20.4% as customers migrate to high-speed data products to access the Internet. Commercial revenues for the three months ended September 30, 2004 increased 4.6%, as increases in transport related revenues more than offset declines in the Company’s wholesale long-distance business. For the nine months ended September 30, 2004, declines in the Company’s wholesale long-distance business outpaced increases in other commercial revenues.

Reciprocal compensation and other revenues, which is largely comprised of reciprocal compensation, declined $41, or 1.3%, for the three months ended September 30, 2004 reflecting lower reciprocal compensation rates being paid by the incumbent local exchange carriers. For the nine months ended September 30, 2004, reciprocal compensation and other revenues was $6,722, or 45.8% lower than the comparable period in 2003. The Company adopted a change in accounting estimate in the first quarter of 2003 surrounding the recognition of reciprocal compensation. When this change in accounting estimate was adopted, approximately $4,100 of the reciprocal compensation was recorded related to services rendered in calendar 2002. Excluding the amount related to 2002, reciprocal compensation and other revenues for the nine months ended September 30, 2004 declined $2,622 reflecting lower reciprocal compensation rates.

The increase in direct expenses for the three and nine months ended September 30, 2004 is mainly attributable to higher video costs resulting from increases in video connections and programming rates and higher television production costs. The decrease in direct voice and high-speed data expenses for the nine months ended September 30, 2004, reflect operating efficiencies resulting from network optimization.

Operating, selling, and general and administrative expenses decreased $8,817 or 11.8%, to $65,791 for the three months ended September 30, 2004. During the current period, the Company reached favorable settlements on several obligations under its franchise agreements, and reversed provisions of $4,282 associated with these agreements. Additionally, the Company reversed

approximately $1,700 relating to its short-term bonus plan. Operating, selling, and general and administrative expenses decreased $36,023 or 16.0%, to $189,497 for the nine months ended September 30, 2004. In addition to the quarter items discussed above, during the nine-month period, as a result of the Chapter 11 process, the Chairman’s Bonus Plan was consolidated into the Key Employee Retention Plan. As of September 30, 2004, $5,109 was reversed which represents the amount associated with the Chairman’s Plan. Additionally, during the nine months ended September 30, 2004, the Company reached favorable settlements on disputed property taxes and litigation on Newtown Borough, and reversed provisions of $1,000 and $2,530, respectively.

In addition to the non-recurring items discussed above, lower expenses for the three and nine months ended September 30, 2004, in all areas other than marketing and advertising, reflect the Company’s continued implementation of plans to reduce general and administrative expenses. Customer service operations were consolidated into one call center in September 2003, which resulted in personnel and facilities savings. The reductions in operating, general and administrative expenses are mainly due to a reduction of personnel and lower information technology expenses. The increase in marketing and advertising during the three and nine months ended September 30, 2004 is due to increase direct mail and outdoor advertising costs. Components of Operating, selling, general and administrative expenses are as follows:

The non-cash stock-based compensation decreased $2,054, or 65.8%, to $1,069 for the three months ended September 30, 2004 and $4,268, or 53.6%, to $3,702 for the nine months ended September 30, 2004. The continued decrease in expense is due to fewer stock option grants with lower fair values.

Depreciation and amortization expense for the three months ended September 30, 2004, increased $3,002, or 5.7%, to $55,691 from $52,689. Depreciation and amortization expense for the nine months ended September 30, 2004 increased $35,748 or 24.1% to $184,105 from $148,357. The increase in both periods is due to additional depreciation due to the change in accounting estimate adopted on January 1, 2004 (See Note 4, Change in Accounting Estimates, to the Unaudited Condensed Consolidated Financial Statements.) and depreciation on new capital expenditures, partially offset by, the effect of previous disposition and impairment in the value of network construction materials, equipment and leasehold improvements as network expansion plans were curtailed to preserve capital.

The decreases in investment income for the three and nine months ended September 30, 2004 reflect the decline in average cash, temporary cash investments, short-term investments and restricted investments compared to prior periods in 2003.

The decrease in interest expense for the three and nine months ended September 30, 2004 reflects the Company’s implementation of Statement of Position 90-7 (“SOP 90-7”), Financial Reporting by Entities in Reorganization under the Bankruptcy Code. On May 27, 2004 the Debtors filed voluntary petitions for reorganization under Chapter 11. The Company stopped recording interest on its Senior Notes and Senior Discount Notes as it considers this debt a pre-petition liability subject to compromise and does not anticipate paying the interest accrued beyond date of the Chapter 11 filing.

Other income (expense), net of ($304) for the three months ended September 30, 2004 decreased from $644 primarily due to a gain recorded by the Company of approximately $933 during the three month ended September 30, 2003, relating to the increase

in the value associated with an investment the Company marked to market. For the nine months ended September 30, 2004, the decrease in other income (expense), net also reflects a gain recorded from the buyout of a capital lease during the nine months ended September 30, 2004.

Reorganization items represent expenses the Company has incurred as a result of its negotiations to restructure the balance sheet and subsequent Chapter 11 filing. In accordance with SOP 90-7, these expenses have been reclassified on the statement of operations.

Equity in income (loss) of unconsolidated entities decreased $9,391 to ($1,661) for the three months ended September 30, 2004 from $7,730. The results included a loss from Starpower of $1,661. For the nine months ended September 30, 2004, equity in income (loss) of unconsolidated entities decreased $5,106, or 27.7%, to $13,311, representing income from Megacable of $17,182 and a loss from Starpower of ($3,871). Results presented for the three months ended September 30, 2004, do not include estimated income from Megacable. The results for the nine months ended September 30, 2004 include estimated income from Megacable. Actual results could vary from these estimates.

On March 8, 2004, the Company completed the sale of its Carmel, NY (“Carmel”) cable system for proceeds of approximately $120,203 and a gain on the sale of approximately $89,778. The transaction was structured as an asset purchase, with the buyer assuming certain liabilities related to the business. Approximately $5,000 was placed into escrow for future claims of the buyer. As of September 30, 2004, $2,000 was reserved against the escrow based on the initial claims received from the buyer. In accordance with the Fifth Amendment to the Credit Facility (see Liquidity and Capital Resources for discussion regarding the Fifth Amendment), proceeds of approximately $62,400 were applied as a partial pay-down of the Company’s Credit Facility. In addition, approximately $44,858 of the net proceeds were placed into a collateral account that is restricted to prepay term loans under the Company’s Credit Facility or for the purchase of telecommunication assets, by the terms of the senior secured bank facility. In accordance with SFAS No. 144, the results of operations for Carmel are reported as discontinued operations.

On February 19, 2003, the sale of the central New Jersey cable system assets was completed. At the time of the sale, the Company recorded a gain of $165,134 net of taxes. On February 9, 2004, the Company agreed to accept $10,800 of the $14,690 escrow and to forgo the remaining as settlement of all purchase price adjustment claims. At December 31, 2003, the Company reflected an adjustment to the gain on sale to reflect the settlement agreement. In addition, the Company recorded net income of $2,860 from operations of the system from January 1, 2003 to February 19, 2003. In accordance with the Credit Facility, 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 Facility, or (ii) to purchase telecommunications assets and/or for working capital if the Company does 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.

On May 27, 2004, August 5, 2004 and August 20, 2004, respectively, the Debtors filed voluntary petitions for reorganization under Chapter 11. The Debtors are currently operating their business as debtors-in-possession pursuant the Bankruptcy Code.

In connection with the Chapter 11 filings, RCN has obtained a waiver from its existing Lenders that waives any events of default caused by the Chapter 11 filings and amends the minimum cash requirements under its existing senior secured credit facility. The Debtors have also obtained Bankruptcy Court authorization to use the existing Lenders’ cash collateral to fund ongoing operations and administrative expenses, subject to certain terms and conditions agreed upon with the existing Lenders, which include the following: unrestricted cash must be used first based on a 13 week cash flow budget, a 13 week cash flow budget must be provided to the Administrative Agent for the Lenders monthly, certain minimum cash balance

requirements must be met and additional reporting requirements to the Administrative Agent for the Lenders summarizing the results of operations. The current authorization to use cash collateral expires on November 19, 2004. The Company is currently in discussions with the Lenders to extend the authorization to use cash collateral on a consensual basis. There can be no assurance that the Company will be able to obtain authority to use cash collateral beyond November 19, 2004.

At this time, it is not possible to predict the effect of the Chapter 11 reorganization process on the Company’s business, various creditors and security holders, or when the Debtors will emerge from Chapter 11. Although the Disclosure Statement has been approved by the Bankruptcy Court, the Plan remains subject to Bankruptcy Court approval and satisfaction of Bankruptcy Code requirements, including requisite stakeholder approval. Additionally, consummation of the Plan remains subject to a number of conditions typical in similar reorganizations, including closing of the Deutsche Bank exit facility.

The ultimate recovery, if any, by creditors and shareholders will not be determined until confirmation of a plan of reorganization. No assurance can be given as to the value, if any, which will be ascribed in the bankruptcy proceedings to any of these constituencies. The restructuring, as currently contemplated, will result in a conversion the Company’s outstanding Senior Notes into equity and an extremely significant, if not complete, dilution of current equity. Accordingly, RCN urges appropriate caution be exercised with respect to existing and future investments in any of its securities.

Available cash and temporary cash investments was approximately $28,003 at September 30, 2004. In addition, at September 30, 2004 approximately $100,000 of cash was restricted under the terms of the Company’s Credit Facility and approximately $31,014 was restricted as collateral for letters of credit and deposits related to insurance claims. Because the Company’s cash and cash equivalents at September 30, 2004 and projected 2004 cash flows from operations are not sufficient to meet its anticipated cash needs for working capital, capital expenditures and other activities for the next twelve months, there is substantial doubt about the Company’s ability to continue as a going-concern.

During the nine months ended September 30, 2004, net cash increased by $9,608. Net cash provided by operating activities of $27,182 consisted of $190,893 in adjustments to reconcile net losses for non-cash items, which included $184,105 in depreciation and amortization, $7,542 for losses on accounts receivable, offset by equity in income in unconsolidated entities of $13,311. Furthermore, working capital provided $83,271. Investing activities provided $82,283 primarily from the sale of Carmel offset by property, plant and equipment. The Company repaid $99,857 of its long-term debt obligations.

At September 30, 2004 there were no outstanding loans 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, 2004, there were $15,000 in letters of credit outstanding under the Revolver and the Company also had letters of credit outside the Revolver of $16,444 collateralized by restricted cash. As of September 30, 2004, a total of $407,964 was outstanding under Terms loans A and B.

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, 2004 approximately $30,548 was outstanding under the Evergreen Facility.

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 $2,952 at September 30, 2004.

As set forth in the Disclosure Statement RCN proposes to modify and reinstate the Evergreen Facility (the “Restructured Facility”). The maturity date will be 7 ¾ years from the Effective Date. From the Effective Date through and including March 31, 2006, the interest rate will be 12.5% payable quarterly in-kind. The interest rate from April 1, 2006 through and including the maturity date, will be 6.25% payable quarterly in cash and 6.95% payable quarterly in-kind, provided however that in any quarter, the Debtors may elect, with Deutsche Bank’s consent, to pay the full amount of interest for that quarter in cash at a rate of 12.5%. Mandatory prepayment provisions will be modified to the extent necessary so that they are no more favorable to Evergreen than similar provisions in the Deutsche Bank Facility and the Second Lien Notes. Liens will be subordinated to the Deutsche Bank Facility and the Second Lien Notes obligation on terms substantially similar to those currently set forth in the Evergreen Credit Facility. Representations, warranties, covenants, and events of default will be modified as necessary so that the terms of the Restructured Facility are no more restrictive to the Debtors and its subsidiaries than the terms of the Deutsche Bank Facility and the Second Lien Notes. The covenants will be additionally modified to permit the incurrence of the obligations in respect of the Deutsche Bank Facility and the Second Lien Notes.

At September 30, 2004, the Company had the following other commercial commitments:

The Company has two tranches of redeemable Preferred stock, Series A and Series B. At September 30, 2004 the Company had paid cumulative dividends in the amount of $651,972 in the form of additional Series A and B Preferred Stock. At September 30, 2004 the number of common shares that would be issued upon conversion of the Series A and B Preferred stock was 33,344,068.

September 30, 2004 and for the period May 27, 2004 through September 30, 2004 was approximately $33,961 and $46,890, respectively.

The Company 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. RCN currently has no items that relate to “trading portfolios”. Under the “other than trading portfolios” the Company does have four short-term investment portfolios categorized as available for sale securities that are stated at cost, which approximates market, and which are re-evaluated at each balance sheet date and one portfolio that is categorized as held to maturity which is an escrow account against a defined number of future interest payments related to the Company’s 10% Senior Discount Notes. These portfolios consist of Federal Agency notes, Commercial Paper, Corporate Debt Securities, Certificates of Deposit, U.S. Treasury notes, and Asset Backed Securities. The Company believes there is limited exposure to market risk due primarily to the small amount of market sensitive investments that have the potential to create material market risk. Furthermore, RCN’s internal investment policies have set maturity limits, concentration limits, and credit quality limits to minimize risk and promote liquidity. RCN does not include trade accounts payable and trade accounts receivable in the “other than trading portfolio” because their carrying amounts approximate fair value.

The objective of the Company’s “other than trading portfolio” is to invest in high quality securities and seeks to preserve principal, meet liquidity needs, and deliver a suitable return in relationship to these guidelines.

The Company, with participation of its CEO and CFO, has performed an evaluation of disclosure controls and internal controls over financial reporting as of the end of the period covered by this quarterly report. As reported in the 2003 Annual Report filed with the SEC on Form 10-K, given the impending restructuring and associated employee turnover, significant deficiencies in internal controls in the areas of non-customer payment processing, technical capital labor and customer adjustments were identified and communicated to the Company’s Audit Committee as reportable conditions. Additionally, as reported on the 10-Q/A Amendment No. 1 for the three months ended March 31, 2004, material internal control weaknesses were reported surrounding the training of existing personnel, who are taking on additional responsibilities, in the use of accounting software. The Company has enhanced policies and procedures surrounding technical capital labor and non-customer deposits, and is in the process of putting in place enhanced policies and procedures to address customer adjustments and remediating weaknesses surrounding software training.

The Company has experienced recent turnover of key employees in positions responsible for maintaining its disclosure controls and internal controls over financial reporting. Additionally, there were vacancies in key positions in the Company’s internal audit function at September 30, 2004. In updating the evaluation of disclosure controls and internal controls over financial reporting as of September 30, 2004, the Company identified certain significant deficiencies in the following areas:

The Company has performed substantive procedures to ensure that the known and estimable financial impact of the reportable conditions described in this Item 4 (a) have been recorded in the financial statements for the period ended September 30, 2004. Based upon these procedures, the Company, CEO and CFO have concluded that as of the end of such period, its disclosure controls are effective, except those disclosure controls relative to the Company’s 48.93% ownership interest in Megacable.

As previously reported, in December 2003, RCN-Chicago filed a modification petition under the provisions of Section 635 of the Communications Act of 1934, 47 U.S.C. Section 545, with the City of Chicago’s Cable television commission (the “Commission”) seeking modification of certain of the franchise agreements with the City of Chicago (the “City”). Notwithstanding the filing of the modification petition, in February 2004, the Commission declared the Company in default of certain obligations of the franchise agreements for failure to construct in certain areas of the City and to make certain payments to the Chicago Access Corporation (“CAC”). As a result of these alleged defaults, the Commission assessed multiple fines, some of which were retroactive to January 7, 2004 and some continuing through the end of the franchise terms in the year 2015. Although the precise calculation of the assessments is impossible to discern from the Commission’s resolutions, it has been reported that the Commission believes that they amount to approximately $1 million per day in the aggregate. In connection with these claims, the City has drawn down the RCN-Chicago’s letters of credit and demanded payment in full on the performance bonds posted pursuant to the franchise agreements.

On April 9, 2004, the Commission denied RCN-Chicago’s modification petition. On August 5, 2004, RCN-Chicago filed a voluntary petition for reorganization under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York. Concurrently, RCN and RCN-Chicago also sought relief, including injunctive relief, from the Bankruptcy Court under the Communications Act and the Bankruptcy Code. Specifically, RCN and RCN-Chicago have alleged that the Commission’s actions in assessing damages and fines and drawing down the letters of credit were illegal and improper under section 544 of the Communications Act, that they constituted improper discrimination under section 525 of the Bankruptcy Code, and that certain of the City’s actions violated applicable state law and the terms of the franchise agreements. RCN and RCN-Chicago have sought injunctive relief to compel the City to cease making demand on RCN-Chicago’s performance bonds and to restore the letters of credit. The complaint further seeks to reverse the improper denial by the Commission of the modification petition by seeking modification of the franchise agreements under the Communications Act.

the remaining claims on the basis that such claims are claims against non-Debtor entities and, accordingly, were improperly asserted against one of the Debtors in the Chapter 11 cases.

On or about August 11, 2004, IBM filed proofs of claim (the “IBM Proofs of Claim”) in the Chapter 11 cases of each of RCN, Hot Spots Productions, Inc., RCN Finance, LLC, RLH Property Corporation, and TEC Air, Inc. (collectively, the “Initial Debtors”). The IBM Proofs of Claim filed in the Chapter 11 Case of RCN asserts a claim in the amount of $37.6 million. The remaining IBM Proofs of Claim are asserted in an unliquidated amount. The IBM Proofs of Claim assert that certain Debtors have been and continue to infringe one or more of IBM’s patents. After a review of the IBM Proofs of Claim, the Debtors believe that the IBM Proofs of Claim relate to the internet operations of a non-Debtor affiliate. Accordingly, the Debtors believe that none of the Debtors, including the subsidiary Debtors, are potentially liable to IBM. Furthermore, the Debtors believe that IBM’s alleged claims of patent infringement are without merit.

On or about August 11, 2004 and September 28, 2004, Merrill filed proofs of claim in the amount of $9.8 million in the Chapter 11 Cases of each of the Debtors (the “Merrill Proofs of Claim”). Through the Merrill Proofs of Claim, Merrill seeks $9.8 million, plus additional fees, costs, expenses, attorney’s fees, and other amounts related to potential losses that may accrue, on account of financial advisory fees allegedly due under an engagement agreement among Merrill and the Debtors (the “Engagement Agreement”). Merrill asserts that under the terms of the Engagement Agreement, Merrill became entitled to all fees which had been earned but were unpaid prior to the Petition Date of the Initial Debtors. The Debtors believe that claims alleged by the Merrill Proofs of Claim are without merit. Furthermore, the Debtors hold certain claims against Merrill in connection with the services Merrill provided pursuant to the Engagement Agreement. On November 12, 2004, the Debtors and certain of RCN’s non-debtor subsidiaries initiated an action against Merrill in the Bankruptcy Court to, among other things, object to the Merrill Claims in their entirety, seek disgorgement of payments made to Merrill, and recover money damages.

For a discussion of the Company’s other pending legal proceedings, see Part I Item 3 of the Company’s December 31, 2003 Annual Report on Form 10-K and Amendment No. 1 thereto filed on Form 10-K/A, previously filed with the SEC.

For a discussion of the current defaults on certain of the Company’s Senior Notes, See Part I, Item 2, Management’s Discussion and Analysis, particularly discussion of Liquidity and Capital Resources.

On March 25, 2004, Local 1101, Communications Workers of America (“CWA”) filed a petition with the New York Region (also known as Region 2) of the National Labor Relations Board (“NLRB”) seeking union representation of certain technical employees in the Company’s New York Market. The Company objected to the petition, and on April 7, 8, 14, and 15, 2004, a formal hearing was held before a hearing officer designated by the NLRB’s Regional Director for Region 2. On May 7, 2004, the Regional Director issued a Decision and Order Dismissing Petition (“Order of Dismissal”). The Order of Dismissal dismissed the CWA’s petition on the grounds that the unit of employees petitioned for by the CWA “does not constitute a unit appropriate for collective bargaining.” The CWA had fourteen (14) days to appeal the Order of Dismissal to the NLRB in Washington, D.C. No such appeal has been filed and the time to file such appeal has lapsed. The Company can provide no assurances at this time as to the ultimate outcome of the CWA’s efforts to unionize certain employees. The Company intends to continue to respond legally and proactively to unionization attempts. The Company’s goal is to retain the direct working relationship with its employees which the Company believes is necessary to meet its daily business challenges.

Updating Form 10-K, Part III, Item 10. Directors and Executive Officers of the Registrant

On July 21, 2004, the Company announced that David C. McCourt, Chairman and Chief Executive Officer of RCN, will lead a search committee to identify and select a successor to serve as RCN’s chief executive officer subject to approval by the new equity holders. Mr. McCourt will retain his role as Chairman of the Board and continue to act as Chief Executive Officer until the selection of that successor.

On July 1, 2004, the Company entered into a separation agreement with W. Terrell Wingfield, Jr., Senior Vice President – Legal Affairs. The separation agreement provided for Mr. Wingfield to continue to be paid his base salary of $225 and medical insurance coverage for a period of six months, (the “Severance Period”). During the Severance Period, any previously granted restricted stock and options will continue to vest. Following the expiration of the Severance Period, Mr. Wingfield will have ninety days to exercise any vested options or they will be deemed forfeited. In addition, upon the consummation of the Chapter 11 case filed by the Company, Mr. Wingfield will receive a cash bonus of $90.

The Company entered into a separation agreement with Michael J. Angi, Senior Vice President, Operations effective September 3, 2004. As a Tier 1 Participant under the terms of the RCN Corporation Key Employee Retention and Severance Plan, Mr. Angi will be paid severance in an amount equal to his base salary of $240 for a period of up to twelve months, (six months of this severance payment would be mitigated against any other income received), will receive medical insurance coverage for the duration of this severance period and upon the consummation of the Chapter 11 case filed by the Company Mr. Angi will receive a cash bonus of $96.

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 15, 2004

/s/ PATRICK T. HOGAN

Patrick T. Hogan

Executive Vice President and Chief Financial Officer


Class A Common stock		110,280,710

Class B Common stock		11,424,810



		Page

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003	1

	Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003	2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 3.	Defaults Upon Senior Securities	39

Item 5.	Other Information	40

Item 6.	Exhibits	40

SIGNATURES		41

CERTIFICATIONS


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues	$	121,358		$	114,991		$	363,899		$	347,047
Costs and expenses, excluding non-cash stock based compensation, depreciation and amortization
Direct expenses		45,560			41,080			130,921			123,291
Operating and selling, general and administrative		65,791			74,608			189,497			225,520
Non-cash stock based compensation		1,069			3,123			3,702			7,970
Impairments (recoveries) and other charges, net (Note 6)		(1,450	)		25,371			(1,688	)		31,948
Depreciation and amortization		55,691			52,689			184,105			148,357

Operating loss		(45,303	)		(81,880	)		(142,638	)		(190,039	)
Investment income		633			1,724			2,218			5,418
Interest expense (contract expense of $44,170 and $126,782 for the three and nine months ended September 30, 2004, respectively (Note 15))		15,499			43,496			87,112			138,401
Gain on early extinguishment of debt		—			45,733			—			45,733
Other income (expense), net		(304	)		644			129			9,082

Loss from continuing operations before reorganization items and income taxes		(60,473	)		(77,275	)		(227,403	)		(268,207	)
Reorganization items, net (Note 12)		12,947			—			29,644			—
Income tax benefit		—			(12	)		—			—

Loss from continuing operations before equity in unconsolidated entities		(73,420	)		(77,263	)		(257,047	)		(268,207	)
Equity in income (loss) of unconsolidated entities		(1,661	)		7,730			13,311			18,417

Net loss from continuing operations		(75,081	)		(69,533	)		(243,736	)		(249,790	)
Discontinued operations, net of tax of $0 (Note 5)
Income (loss) from discontinued operations, (including net gain (loss) on disposal of ($67), $155, $88,120 and $166,144, in the three and nine months ended September 30, 2004 and 2003, respectively)		(364	)		2,704			89,744			174,125

Net loss		(75,445	)		(66,829	)		(153,992	)		(75,665	)
Preferred dividend and accretion requirements (contract dividend and accretion of $33,961 and $99,792 for the three and nine months ended September 30, 2004, respectively (Note 16))		—			43,705			52,902			128,946

Net loss to common shareholders	$	(75,445	)	$	(110,534	)	$	(206,894	)	$	(204,611	)

Basic and diluted loss per common share (Note 9)
Net loss from continuing operations	$	(0.61	)	$	(1.02	)	$	(2.43	)	$	(3.42	)

Net income from discontinued operations		0.00			0.02			0.73			1.57

Net loss to common shareholders	$	(0.61	)	$	(1.00	)	$	(1.70	)	$	(1.85	)

Weighted average shares outstanding, basic and diluted		122,267,810			111,401,962			122,268,090			110,712,231


	September 30, 2004			December 31, 2003
ASSETS
Current Assets:
Cash and temporary cash investments	$	28,003		$	18,395
Short-term investments		68,398			—
Accounts receivable from related parties		6,254			13,329
Accounts receivable, net of reserve for doubtful accounts of $3,425 and $5,923		44,271			45,378
Unbilled revenues		695			1,105
Interest receivable		1,089			1,170
Prepayments and other current assets		21,841			33,064
Short-term restricted investments		—			134,205
Current assets of discontinued operations		—			2,375

Total current assets		170,551			249,021
Property, plant and equipment, net of accumulated depreciation of $1,013,995 and $900,458		751,550			908,009
Investments in joint ventures and equity securities		212,107			202,095
Intangible assets, net of accumulated amortization of $18,141 and $18,266		1,373			1,503
Goodwill, net of accumulated amortization of $10,530 and $10,530		6,130			6,130
Long-term restricted investments		131,014			100,000
Deferred charges and other assets		25,953			34,430
Noncurrent assets of discontinued operations		—			28,168

Total assets	$	1,298,678		$	1,529,356

LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Current maturities of long-term debt (Note 7)	$	448,429		$	1,654,585
Accounts payable		25,771			22,697
Accounts payable to related parties		3,142			3,715
Advance billings and customer deposits		28,753			26,906
Accrued exit costs (Note 6)		10,834			38,095
Accrued expenses		90,896			140,205
Current liabilities of discontinued operations		—			3,330

Total current liabilities		607,825			1,889,533

Other deferred credits		6,315			6,398
Liabilities subject to compromise (Note 13)		1,205,165			—
Commitments and contingencies
Redeemable preferred stock, Series A, convertible, par value $1 per share; 708,000 shares authorized, 353,289 and 347,213 shares issued and outstanding, respectively (Note 16)		350,362			340,293
Redeemable preferred stock, Series B, convertible, par value $1 per share; 2,681,931 shares authorized, 1,222,250 and 1,201,228 shares issued and outstanding, respectively (Note 16)		1,474,850			1,432,017
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, 112,163,061 and 112,151,560 shares issued and 110,846,501 and 110,835,000 shares outstanding, respectively		112,163			112,152
Class B Common stock, par value $1 per share, 400,000,000 shares authorized, 11,424,810 issued and outstanding		11,425			11,425
Additional paid-in-capital		2,153,614			2,150,418
Cumulative translation adjustments		(17,288	)		(13,990	)
Unearned compensation expense		(90	)		(342	)
Unrealized (depreciation) appreciation on investments		(126	)		240
Treasury stock, 1,260,254 and 1,316,560 shares at cost		(10,166	)		(10,310	)
Accumulated deficit		(4,595,371	)		(4,388,478	)

Total shareholders’ deficit		(2,345,839	)		(2,138,885	)

Total liabilities, redeemable preferred stock and shareholders’ deficit	$	1,298,678		$	1,529,356


	For the Nine months ended September 30, 2004			For the Nine months ended September 30, 2003
Cash flows from operating activities
Net loss	$	(153,992	)	$	(75,665	)
Income from discontinued operations		(1,624	)		(7,981	)
Gain on sale of discontinued operation		(88,120	)		(166,144	)

Net loss from continuing operations		(243,736	)		(249,790	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Accretion of discounted debt		2,692			13,386
Amortization of financing costs		7,851			13,410
Non-cash stock based compensation expense		3,702			7,970
Gain on sale of assets		—			(8,118	)
Gain on early extinguishment of debt					(45,733	)
Depreciation and amortization		184,105			148,357
Deferred income taxes, net		—			(2,503	)
Provision for losses on accounts receivable		7,542			11,248
Equity in income of unconsolidated entities		(13,311	)		(18,417	)
Impairments (recoveries) and special charges		(1,688	)		31,948

		(52,843	)		(98,242	)
Net change in working capital		83,271			(62,301	)

Net cash provided by (used in) continuing operations		30,428			(160,543	)
Cash (used in) provided by discontinued operations		(3,246	)		1,906

Net cash provided by (used in) operating activities		27,182			(158,637	)

Cash flows from investing activities:
Additions to property, plant and equipment		(37,518	)		(49,499	)
(Increase) decrease in short-term investments		(68,398	)		227,641
Proceeds from sale of assets		—			2,628
Proceeds from sale of discontinued operations		120,203			242,844
Discontinued operations		(402	)		(2,191	)
Decrease (increase) in investments restricted for debt service		68,398			(224,156	)

Net cash provided by investing activities		82,283			197,267

Cash flows from financing activities:
Repayment of long-term debt		(98,780	)		(53,493	)
Repayment of capital lease obligations		(1,077	)		(1,427	)
Payments made for debt financing costs		—			(13,995	)
Proceeds from the issuance of long-term debt		—			27,806
Proceeds from the exercise of stock options		—			53

Net cash used in financing activities		(99,857	)		(41,056	)

Net increase (decrease) in cash and temporary cash investments		9,608			(2,426	)
Cash and temporary cash investments at beginning of period		18,395			49,365

Cash and temporary cash investments at end of period	$	28,003		$	46,939

Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of $461 and $681 capitalized as of September 30, 2004 and 2003, respectively)	$	23,370		$	104,582

Income taxes	$	—		$	86


	Three Months Ended September 30,					Nine Months Ended September 30,
	2004			2003		2004		2003
Revenues	$	—		$	7,317	$	5,928	$	21,369
Direct expenses		3			2,395		1,853		6,834
Operating and selling, general and administrative, and depreciation and amortization expense		287			2,447		2,513		9,143
(Loss) Income before tax		(290	)		2,513		1,566		5,445
(Loss) Income after tax	$	(290	)	$	2,513	$	1,566	$	5,445


	December 31, 2003
Current assets
Accounts receivable from related parties	$	19
Accounts receivable, net of reserve for doubtful accounts		2,221
Other current assets		135

Current assets of discontinued operations	$	2,375

Noncurrent assets
Property, plant and equipment, net	$	28,168

Noncurrent assets of discontinued operations	$	28,168

Current liabilities
Accounts payable from related parties	$	16
Account payable		293
Advance billings and customer deposits		662
Deferred revenue		616
Accrued liabilities		1,743

Current liabilities of discontinued operations	$	3,330


	Exit Costs
	Franchise			Facility			Total
Balance, December 31, 2003	$	16,833		$	21,262		$	38,095
Additional accrued costs		40			2,507			2,547
Recoveries		(622	)		(6,956	)		(7,578	)
Payments		(1,157	)		(2,073	)		(3,230	)

Balance, March 31, 2004		15,094			14,740			29,834

Additional accrued costs		150			913			1,063
Recoveries		(2,530	)		(1,012	)		(3,542	)
Payments		(33	)		(1,807	)		(1,840	)

Balance, June 30, 2004		12,681			12,834			25,515

Additional accrued costs		960			51			1,011
Recoveries		(4,282	)		(1,501	)		(5,783	)
Reclass to liabilities subject to compromise		(7,268	)		—			(7,268	)
Payments		(938	)		(1,703	)		(2,641	)

Balance, September 30, 2004	$	1,153		$	9,681		$	10,834


	September 30, 2004		December 31, 2003
Long-term Debt Not Subject to Compromise:
Term Loans	$	407,964	$	506,744
Evergreen Facility		30,548		27,252
Senior Notes 10% due 2007		—		160,879
Senior Discount Notes 11.125% due 2007		—		315,995
Senior Discount Notes 9.8% due 2008		—		290,289
Senior Discount Notes 11% due 2008		—		139,472
Senior Notes 10.125% due 2010		—		202,871
Capital Leases		9,917		11,084

Total Debt Not Subject to Compromise		448,429		1,654,585
Due with in one year		448,429		1,654,585

Total Long-Term Debt	$	—	$	—

Long-term Debt Subject to Compromise:
Senior Notes 10.00% due 2007		160,879		—
Senior Discount Notes 11.125% due 2007		315,995		—
Senior Discount Notes 9.80% due 2008		290,289		—
Senior Discount Notes 11.00% due 2008		139,472		—
Senior Notes 10.125% due 2010		202,871		—

Total Debt Subject to Compromise	$	1,109,506	$	—


For the period October 1, 2004 through December 31, 2004	$	12,974
For the year ended December 31, 2005		69,210
For the year ended December 31, 2006		206,629
For the year ended December 31, 2007		122,943
For the year ended December 31, 2008		36,673

	$	448,429


	Three Months Ending September 30,						Nine Months Ending September 30,
	2004			2003			2004			2003
	Granted	Fair Value		Granted	Fair Value		Granted	Fair Value		Granted	Fair Value
ISO	—	$	—	—	$	—	—	$	—	111,200	$	88
OSO	—	$	—	—	$	—	—	$	—	750,000	$	423


	Three Months Ended September 30, 2004			For the Period May 27, 2004 through September 30, 2004
Revenues	$	1,276		$	1,276
Cost and expenses		1,846			1,882
Non-cash stock based compensation		1,069			1,575
Depreciation and amortization		7			7
Reorganization items, net (Note 13)		12,947			15,691

Operating loss		(14,593	)		(17,879	)
Interest expense (contract interest of $44,126 and $58,572 (Note 15))		15,455			18,902
Other expense		40			54

Loss before income taxes		(30,088	)		(36,835	)
(Benefit)/provision for income taxes		—			—
Equity in the (loss) income of non-combined subsidiaries		(45,357	)		(43,256	)

Net loss	$	(75,445	)	$	(80,091	)


	For the Period May 27, 2004 through September 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		($80,091	)
Non-cash stock based compensation		1,575
Equity loss of non-combined subsidiaries		43,257
Amortization of financing costs		2,147

Net cash used in operating activities		(33,112	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt		(24,490	)
Intercompany receipts from non-combined subsidiaries, net		57,643

Net cash (used in) financing activities		33,153

Net increase/(decrease) in cash and temporary cash investments		41
Beginning cash & temporary cash investments		775

Ending cash & temporary cash investments	$	816


	Three Months Ended September 30, 2004									Nine Months Ended September 30, 2004
	RCN Including Starpower ⁽¹⁾			Less Starpower ⁽²⁾			RCN GAAP			RCN Including Starpower ⁽¹⁾			Less Starpower ⁽²⁾			RCN GAAP
Total sales	$	140,719		$	19,361		$	121,358		$	422,801		$	58,902		$	363,899
Total direct costs		51,174			5,614			45,560			147,458			16,537			130,921

Margin		89,545			13,747			75,798			275,343			42,365			232,978
Total operating and selling, general and administrative costs		76,039			10,248			65,791			220,317			30,820			189,497

Adjusted EBITDA ⁽³⁾		13,506			3,499			10,007			55,026			11,545			43,481
Non-cash stock-based compensation		1,069			—			1,069			3,702			—			3,702
Impairment and special charges		(1,450	)		—			(1,450	)		(1,688	)		—			(1,688	)
Depreciation and amortization		62,133			6,442			55,691			203,468			19,363			184,105

Operating loss	$	(48,246	)	$	(2,943	)	$	(45,303	)	$	(150,456	)	$	(7,818	)	$	(142,638	)


	Three Months Ended September 30, 2004									Nine Months Ended September 30, 2004
	2004		2003		Change			%		2004		2003		Change			%
Residential
Voice	$	33,328	$	34,006						$	101,593	$	102,065
Video		54,693		49,441							161,925		147,448
High-speed Data		20,693		18,653							62,732		50,811
Advertising		1,015		1,094							3,342		2,534

Total	$	109,729	$	103,194		6,536		6.3	%	$	329,592	$	302,858		26,734		8.8	%
Commercial & Other
Dial-up		3,218		3,577		(359	)	-10.0	%		10,738		13,493		(2,755	)	-20.4	%
Commercial		5,270		5,038		231		4.6	%		15,618		16,023		(405	)	-2.5	%
Reciprocal compensation & Other		3,142		3,182		(41	)	-1.3	%		7,951		14,673		(6,722	)	-45.8	%

	$	121,358	$	114,991	$	6,367		5.5	%	$	363,899	$	347,047	$	16,852		4.9	%

Average customers		382,231		385,694		(3,462	)	-0.9	%		385,620		386,435		(816	)	-0.2	%
Average services per customer		2.51		2.33							2.46		2.30

	Average Residential Monthly Revenue per Customer
	Three Months Ended September 30, 2004									Nine Months Ended September 30, 2004
	2004		2003		Change			%		2004		2003		Change			%
Residential	$	95.69	$	89.18	$	6.51		7.3	%	$	94.97	$	87.08	$	7.89		9.1	%


	Three Months Ended September 30,							Nine Months Ended September 30,
	2004		2003		Change			2004		2003		Change
Voice	$	8,893	$	8,272	$	(621	)	$	24,085	$	28,402	$	4,317
Video		31,103		29,201		(1,902	)		95,240		83,627		(11,613	)
High-speed data		3,918		3,140		(778	)		8,967		10,141		1,174
Other		1,646		467		(1,179	)		2,629		1,121		(1,508	)

	$	45,560	$	41,080	$	(4,480	)	$	130,921	$	123,291	$	(7,630	)


Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Senior Notes ⁽¹⁾	$	—	$	—	$	—	$	—	$	—
Interest on aggregate debt ⁽²⁾		12,579		178		4,846		7,555		—
Term Loans and Evergreen Facility		438,512		12,600		272,688		153,224		—
Capital Leases		9,919		374		3,151		565		5,829
Operating Leases		218,116		4,925		44,038		55,008		114,145
Nonbinding purchase and other commitments ⁽³⁾		46,877		46,877		—		—		—

Total Contractual Obligations	$	726,003	$	64,954	$	324,723	$	216,352	$	119,974


Other Commercial Commitments	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Letters of Credit - Collateralized by Revolver	$	15,000	$	15,000	$	—	$	—	$	—
Letters of Credit - Collateralized by Restricted Cash		16,444		69		1,189		125		15,061

Total Contractual Obligations	$	31,444	$	15,069	$	1,189	$	125	$	15,061



3.1		Amended Certificate of Incorporation of RCN Corporation incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed on August 11, 1998.

3.2		Amended and Restated ByLaws of RCN Corporation incorporated by reference to Exhibit 3.7 to the Company’s annual report on Form 10-K filed on March 29, 2002.

31.1		Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chairman and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.