UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-16805

 

RCN Corporation

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		22-3498533 (I.R.S. Employer Identification No.)
196 Van Buren Street, Herndon, VA (Address of principal executive offices)		20170 (Zip Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer		þ Accelerated filer		o Non-accelerated filer		o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No þ

The number of shares of the registrant’s common stock, par value of $0.01 per share, outstanding at August 6, 2010 was 35,741,528.

 

 

RCN CORPORATION AND SUBSIDIARIES
FORM 10-Q
Table of Contents

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009			4
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			33
SIGNATURES			34
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Cautionary Statement Regarding Forward-Looking Statements

Certain of the statements contained in this Form 10-Q (“Report”) constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the current views of RCN Corporation (“RCN” or the “Company”) with respect to current events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “could,” “should,” and “continue” or similar words. These forward-looking statements may also use different phrases. From time to time, RCN also provides forward-looking statements in other materials RCN releases to the public or files with the Securities and Exchange Commission (“SEC”), as well as oral forward-looking statements. You should consult any further disclosures on related subjects in RCN’s Annual Reports on Form 10-K, Quarterly Reports of Form 10-Q and Current Reports on Form 8-K filed with the SEC.

While we believe the judgments we have made with respect to forward-looking statements are reasonable, you should understand that these statements are not guarantees of future performance or results and such forward-looking statements are and will be subject to many risks, uncertainties and factors, which may cause RCN’s actual results to be materially different from such forward-looking statements. Factors that could cause RCN’s actual results to differ materially from these forward-looking statements include, but are not limited to, the following:

•

our ability to operate in compliance with the terms of our financing facilities (particularly the financial covenants);

•

our ability to maintain adequate liquidity and produce sufficient cash flow to fund our capital expenditures and debt service;

•

our ability to attract and retain qualified management and other personnel;

•

our ability to maintain current price levels;

•

our ability to acquire new customers and retain existing customers;

•

changes in the competitive environment in which we operate, including the emergence of new competitors;

•

changes in government and regulatory policies;

•

deterioration in and uncertainty relating to economic conditions generally and, in particular, affecting the markets in which we operate;

•

pricing and availability of equipment and programming;

•

our ability to obtain regulatory approvals and to meet the requirements in our license agreements;

•

our ability to complete the proposed merger described herein;

•

our ability to complete acquisitions or divestitures and to integrate any business or operation acquired;

•

our ability to enter into strategic business relationships;

•

our ability to overcome significant operating losses;

•

our ability to expand our operating margins;

•

our ability to develop products and services and to penetrate existing and new markets;

•

technological developments and changes in the industry; and

•

the risks discussed in Part 1, Item 1A “Business-Risk Factors” in our Annual Report for the 2009 fiscal year, filed on March 9, 2010, or our “Annual Report”.

Statements in this Report and the exhibits to this Report should be evaluated in light of these important factors and you should not unduly rely on these forward-looking statements. RCN is not obligated to, and undertakes no obligation to publicly update any forward-looking statement due to actual results, changes in assumptions, new information or future events.

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

RCN CORPORATION AND SUBSIDIARIES

		For the three months ended								For the six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues		$	194,624			$	192,332			$	384,727			$	381,559
Costs and expenses:
Direct expenses			71,275				69,291				143,481				139,573
Selling, general and administrative (including stock-based compensation of $2,595, $2,117, $5,664, and $4,511)			72,550				69,643				140,533				138,704
Exit costs and restructuring charges, net			(178	)			7				(134	)			302
Depreciation and amortization			37,764				50,857				74,660				99,570
Operating income		$	13,213			$	2,534			$	26,187			$	3,410
Investment income			26				53				13				315
Interest expense			(9,701	)			(10,983	)			(19,429	)			(21,962	)
Other (expense) income, net			(12	)			(241	)			1,972				(36	)
Income (loss) before income taxes			3,526				(8,637	)			8,743				(18,273	)
Income tax expense			70				764				367				764
Net income (loss)		$	3,456			$	(9,401	)		$	8,376			$	(19,037	)
Basic net income (loss) per share		$	0.10			$	(0.26	)		$	0.24			$	(0.53	)
Diluted net income (loss) per share		$	0.10			$	(0.26	)		$	0.23			$	(0.53	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

RCN CORPORATION AND SUBSIDIARIES

(dollars in thousands)

(Unaudited)

		June 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	37,389			$	71,808
Short-term investments			42,992				15,135
Accounts receivable, net of allowance for doubtful accounts of $7,618 and $6,932			63,400				65,734
Prepayments and other current assets			16,887				14,727
Total current assets			160,668				167,404
Property, plant and equipment, net of accumulated depreciation of $907,343 and $839,998			640,163				654,678
Goodwill			15,479				15,479
Intangible assets, net of accumulated amortization of $86,208 and $84,720			105,875				106,164
Long-term restricted investments			9,556				11,666
Deferred charges and other assets			14,258				15,060
Total assets		$	945,999			$	970,451
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses related to trade creditors		$	64,288			$	66,166
Accrued expenses and other liabilities			60,546				70,263
Current portion of long-term debt and capital lease obligations			7,185				25,947
Total current liabilities			132,019				162,376
Long-term debt and capital lease obligations, net of current maturities			705,856				709,308
Other long-term liabilities			98,277				90,633
Total liabilities			936,152				962,317
Commitments and contingencies
Stockholders’ Equity:
Common stock, par value $0.01 per share, 100,000,000 shares authorized; 36,408,108 and 35,616,512 shares issued; 35,731,752 and 35,212,173 outstanding			364				356
Additional paid-in capital			460,735				454,215
Treasury stock, 676,356 and 404,339 shares at cost			(10,281	)			(6,366	)
Accumulated deficit			(394,661	)			(403,037	)
Accumulated other comprehensive loss			(46,310	)			(37,034	)
Total stockholders’ equity			9,847				8,134
Total liabilities and stockholders’ equity		$	945,999			$	970,451

The accompanying notes are an integral part of these condensed consolidated financial statements.

RCN CORPORATION AND SUBSIDIARIES

		For the six months ended
		June 30,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	8,376			$	(19,037	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash stock-based compensation			5,664				4,511
Depreciation and amortization			74,660				99,570
Other, net			1,476				620
Net change in certain assets and liabilities			(7,840	)			(19,322	)
Net cash provided by operating activities			82,336				66,342
Cash flows from (used in) investing activities:
Additions to property, plant and equipment			(65,055	)			(49,443	)
Investment in intangibles			(1,200	)			—
Increase in short-term investments			(27,842	)			(116	)
Proceeds from sale of assets			977				615
Decrease in restricted investments			2,110				3,673
Net cash used in investing activities			(91,010	)			(45,271	)
Cash flows from (used in) financing activities:
Payments of long-term debt, including capital leases			(22,214	)			(3,674	)
Dividend payments			(477	)			(641	)
Cost of common shares repurchased			(3,915	)			(5,713	)
Proceeds from the exercise of stock options			861				—
Net cash used in financing activities			(25,745	)			(10,028	)
Net (decrease) increase in cash and cash equivalents			(34,419	)			11,043
Cash and cash equivalents at beginning of the period			71,808				10,778
Cash and cash equivalents at end of the period		$	37,389			$	21,821
Supplemental disclosures of cash flow information:

During the six months ended June 30, 2010 and 2009, cash paid for interest totaled $18.4 million and $20.8 million, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

RCN CORPORATION

1. ORGANIZATION AND BASIS OF PRESENTATION

RCN Corporation (“RCN” or the “Company”) is a competitive broadband services provider, delivering all-digital and high-definition video, high-speed internet and premium voice services to Residential and Small and Medium Business (“SMB”) customers under the brand names of RCN and RCN Business Services, respectively. In addition, the Company’s RCN Metro Optical Networks business unit (“RCN Metro”) delivers fiber-based high-capacity data transport services to large commercial customers, primarily large enterprises and carriers, targeting the metropolitan central business districts in RCN’s geographic markets. The Company constructs and operates its own networks, and our primary service areas include: Washington, D.C., Philadelphia, Lehigh Valley (PA), New York City, Boston and Chicago.

The Company has two principal business segments (i) Residential/SMB and (ii) RCN Metro. For financial and other information about the Company’s segments, refer to Note 13.

As previously reported by RCN in the Form 8-K filed on March 5, 2010 with the Securities and Exchange Commission (the “SEC”), RCN entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Yankee Cable Acquisition, LLC (“Cable Buyer”), Yankee Metro Parent, Inc. (“Metro Parent”) and Yankee Metro Merger Sub, Inc. (“Merger Sub”) on March 5, 2010, pursuant to which those entities agreed to acquire RCN for total consideration of approximately $1.2 billion, including the assumption of debt. Cable Buyer, Metro Parent and Merger Sub are controlled by a private equity fund associated with ABRY Partners, LLC. The transaction was approved at a special meeting of stockholders held on May 19, 2010, and is expected to be completed in the second half of 2010, subject to receipt of regulatory approvals, as well as satisfaction of other customary closing conditions. The transaction is not subject to any financing condition.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with rules and regulations of the SEC for quarterly reports on Form 10-Q (the “Report”). Accordingly, some information and footnote disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements have been condensed or omitted. The condensed consolidated financial statements include the accounts of RCN and its consolidated subsidiaries. All intercompany transactions and balances among consolidated entities have been eliminated.

In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all 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 six months ended June 30, 2010 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 Annual Report on Form 10-K for the year ended December 31, 2009, filed on March 9, 2010 (the “Annual Report”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For a more complete discussion of the Company’s accounting policies, refer to our annual financial statements and the notes thereto included in the Annual Report.

Use of Estimates and Assumptions

The preparation of consolidated financial statements in accordance with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management periodically assesses the accuracy of these estimates and assumptions. Actual results could differ from those estimates. Estimates are used when accounting for various items, including but not limited to allowances for doubtful accounts; investments; derivative financial instruments; asset impairments; certain acquisition-related liabilities; programming related liabilities; revenue recognition; depreciation and amortization; income taxes; exit and restructuring costs; and legal and other contingencies. Estimates and assumptions are also used when determining the allocation of the purchase price in a business combination to the fair value of assets and liabilities and determining related useful lives.

Revenue Recognition

Revenues are principally derived from fees associated with the Company’s video, telephone, high-speed data and transport services and are recognized as earned when the services are rendered, evidence of an arrangement exists, the fee is fixed and determinable and collection is probable. Payments received in advance are deferred and recognized as revenue when the service is provided. Installation fees charged to the Company’s residential and small business customers are less than related direct selling costs and therefore, are recognized in the period the service is provided. Installation fees charged to larger commercial customers are generally recognized over the contract life which is not materially different than the service life. Reciprocal compensation revenue, the fees that local exchange carriers pay to terminate calls on each other’s networks, is based upon calls terminated on the Company’s network at contractual rates. Under the terms of applicable franchise agreements, the Company is generally required to pay an amount based on gross video revenues to the local franchising authority. These fees are normally passed through to the Company’s cable subscribers and accordingly, the fees are classified as revenue with the corresponding cost included in direct expenses. Certain other taxes imposed on revenue producing transactions, such as Universal Service Fund fees, are also presented as revenue and expense.

Sales of Multiple Products or Services

When the Company enters into sales contracts for the sale of multiple products or services, the Company evaluates whether it has fair value evidence for each deliverable in the transaction. If the Company has fair value evidence for each deliverable in the transaction, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition accounting policies. For example, the Company sells video, high-speed data and voice services to subscribers in a bundled package at a rate lower than if the subscriber purchases each product on an individual basis. Subscription revenues received from such subscribers are allocated to each product in a pro-rata manner based on the fair value of each of the respective services.

Concentration and Monitoring of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, restricted investments, accounts receivable, interest rate swap agreements, and undrawn revolving line of credit commitments.

The Company invests its cash and cash equivalents and short-term investments in accordance with the terms and conditions of its First-Lien Credit Agreement, which seeks to ensure both liquidity and safety of principal. The Company’s policy limits investments to instruments issued by the U.S. government and commercial institutions with strong investment grade credit ratings, and places restrictions on the length of maturity. The Company monitors the third-party depository institutions that hold its cash and cash equivalents, and short-term investments. As of June 30, 2010, the Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or non-government guaranteed mortgage backed securities.

The Company’s restricted investments are either held in escrow or in deposit accounts with institutions having strong investment grade credit ratings.

The Company’s trade receivables reflect a diverse customer base. Up front credit evaluation and account monitoring procedures are used to minimize the risk of loss. As a result, concentrations of credit risk are limited. The Company believes that its allowances for doubtful accounts are adequate to cover these risks.

The Company has potential exposure to credit losses in the event of nonperformance by the counterparties to its revolving line of credit specifically related to undrawn commitments, including amounts utilized as collateral for letters of credit, and interest rate swap agreements. The Company anticipates however, that the counterparties will be able to fully satisfy their obligations under these agreements, given that they are very large, highly rated financial institutions who are also key lenders under the Company’s First Lien Credit Agreement.

Goodwill and Intangible Assets

Goodwill represents the excess of the acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired. In accordance with the provisions of FASB ASC Topic 350 Intangibles — Goodwill and Other (“ASC Topic 350”), goodwill is not amortized but is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill at June 30, 2010 and December 31, 2009 totaled $15.5 million. The Company conducted an annual impairment test of its goodwill during the fourth quarter of 2009. The Company used an income-based approach and discounted the cash flows attributable to the RCN Metro reporting unit to estimate its fair value. Several estimates were incorporated into this analysis, including projected net monthly installed revenue, related operating and capital spending projections, cost of capital and estimated terminal value. In addition, comparative market multiples were used to corroborate discounted cash flow results. The impairment test indicated that the goodwill was not impaired.

Indefinite-Lived Intangibles

In accordance with the provisions of FASB ASC Topic 350, indefinite-lived intangible assets are tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would indicate that the assets might be impaired. The Company’s indefinite-lived intangible assets consist of certain franchise rights associated with the Residential/SMB segment as well as certain rights-of-way acquired in the NEON transaction. The Company conducted an annual impairment test of its indefinite-lived assets during the fourth quarter of 2009 at the units of accounting level. The units of accounting were determined under the provisions of FASB ASC Topic 350 to be the Company’s franchise rights in the Pennsylvania market and certain rights-of-way acquired in the NEON transaction. The Company used an income-based approach and discounted the cash flows attributable to the applicable franchise rights to estimate their fair value. Several estimates and assumptions were incorporated into this analysis including existing customers, expected penetration level of marketable homes within the franchised areas, expected average revenue per customer, projected operating expenses, contributory asset charges, applicable cost of capital, estimated terminal value and present value of tax benefits. The fair value of the rights-of-way was estimated using a replacement cost approach using internal personnel involved in the original construction and attainment of the rights-of-way. The impairment tests performed indicated that the franchise rights and rights-of-way were not impaired. While management believes the estimates used in the impairment tests of goodwill and the indefinite-lived intangibles are reasonable, actual results may differ significantly from these assumptions, which could materially affect the valuation.

Other Intangibles

The costs of other intangible assets, including trademarks, trade names, customer relationships and software, are amortized over their estimated useful lives. Amortizable intangible assets are tested for impairment based on undiscounted cash flows in accordance with FASB ASC Topic 350 and, if impaired, are written down to fair value based on discounted cash flows. See Note 7 for the ranges of useful lives of the amortizable intangible assets.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-6, Fair Value Measurements and Disclosures, that amends existing disclosure requirements under ASC Topic 820 by adding required disclosures about items transferring into and out of Levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to Level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity between purchases, sales, issuances, and settlements on a gross basis. That requirement is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This pronouncement is related to disclosure only. We have adopted the disclosure requirement in effect after December 15, 2009 with no material impact on the Company’s consolidated financial statements and we anticipate no material impact to the Company’s consolidated financial statements for the disclosure requirement in effect after December 15, 2010.

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, which amends the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate the consideration received. This ASU is effective for fiscal years beginning on or after June 15, 2010, which is January 1, 2011 for the Company. This ASU is effective prospectively for revenue arrangements entered into or materially modified after January 1, 2011. The Company is currently evaluating the impact that this new accounting guidance will have on its consolidated financial statements.

3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The Company has two primary components of other comprehensive income (loss): changes in the fair value of interest rate swaps, and unrealized appreciation (depreciation) on investments. The following table reflects the components of accumulated other comprehensive loss (dollars in thousands):

		June 30,				December 31,
		2010				2009
Fair value of interest rate swaps		$	(46,310	)		$	(37,018	)
Unrealized depreciation on investments			—				(16	)
Accumulated other comprehensive loss			(46,310	)			(37,034	)

4. EXIT COSTS AND RESTRUCTURING CHARGES

Total exit costs and restructuring charges for the three and six months ended June 30, 2010 and June 30, 2009 were comprised of the following (dollars in thousands):

		Three months ended June 30,
		2010				2009
Exit costs for excess facilities		$	(178	)		$	7
Severance and retention			—				—
Total		$	(178	)		$	7

		Six months ended June 30,
		2010				2009
Exit costs for excess facilities		$	(178	)		$	9
Severance and retention			44				293
Total		$	(134	)		$	302

The following table presents the activity in the lease fair value and exit cost liability accounts for the six months ended June 30, 2010 (dollars in thousands):

						Exit Costs and
		Lease Fair				Restructuring
		Value				Charges				Total
Balance, December 31, 2008		$	2,691			$	5,713			$	8,404
Additional accrued costs			—				575				575
Amortization			(621	)			(1,351	)			(1,972	)
Adjustments / Payments			—				(1,187	)			(1,187	)
Balance, December 31, 2009			2,070				3,750				5,820
Additional accrued costs			—				44				44
Amortization			(279	)			(675	)			(954	)
Adjustment / Payments			—				(459	)			(459	)
Balance, June 30, 2010			1,791				2,660				4,451
Less: current portion			480				1,078				1,558
Long-term portion June 30, 2010		$	1,311			$	1,582			$	2,893

The current portion of these liabilities is included in accrued expenses and other liabilities on the condensed consolidated balance sheets and the long-term portion is included in other long-term liabilities.

5. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

In accordance with the authoritative guidance for fair value measurements and the fair value election for financial assets and financial liabilities, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy was established that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The Company’s financial assets and liabilities that are accounted for at fair value on a recurring basis are summarized below (dollars in thousands):

		June 30, 2010
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	37,389			$	—			$	—			$	37,389
Short-term investments			42,992				—				—				42,992
Restricted investments			9,556				—				—				9,556
Total financial assets		$	89,937			$	—			$	—			$	89,937
Liabilities:
Interest rate swap agreements		$	—			$	46,310			$	—			$	46,310
Total financial liabilities		$	—			$	46,310			$	—			$	46,310

		December 31, 2009
		Level 1				Level 2				Level 3				Total
Assets:
Cash and cash equivalents		$	71,808			$	—			$	—			$	71,808
Short-term investments			15,135				—				—				15,135
Restricted investments			11,666				—				—				11,666
Total financial assets		$	98,609			$	—			$	—			$	98,609
Liabilities:
Interest rate swap agreements		$	—			$	37,018			$	—			$	37,018
Total financial liabilities		$	—			$	37,018			$	—			$	37,018

For the interest rate swap agreements, fair value is calculated using standard industry models based on significant observable market inputs such as swap rates, interest rates, and implied volatilities obtained from the counterparties to the swap agreements. The Company performs an independent evaluation to validate the reasonableness of the fair value obtained.

Pursuant to the authoritative guidance which requires fair value disclosures for financial instruments that are not currently reflected on the balance sheet at fair value, the Company’s term loan borrowings under the First-Lien Credit Agreement have a fair value of $677.0 million as of June 30, 2010, as determined based on the bid and ask quotes for the related debt.

The carrying values of accounts receivable, accounts payable and accrued liabilities are reasonable estimates of their fair values due to their short maturity.

6. PROPERTY, PLANT AND EQUIPMENT

The significant components of property, plant and equipment, as well as average estimated lives, are as follows at June 30, 2010 and December 31, 2009 (dollars in thousands):

						June 30,				December 31,
		Useful Life				2010				2009
Telecommunications plant		5-22.5 years				$	1,152,401			$	1,118,512
Indefeasible rights of use		5-20 years					139,790				139,757
Computer equipment		3-5 years					71,685				68,024
Buildings, leasehold improvements and land		0-30 years					92,243				91,462
Furniture, fixtures and vehicles		3-10 years					32,107				28,270
Construction materials and other		3-10 years					59,280				48,651
Total property, plant and equipment							1,547,506				1,494,676
Less: accumulated depreciation							(907,343	)			(839,998	)
Property, plant and equipment, net						$	640,163			$	654,678

Depreciation is recorded using the straight-line method over the estimated useful lives of the various classes of depreciable assets. Leasehold improvements are amortized over the lesser of the life of the lease or its estimated useful life. Depreciation expense was $37.1 million and $73.2 million for the three and six months ended June 30, 2010, respectively, and $49.4 million and $96.4 million for the three and six months ended June 30, 2009, respectively.

7. INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill at June 30, 2010 and December 31, 2009 are as follows (dollars in thousands):

				June 30, 2010								December 31, 2009
				Gross								Gross
				Carrying				Accumulated				Carrying				Accumulated
		Useful Life		Amount				Amortization				Amount				Amortization
Amortized intangible assets:
Customer relationships		4-10 years		$	89,272			$	(72,125	)		$	88,072			$	(70,676	)
Trademarks/tradenames		5 years			13,573				(13,573	)			13,573				(13,573	)
Software		3 years			540				(510	)			540				(471	)
Subtotal				$	103,385			$	(86,208	)		$	102,185			$	(84,720	)
Indefinite-lived intangible assets:
Franchise rights		Indefinite			54,842				—				54,842				—
Rights-of-way		Indefinite			33,856				—				33,857				—
Total intangible assets				$	192,083			$	(86,208	)		$	190,884			$	(84,720	)
Goodwill		Indefinite		$	15,479			$	—			$	15,479			$	—

The increase in customer relationships relates to rights obtained by RCN to provide services to customers on an exclusive basis for a specific period of time. Amortization expense was $0.7 million and $1.5 million for the three and six months ended June 30, 2010, respectively, and $1.5 million and $3.2 million for the three and six months ended June 30, 2009, respectively.

8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt at June 30, 2010 and December 31, 2009 consisted of the following (dollars in thousands):

		June 30,				December 31,
		2010				2009
First-lien term loan		$	680,355			$	702,489
Revolving line of credit			30,000				30,000
Capital leases			2,686				2,766
Total			713,041				735,255
Due within one year (1)			7,185				25,947
Total long-term debt		$	705,856			$	709,308

The following is a description of the Company’s debt and the significant terms contained in the related agreements.

First-Lien Credit Agreement

The Company’s credit agreement with Deutsche Bank, as Administrative Agent, and certain syndicated lenders (“First-Lien Credit Agreement”) provides for term loans to the Company in the aggregate principal amount of $720 million, and a $75 million revolving line of credit, all of which can be used as collateral for letters of credit. Approximately $37.2 million of the revolving line of credit is currently utilized for outstanding letters of credit relating to the Company’s surety bonds, real estate lease obligations, right-of-way obligations, and license and permit obligations. As of June 30, 2010, the Company had drawn an additional $30 million under the revolving line of credit and had $7.7 million of available borrowing capacity remaining. The obligations of the Company under the First-Lien Credit Agreement are guaranteed by all of its operating subsidiaries and are collateralized by substantially all of the Company’s assets.

The term loan bears interest at the Administrative Agent’s prime lending rate plus an applicable margin or at the Eurodollar rate plus an applicable margin, based on the type of borrowing elected by the Company. The effective rate on outstanding debt at June 30, 2010 and December 31, 2009 was 4.9%, including the effect of the interest rate swaps discussed in Note 9.

The First-Lien Credit Agreement requires the Company to maintain a Secured Leverage Ratio not to exceed 4.00:1 through December 30, 2010. On December 31, 2010, the maximum permitted Secured Leverage Ratio declines to 3.50:1, then declines to 3.25:1 on December 31, 2011, and then declines to 3.00:1 on December 31, 2012 where it remains until maturity in May 2014. The First-Lien Credit Agreement also contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur indebtedness, create liens on their assets, make particular types of investments or other restricted payments, engage in transactions with affiliates, acquire assets, utilize proceeds from asset sales for purposes other than debt reduction (except for limited exceptions for reinvestment in the business), merge or consolidate or sell substantially all of the Company’s assets.

The Company is in compliance with all financial covenants under the First-Lien Credit Agreement as of the date of this filing.

9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

During May 2007, the Company entered into three interest rate swap agreements with an initial notional amount of $345 million to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on its term loans under the First-Lien Credit Agreement. The interest rate swap agreements have a seven year term with an amortizing notional amount which adjusts down on the dates payments are due on the underlying term loans. Under the terms of the swap agreements, on specified dates, the Company makes payments calculated using a fixed rate of 5.319% and receives payments equal to 3-month LIBOR.

These interest rate swap agreements qualify for hedge accounting because the swap terms match the critical terms of the hedged debt. The Company has assessed, on a quarterly basis, that the swap agreements are completely effective based on criteria listed in the authoritative guidance pertaining to cash flow derivative instruments that are interest rate swaps. Accordingly, these agreements had no net effect on the Company’s results of operations for the six months ended June 30, 2010 and June 30 2009. The Company uses derivative instruments as risk management tools and not for trading purposes. As of June 30, 2010, the notional amount of these swap agreements was $333.3 million.

At June 30, 2010 and December 31, 2009, the fair value of the interest rate swap agreements was a liability position of $46.3 million and $37.0 million, respectively. All of these interest rate swap agreements are designated as cash flow hedges under FASB ASC Topic 815 Derivatives and Hedging. These liabilities are reported in other long-term liabilities on the Company’s condensed consolidated balance sheets. Expense associated with the derivatives, which is classified as interest expense on the Company’s condensed consolidated statements of income, was $4.2 million and $8.5 million for the three and six month ended June 30, 2010, respectively, and $3.3 million and $6.8 million for the three and six months ended June 30, 2009, respectively.

10. STOCKHOLDERS’ EQUITY AND STOCK PLANS

Income (Loss) Per Share

Basic earnings per share (“EPS”) is computed by dividing the income available to common stockholders by the weighted average number of shares of common stock outstanding during the period.

The computation of weighted average shares outstanding for the diluted EPS calculation includes the number of additional shares of common stock that would be outstanding if all potentially dilutive common stock equivalents would have been issued. For the three and six months ended June 30, 2009, the Company incurred losses and accordingly, all potential common stock equivalents would have been anti-dilutive so the average weighted common shares for the basic EPS computation is equal to the weighted average common shares used for the diluted EPS computation.

The following table shows the Company’s EPS (basic and diluted) for the three and six months ended June 30, 2010 and June 30, 2009 (dollars in thousands, except shares and per share amounts):

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income (loss) available to common shares		$	3,456			$	(9,401	)		$	8,376			$	(19,037	)
Weighted average shares outstanding-basic			35,408,402				35,728,226				35,322,152				35,682,610
Effect of dilutive shares:
Stock options			—				—				19,506				—
Restricted stock			602,346				—				699,333				—
Weighted average shares outstanding-diluted			36,010,748				35,728,226				36,040,991				35,682,610
Earnings (loss) per share-basic		$	0.10			$	(0.26	)		$	0.24			$	(0.53	)
Earnings (loss) per share-diluted		$	0.10			$	(0.26	)		$	0.23			$	(0.53	)

The following table shows the securities outstanding at June 30, 2010 and June 30, 2009 that could potentially dilute basic EPS in the future and the number of shares of common stock represented by, or underlying, such securities:

		June 30,				June 30,
		2010				2009
Options			2,308,821				3,466,755
Warrants			8,018,276				8,018,276
Unvested restricted stock awards			—				70,731
Unvested restricted stock units			1,503,693				377,598
Total			11,830,790				11,933,360

Common Stock and Dividends

At June 30, 2010 and December 31, 2009, 5,328,521 warrants to purchase 1.50478 shares of common stock (an aggregate of 8,018,276 shares) at a price per share of $16.72 were outstanding. These warrants expire on June 21, 2012.

Stock Repurchase Program

During 2007, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. To date, the Company has repurchased approximately 2.6 million shares. All of these shares were retired. As of June 30, 2010, approximately $6.3 million remains authorized for repurchases under the stock repurchase program. No shares were repurchased under the share repurchase program during the six months ended June 30, 2010. A total of 754,976 shares and 1,064,376 shares were repurchased for $3.9 million and $5.1 million under the share repurchase program during the three and six months ended June 30, 2009, respectively.

Total treasury shares were repurchased for $0.6 million and $3.9 million in the three and six months ended June 30, 2010, respectively, and $0.3 million and $0.6 million in the three and six months ended June 30, 2009, respectively, resulting from the vesting of restricted shares.

Stock-Based Compensation

RCN’s 2005 Stock Compensation Plan (the “Stock Plan”) currently allows for the issuance of up to 8,327,799 shares of the Company’s stock in the form of stock options, restricted stock and restricted stock units to directors, officers and employees. As of June 30, 2010, there were approximately 1.5 million shares remaining available for grant under the Stock Plan.

The Company recognizes compensation expense for stock-based compensation issued to or purchased by employees, net of estimated forfeitures, using a fair value method. When estimating forfeitures, the Company considers voluntary termination behavior as well as actual option forfeitures. Any adjustments to the forfeiture rate result in a cumulative adjustment to compensation cost in the period the estimate is revised. Compensation expense is recorded for performance-based stock options, restricted stock awards (“RSAs”), and restricted stock units (“RSUs”) based on the Company’s projected performance relative to the performance goals established by the Board of Directors.

Compensation expense recognized related to restricted stock awards, restricted stock units and stock option awards are summarized in the table below (dollars in thousands):

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Restricted stock awards		$	(17	)		$	453			$	282			$	1,048
Restricted stock units			2,198				809				4,543				1,451
Stock options			414				855				839				2,012
Total stock-based compensation expense		$	2,595			$	2,117			$	5,664			$	4,511

As of June 30, 2010, total unamortized stock-based compensation expense related to stock options and restricted stock units totaled $13.7 million. The unamortized expense of $13.7 million will be recognized through the third quarter of 2012. The Company expects to recognize approximately $4.4 million for the remainder of 2010, as well as, $6.6 million, and $2.7 million in compensation expense in the years ended December 31, 2011, and December 31, 2012, respectively, based on outstanding grants under the Stock Plan as of June 30, 2010.

Stock Options

Stock options may be granted as either non-qualified stock options or incentive stock options.

On June 2, 2009, RCN obtained stockholder approval for a stock option exchange program (the “Program”) that permitted all of the then current employees of RCN, except for the chief executive officer, to exchange outstanding options issued under the Stock Plan for a lesser number of new options with lower exercise prices. Under the Program, the exchange ratios were designed to result in a fair value of the replacement options to be granted to be approximately equal to the fair value of the options that were surrendered. The Program started on July 16, 2009 and ended on August 12, 2009. Pursuant to the Program, RCN accepted for cancellation options to purchase 1,179,651 shares of the Company’s common stock in exchange for new options to purchase 383,975 shares of the Company’s common stock. The per share exercise price of the new options is $9.05, which was the closing price of RCN’s common stock as quoted on the NASDAQ Global Select Market on August 12, 2009.

The following table summarizes the Company’s option activity during the six months ended June 30, 2010 and June 30, 2009:

						2010												2009
										Weighted
						Weighted				average				Aggregate								Weighted
						Average				remaining				intrinsic								Average
		Number of				Exercise				contractual life				value				Number of				Exercise
		Shares				Price				(in years)				(in millions)				Shares				Price
Awards Outstanding at January 1			2,560,774			$	12.35												4,057,561			$	13.94
Granted			—				—												—				—
Exercised			(71,966	)			11.95												—				—
Forfeitures			(179,987	)			13.32												(590,806	)			16.97
Awards Outstanding at June 30			2,308,821			$	12.29				3.61			$	6.1				3,466,755			$	13.42
Awards Exercisable at June 30			1,685,423			$	13.15				2.89			$	3.1				2,608,390			$	13.91

The intrinsic value in the awards outstanding totaled $6.1 million at June 30, 2010. There were 35,958 and 71,966 options exercised during the three and six months ended June 30, 2010, respectively. The intrinsic value of the awards exercisable at June 30, 2010 was $3.1 million. Cash received from stock options exercised during the three and six months ended June 30, 2010 was $0.4 million and $0.9 million, respectively.

The following table summarizes additional information regarding outstanding and exercisable options at June 30, 2010:

				Options Outstanding												Options Exercisable
								Average				Weighted								Weighted
Exercise price				Number				remaining				Average								Average
of				outstanding				contractual				Exercise Price				As of				Exercise Price
options				at 6/30/2010				life (years)				per Option				6/30/2010				per Option
$	9.05				371,294				6.12			$	9.05				—			$	9.05
$	11.22				725,861				4.70			$	11.22				477,943			$	11.22
$	12.36				198,762				1.90			$	12.36				198,762			$	12.36
$	13.79				772,681				1.90			$	13.79				772,681			$	13.79
$	14.29				69,998				2.41			$	14.29				69,998			$	14.29
$	14.39				91,289				4.17			$	14.39				87,103			$	14.39
$	17.42				53,692				2.93			$	17.42				53,692			$	17.42
$	19.78				25,244				3.43			$	19.78				25,244			$	19.78
$	9.05 - $19.78				2,308,821				3.61			$	12.29				1,685,423			$	13.15

Unamortized stock-based compensation expense for stock option awards at June 30, 2010 totaled $1.7 million and will be amortized through the third quarter of 2012.

Restricted Stock Awards

RSAs generally entitle employees or non-employee directors to receive at the end of each vesting period one share of common stock for each RSA granted, conditioned on continued employment or service as a director throughout each annual vesting period. The fair value of each RSA granted is equal to the market price of the Company’s stock at the date of grant.

The following table summarizes the Company’s RSA activity during the six months ended June 30, 2010 and June 30, 2009:

		2010								2009
						Weighted								Weighted
						average								average
		Number				fair value				Number				fair value
		of Shares				per share				of Shares				per share
Nonvested, December 31			51,672			$	27.35				162,128			$	27.57
Granted			—				—				—				—
Vested			(51,052	)			27.35				(85,418	)			27.10
Forfeited			(620	)			27.35				(5,979	)			27.99
Nonvested, June 30			—			$	—				70,731			$	28.09

There is no unamortized stock-based compensation expense at June 30, 2010 for RSA grants.

Restricted Stock Units

Beginning in 2008, the Company issued stock-based compensation to employees in the form of RSUs, which are grants of a contractual right to receive future value delivered in the form of RCN common stock. These awards generally entitle employees or non-employee directors to receive at the end of each vesting period one share of common stock for each RSU granted, conditioned on continued employment or service as a director throughout each annual vesting period.

The following table summarizes the Company’s RSU activity during the six months ended June 30, 2010 and June 30, 2009:

		2010								2009
						Weighted								Weighted
						average								average
		Number				fair value				Number				fair value
		of Shares				per share				of Shares				per share
Nonvested, January 1			2,274,391			$	9.50				653,923			$	11.13
Granted			—				—				97,953				4.14
Vested			(720,858	)			9.67				(321,486	)			9.25
Forfeited			(49,840	)			9.46				(52,792	)			8.85
Nonvested, June 30			1,503,693			$	9.42				377,598			$	11.23

Unamortized stock-based compensation expense for RSU grants at June 30, 2010 totaled $12.1 million and will be amortized through the third quarter of 2012.

11. INCOME TAXES

For the three months and six months ended June 30, 2010, the Company’s provision for income taxes was $0.1 million and $0.4 million respectively, all of which is attributable to the new consolidated filing requirements and limitations on utilization of net operating loss carryovers in certain states where the Company operates. For the three and six months ended June 30, 2009, the Company’s provision for income taxes was $0.8 million, all of which was attributable to the change in the deferred tax liability provided for the Company’s indefinite-lived intangibles due to revised effective rates. At June 30, 2010 and December 31, 2009, the Company’s net deferred tax liability was $36.9 million. The net deferred tax liability is included in other long-term liabilities on the condensed consolidated balance sheets.

The Company’s domestic effective income tax rate for the interim periods presented is based on management’s estimate of the Company’s effective tax rate for the applicable year and differs from the federal statutory income tax rate primarily due to nondeductible permanent differences, foreign taxes, state income taxes and changes in the valuation allowance for deferred income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

With few exceptions, periods ending after December 31, 2005 are subject to U.S., state and local income tax examinations by tax authorities.

12. COMMITMENTS AND CONTINGENCIES

Rent Expense

Total rental expense (net of sublease income of $0.3 million and $0.4 million for the three months ended June 30, 2010 and June 30, 2009, respectively) primarily for facilities, was $4.3 million and $4.2 million for the three months ended June 30, 2010 and June 30, 2009, respectively. Total rental expense (net of sublease income of $0.6 million and $0.8 million for the six months ended June 30, 2010 and June 30, 2009, respectively) primarily for facilities, was $8.5 million in both the six months ended June 30, 2010 and June 30, 2009.

Letters of Credit

The Company had outstanding letters of credit in an aggregate face amount of $37.2 million as of June 30, 2010. These letters of credit utilize approximately 50% of the Company’s $75 million revolving line of credit as collateral.

Guarantees

The Company is a guarantor on three leases for buildings that were used in the former San Francisco, California operations totaling $9.6 million at June 30, 2010.

Self Insurance

The Company is self-insured on its largest employee medical plan, which covers approximately 55% of its employees, and for its casualty insurance coverage (subject to certain limitations). The liabilities are established on an actuarial basis, with the advice of consulting actuaries, and totaled $5.1 million and $4.9 million at June 30, 2010 and December 31, 2009, respectively. The liability is included in accrued expenses and other liabilities on the condensed consolidated balance sheets.

Legal Proceedings

As previously disclosed in our Definitive Proxy Statement, on March 8, 2010 and March 11, 2010, class action complaints were filed in the Court of Chancery in the State of Delaware (the “Delaware Action”) and the United States District Court for the Eastern District of Virginia (the “Virginia Action”), respectively, on behalf of putative classes of RCN stockholders and naming RCN, all of the members of our Board of Directors, Cable Buyer, Metro Parent, Merger Sub and, in the case of the Delaware complaint, ABRY, as defendants, alleging among other things breach of fiduciary duty in connection with the pending sale of RCN to affiliates of ABRY and seeking injunctive relief and monetary damages in connection therewith.

On April 23, 2010, RCN, the members of our Board, Cable Buyer, Metro Parent, Merger Sub and ABRY entered into a memorandum of understanding (the “MOU”) with the plaintiff in the Delaware Action reflecting an agreement in principle to settle the Delaware Action based upon the inclusion in our Definitive Proxy Statement of certain additional disclosures that had been requested by the plaintiff in the Delaware Action. RCN, the members of our Board, Cable Buyer, Metro Parent, Merger Sub and ABRY each have denied, and continue to deny, that they have committed or aided and abetted in the commission of any violation of law or engaged in any of the wrongful acts alleged in the Delaware Action, and maintain that they have diligently and scrupulously complied with their fiduciary, disclosure and other legal duties. RCN, the members of our Board, Cable Buyer, Metro Parent, Merger Sub and ABRY believe that the Delaware Action is without merit, and they have entered into the MOU solely to avoid the risk of delaying the transactions contemplated by the Merger Agreement and to minimize the expense of litigation. The MOU is subject to customary conditions, including completion of appropriate settlement documentation, completion of confirmatory discovery to confirm the fairness of the settlement and approval by the Delaware Court of Chancery.

If the settlement contemplated by the MOU is consummated, the Delaware Action will be dismissed with prejudice and the defendants and other released persons will receive from or on behalf of all persons and entities who held RCN common stock at any time from March 5, 2010 through the date of consummation of the transactions contemplated by the Merger Agreement a release of all claims relating to the Merger Agreement and the transactions contemplated thereby and the disclosure made in connection therewith (including the claims asserted in the Virginia Action described above). Neither the MOU nor the proposed settlement would affect the amount of the merger consideration that RCN stockholders would be entitled to receive if the transactions contemplated by the Merger Agreement are consummated. Notwithstanding the foregoing, there can be no assurance that the settlement contemplated by the MOU will be completed.

On April 30, 2010, the United States District Court for the Eastern District of Virginia granted our motion to stay the Virginia Action and denied the Virginia plaintiff’s motions for a preliminary injunction and expedited proceedings. We intend to continue to defend the Virginia Action vigorously.

The Company is party to various other legal proceedings that arise in the normal course of business. In the opinion of management, none of these proceedings, individually or in the aggregate, are likely to have a material adverse effect on the consolidated financial position or consolidated results of operations or cash flows of the Company.

13. FINANCIAL DATA BY BUSINESS SEGMENT

The Company’s reportable segments consist of (i) the Residential/SMB business units, and (ii) the RCN Metro business unit. In evaluating the profitability of these segments, the components of net income (loss) below operating income (loss) before depreciation and amortization, stock-based compensation and any exit costs or restructuring charges are not separately evaluated by the Company’s management. Assets are not allocated to segments for management reporting. Financial data by business segment is as follows (dollars in thousands):

		For the three months ended June 30,								For the six months ended June 30,
		2010				2009				2010				2009
Net Operating Revenues: (1)
Residential/SMB (1)		$	145,045			$	145,149			$	285,934			$	288,860
RCN Metro (1)			49,579				47,183				98,793				92,699
Total		$	194,624			$	192,332			$	384,727			$	381,559
Operating Expenses: (2)
Residential/SMB (2)		$	138,123			$	149,149			$	272,935			$	297,111
RCN Metro (2)			43,288				40,649				85,605				81,038
Total		$	181,411			$	189,798			$	358,540			$	378,149
Operating Income before Depreciation and Amortization, Stock-Based Compensation, and Exit Costs and Restructuring Charges:
Residential/SMB		$	37,412			$	39,946			$	73,729			$	77,746
RCN Metro			15,982				15,569				32,648				30,047
Total		$	53,394			$	55,515			$	106,377			$	107,793
Stock-Based Compensation:
Residential/SMB		$	1,942			$	1,597			$	4,198			$	3,405
RCN Metro			653				520				1,466				1,106
Total		$	2,595			$	2,117			$	5,664			$	4,511
Depreciation and Amortization:
Residential/SMB		$	28,726			$	42,343			$	56,666			$	82,191
RCN Metro			9,038				8,514				17,994				17,379
Total		$	37,764			$	50,857			$	74,660			$	99,570
Exit Costs and Restructuring Charges, Net:
Residential/SMB		$	(178	)		$	6			$	(134	)		$	401
RCN Metro			—				1				—				(99	)
Total		$	(178	)		$	7			$	(134	)		$	302
Operating Income (Loss):
Residential/SMB		$	6,922			$	(4,000	)		$	12,999			$	(8,251	)
RCN Metro			6,291				6,534				13,188				11,661
Total		$	13,213			$	2,534			$	26,187			$	3,410
Additions to Property, Plant and Equipment:
Residential/SMB		$	21,005			$	17,096			$	43,555			$	31,850
RCN Metro			9,014				9,844				21,500				17,593
Total		$	30,019			$	26,940			$	65,055			$	49,443

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto for the three and six months ended June 30, 2010 contained in this Quarterly Report on Form 10-Q (the “Report”), and with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC” or the “Commission”) on March 9, 2010.

Overview

RCN is a competitive broadband services provider, delivering all-digital and high-definition video, high-speed internet and premium voice services primarily to Residential and Small and Medium Business (“SMB”) customers under the brand names of RCN and RCN Business Services, respectively. In addition, through our RCN Metro Optical Networks business unit (“RCN Metro”), we deliver fiber-based high-capacity data transport services to large commercial customers, primarily large enterprises and carriers, targeting the metropolitan central business districts in our geographic markets. We construct, operate, and manage our own networks, and our primary service areas include: Washington, D.C., Philadelphia, Lehigh Valley (PA), New York City, Boston and Chicago.

Our RCN and RCN Business Services network passes approximately 1.4 million marketable homes and businesses, and we currently have licenses to provide video services to over 5 million licensed homes and businesses in our footprint. We serve approximately 422,000 residential and SMB customers.

RCN Metro also has numerous points of presence (“POPs”) in other key cities from Richmond, Virginia to Portland, Maine. RCN Metro currently enters approximately 1,500 locations through our own diverse fiber facilities, providing connectivity to private networks, as well as telecommunications carrier meet points, and local exchange central offices owned and operated by other carriers. Our RCN Metro fiber routes now exceed 10,000 route miles, with many additional commercial buildings on or near our network. We also have over 350,000 fiber strand miles, which highlights the fact that many of our metro and intercity rings are fiber-rich.

The Company has two principal business segments (i) Residential/SMB and (ii) RCN Metro. There is substantial managerial, network, operational support and product overlap between the Residential and SMB businesses and, as a result, we report these two businesses as one segment. For financial and other information about our segments, refer to Item 1, Note 13 to our condensed consolidated financial statements included in this Report and the discussion below. All of the Company’s operations are in the United States. Our Residential/SMB segment generates approximately 74% of our consolidated revenues and the RCN Metro segment generates approximately 26%.

The condensed consolidated financial statements include the accounts of RCN and its consolidated subsidiaries. All intercompany transactions and balances among consolidated entities have been eliminated.

Merger Agreement

As previously reported by RCN in the Form 8-K filed on March 5, 2010 with the SEC, RCN entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Yankee Cable Acquisition, LLC (“Cable Buyer”), Yankee Metro Parent, Inc. (“Metro Parent”) and Yankee Metro Merger Sub, Inc. (“Merger Sub”) on March 5, 2010, pursuant to which those entities agreed to acquire RCN for total consideration of approximately $1.2 billion, including the assumption of debt. Cable Buyer, Metro Parent and Merger Sub are controlled by a private equity fund associated with ABRY Partners, LLC. The transaction was approved at a special meeting of stockholders held on May 19, 2010 and is expected to be completed in the second half of 2010, subject to receipt of regulatory approvals, as well as satisfaction of other customary closing conditions. The transaction is not subject to any financing condition.

RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(Unaudited)

		For the three months ended June 30,								For the six months ended June 30,
		2010				2009				2010				2009
Revenues		$	194,624			$	192,332			$	384,727			$	381,559
Costs and expenses:
Direct expenses			71,275				69,291				143,481				139,573
Selling, general and administrative (including stock-based compensation of $2,595, $2,117, $5,664, and $4,511)			72,550				69,643				140,533				138,704
Exit costs and restructuring charges, net			(178	)			7				(134	)			302
Depreciation and amortization			37,764				50,857				74,660				99,570
Operating income			13,213				2,534				26,187				3,410
Investment income			26				53				13				315
Interest expense			(9,701	)			(10,983	)			(19,429	)			(21,962	)
Other (expense) income, net			(12	)			(241	)			1,972				(36	)
Income (loss) before income taxes			3,526				(8,637	)			8,743				(18,273	)
Income tax expense			70				764				367				764
Net income (loss)		$	3,456			$	(9,401	)		$	8,376			$	(19,037	)