Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - RCN CORP /DE/ | c04536exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - RCN CORP /DE/ | c04536exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - RCN CORP /DE/ | c04536exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - RCN CORP /DE/ | c04536exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - RCN CORP /DE/ | c04536exv31w1.htm |
EX-10.2 - EXHIBIT 10.2 - RCN CORP /DE/ | c04536exv10w2.htm |
EX-10.3 - EXHIBIT 10.3 - RCN CORP /DE/ | c04536exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 |
For the quarterly period ended June 30, 2010
or
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) |
Registrants telephone number, including area code: (703) 434-8200
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 registrants 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
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Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
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 RCNs 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 RCNs actual results to be materially different from such
forward-looking statements. Factors that could cause RCNs 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.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
(Unaudited)
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.
4
Table of Contents
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(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.
5
Table of Contents
RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
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.
6
Table of Contents
RCN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
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 Companys 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 RCNs 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 Companys 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 Companys 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 Companys 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 Companys accounting policies, refer to our annual
financial statements and the notes thereto included in the Annual Report.
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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 Companys 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 Companys 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 others networks, is based upon
calls terminated on the Companys 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
Companys 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 Companys 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 Companys restricted investments are either held in escrow or in deposit accounts with
institutions having strong investment grade credit ratings.
The Companys 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 Companys First Lien Credit Agreement.
8
Table of Contents
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 Companys
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 Companys 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 Companys consolidated
financial statements and we anticipate no material impact to the Companys consolidated financial
statements for the disclosure requirement in effect after December 15, 2010.
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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 | |||
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Table of Contents
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 Companys 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 Companys 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 | ||||||||
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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 Companys 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.
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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 | ||||
(1) | In addition to scheduled mandatory repayments under the First-Lien Credit Agreement, the Company is also required to repay 50% of Excess Cash Flow (as defined in the First-Lien Credit Agreement) if the Companys Total Leverage Ratio for the period is greater than 3.00:1 at December 31, 2009. Pursuant to this Excess Cash Flow provision, the Company paid $18.6 million in April 2010, related to the year ended December 31, 2009. |
The following is a description of the Companys debt and the significant terms contained in
the related agreements.
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First-Lien Credit Agreement
The Companys 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 Companys
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 Companys assets.
The term loan bears interest at the Administrative Agents 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 Companys 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 Companys 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 Companys condensed
consolidated balance sheets. Expense associated with the derivatives, which is classified as
interest expense on the Companys 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.
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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 Companys 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 | ||||||
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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 Companys Board of Directors authorized the repurchase of up to $25 million
of the Companys 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
RCNs 2005 Stock Compensation Plan (the Stock Plan) currently allows for the issuance of up
to 8,327,799 shares of the Companys 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 Companys 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.
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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 Companys common stock in exchange for new options to purchase 383,975
shares of the Companys common stock. The per share exercise price of the new options is $9.05,
which was the closing price of RCNs common stock as quoted on the NASDAQ Global Select Market on
August 12, 2009.
The following table summarizes the Companys 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 | ||||||||||||||
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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 Companys stock at the date of grant.
The following table summarizes the Companys 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 Companys 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.
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11. INCOME TAXES
For the three months and six months ended June 30, 2010, the Companys 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
Companys provision for income taxes was $0.8 million, all of which was attributable to the change
in the deferred tax liability provided for the Companys indefinite-lived intangibles due to
revised effective rates. At June 30, 2010 and December 31, 2009, the Companys 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 Companys domestic effective income tax rate for the interim periods presented is based on
managements estimate of the Companys 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 Companys $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.
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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 plaintiffs 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.
20
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13. FINANCIAL DATA BY BUSINESS SEGMENT
The Companys 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
Companys 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 | ||||||||
(1) | All revenues reported for the individual segments are from external customers. | |
(2) | Operating expenses include stock-based compensation expense. |
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Item 2. | Managements 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 Companys
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.
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RCN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
(Unaudited)
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 | ) | ||||||
Consolidated Operating Results
Consolidated Revenues
Consolidated revenue increased $2.3 million, or 1.2%, and $3.2 million, or 0.8%, for the three
and six months ended June 30, 2010, respectively, compared to the same periods in 2009, primarily
due to higher transport and internet protocol (IP) revenue in the RCN Metro segment partially
offset by a decrease in voice revenue in the Residential/SMB segment.
Consolidated Direct Expenses
Consolidated direct expenses increased $2.0 million, or 2.9%, and $3.9 million, or 2.8%,
respectively, for the three and six months ended June 30, 2010 compared to the same periods in
2009, due primarily to added costs associated with the increase in revenue in the RCN Metro
segment, as well as an increase in the average programming cost per subscriber in the
Residential/SMB segment.
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses (SG&A) increased $2.9 million, or
4.2%, and $1.8 million, or 1.4%, for the three and six months ended June 30, 2010, respectively,
compared to the same periods in 2009. SG&A costs for the three and six months ended June 30, 2010
include $3.0 million and $4.3 million, respectively, in transaction costs incurred in connection
with the Merger Agreement. Excluding stock-based compensation and these transaction costs, SG&A
expense decreased $0.5 million, or 1.0%, and $3.6 million, or 2.7%, for the three and six months
ended June 30, 2010, respectively, primarily reflecting reductions in bad debt costs in both the
Residential/SMB and RCN Metro segments, as well as reductions in corporate overhead, partially
offset by certain other costs. In addition, SG&A costs decreased by $0.5 million for the three and
six months ended June 30, 2010, as compared to the same period in 2009, due to the suspension of
the Companys matching contribution to its 401(k) plan in the beginning of March 2009.
23
Table of Contents
Segment Operating Results
To measure the performance of our operating segments, we use operating income before
depreciation and amortization, stock-based compensation, exit costs and restructuring charges. This
measure eliminates the significant level of non-cash depreciation and amortization expense that
results from the capital-intensive nature of our businesses and from intangible assets recognized
in business combinations, as well as non-cash stock-based compensation and other special items such
as exit costs and other restructuring charges. We use this measure to evaluate our consolidated
operating performance and the performance of our operating segments, and to allocate resources and
capital. It is also a significant performance measure in our annual incentive compensation
programs. We believe that this measure is useful to investors because it is one of the bases for
comparing our operating performance with that of other companies in our industries, although our
measure may not be directly comparable to similar measures used by other companies. Because we use
this metric to measure our segment profit or loss, we reconcile it to operating income, the most
directly comparable financial measure calculated and presented in accordance with generally
accepted accounting principles in the United States (GAAP) in the business segment footnote to
our condensed consolidated financial statements (see Note 13). You should not consider this measure
a substitute for operating income (loss), net income (loss), net cash provided by operating
activities, or other measures of performance or liquidity we have reported in accordance with GAAP.
Residential / SMB Segment Operating Results
(dollars in thousands)
(dollars in thousands)
Residential/Small Business | ||||||||||||||||
For the three months ended June 30, | ||||||||||||||||
Fav(unfav) | Fav(unfav) | |||||||||||||||
2010 | 2009 | Variance | Var % | |||||||||||||
Revenue: |
||||||||||||||||
Video |
$ | 80,293 | $ | 78,476 | $ | 1,817 | 2.3 | % | ||||||||
Data |
36,724 | 35,807 | 917 | 2.6 | % | |||||||||||
Voice |
24,729 | 27,404 | (2,675 | ) | (9.8 | %) | ||||||||||
Recip Comp/Other |
3,299 | 3,462 | (163 | ) | (4.7 | %) | ||||||||||
Total Revenue |
145,045 | 145,149 | (104 | ) | (0.1 | %) | ||||||||||
Direct expenses |
52,874 | 52,147 | (727 | ) | (1.4 | %) | ||||||||||
Selling, general and administrative (excluding stock-based compensation) |
54,759 | 53,056 | (1,703 | ) | (3.2 | %) | ||||||||||
Operating income before depreciation and amortization, stock-based
compensation, exit costs and restructuring charges, net |
$ | 37,412 | $ | 39,946 | $ | (2,534 | ) | (6.3 | %) | |||||||
Reconciliation to Operating Income (Loss) |
||||||||||||||||
Operating income before depreciation and
amortization, stock-based compensation, exit
costs and restructuring charges, net |
$ | 37,412 | $ | 39,946 | ||||||||||||
Less: Stock-based compensation |
1,942 | 1,597 | ||||||||||||||
Less: Depreciation and amortization |
28,726 | 42,343 | ||||||||||||||
Less: Exit costs and restructuring charges, net |
(178 | ) | 6 | |||||||||||||
Operating income (loss) |
$ | 6,922 | $ | (4,000 | ) | |||||||||||
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Residential/Small Business | ||||||||||||||||
For the six months ended June 30, | ||||||||||||||||
Fav(unfav) | Fav(unfav) | |||||||||||||||
2010 | 2009 | Variance | Var % | |||||||||||||
Revenue: |
||||||||||||||||
Video |
$ | 158,259 | $ | 155,164 | $ | 3,095 | 2.0 | % | ||||||||
Data |
71,227 | 71,881 | (654 | ) | (0.9 | %) | ||||||||||
Voice |
49,990 | 54,688 | (4,698 | ) | (8.6 | %) | ||||||||||
Recip Comp/Other |
6,458 | 7,127 | (669 | ) | (9.4 | %) | ||||||||||
Total Revenue |
285,934 | 288,860 | (2,926 | ) | (1.0 | %) | ||||||||||
Direct expenses |
106,895 | 105,647 | (1,248 | ) | (1.2 | %) | ||||||||||
Selling, general
and administrative
(excluding
stock-based
compensation) |
105,310 | 105,467 | 157 | 0.1 | % | |||||||||||
Operating income
before depreciation
and amortization,
stock-based
compensation, exit
costs and
restructuring
charges, net |
$ | 73,729 | $ | 77,746 | $ | (4,017 | ) | (5.2 | %) | |||||||
Reconciliation to
Operating Income (Loss) |
||||||||||||||||
Operating income before
depreciation and
amortization, stock-based
compensation, exit
costs and restructuring
charges, net |
$ | 73,729 | $ | 77,746 | ||||||||||||
Less: Stock-based
compensation |
4,198 | 3,405 | ||||||||||||||
Less: Depreciation and
amortization |
56,666 | 82,191 | ||||||||||||||
Less: Exit costs and
restructuring charges, net |
(134 | ) | 401 | |||||||||||||
Operating income (loss) |
$ | 12,999 | $ | (8,251 | ) | |||||||||||
Residential / SMB Revenues
Residential/SMB revenue decreased $0.1 million, or (0.1%), and $2.9 million, or (1.0%),
respectively, for the three and six months ended June 30, 2010 compared to the three and six months
ended June 30, 2009. The decrease is primarily due to a reduction in total Revenue Generating
Units (RGUs), partially driven by a reduction in customers, offset by an increase in Average
Revenue per Customer (ARPC). Customers decreased by approximately 8,000 or 1.9% from June 30,
2009 to June 30, 2010, driven by the implementation of a more stringent credit policy designed to
mitigate risk from poor credit customer segments and increased churn in certain markets, primarily
related to move-out activity. Total RGUs decreased by approximately 25,000, or 2.7%, from June 30,
2009 to June 30, 2010, driven primarily by customer losses and voice penetration declines,
consistent with trends for highly penetrated landline voice providers, partially offset by growth
in data RGUs. Video RGUs decreased by approximately 3% from June 30, 2009 to June 30, 2010. ARPC
increased due to growth in average revenue per video RGU and increased high-speed data
penetration, partially offset by decreasing voice penetration and a slight decline in average
revenue per voice RGU. The increase in average revenue per video RGU was driven mainly by our
annual video rate increase, which partially mitigates the impact of annual increases in programming
costs, as well as increased penetration of our digital set-top, HD and DVR boxes and higher revenue
from premium services.
25
Table of Contents
Residential / SMB Metrics | June 30, 2010 | June 30, 2009 | ||||||
Video RGUs 1 |
356,000 | 368,000 | ||||||
Data RGUs 1 |
316,000 | 307,000 | ||||||
Voice RGUs 1 |
214,000 | 236,000 | ||||||
Total RGUs 1 |
886,000 | 911,000 | ||||||
Customers 2 |
422,000 | 430,000 | ||||||
ARPC 3 |
$ | 113 | $ | 111 |
(1) | RGUs are all video, high-speed data, and voice connections provided to residential households and SMB customers. Dial-up Internet and long distance voice services are not included. Additional telephone lines are each counted as an RGU, but additional room outlets for video service are not counted. For bulk arrangements in residential multiple dwelling units (MDUs), including dormitories, the number of RGUs is based on the number of video, high-speed data and voice connections provided and paid for in that MDU. Commercial structures such as hotels and offices are counted as one RGU regardless of how many units are in the structure. Delinquent accounts are generally disconnected and no longer counted as RGUs after a set period of time in accordance with our credit and disconnection policies. RGUs may include customers receiving some services for free or at a reduced rate in connection with promotional offers or bulk arrangements. RGUs provided free of charge under courtesy account arrangements are not counted, but additional services paid for are counted. | |
(2) | A Customer is a residential household or SMB that has at least one paid video, high-speed data or local voice connection. Customers with only Dial-up Internet or long distance voice service are not included. For bulk arrangements in residential MDUs, including dormitories, each unit for which service is provided and separately paid for is counted as a Customer. Commercial structures such as hotels and offices are counted as one Customer regardless of how many units are in the structure. Delinquent accounts are generally disconnected and no longer counted as Customers after a set period of time in accordance with our credit and disconnection policies. | |
(3) | ARPC is total revenue for the three months ended June 30, 2010 (excluding Dial-up Internet, reciprocal compensation and commercial revenue) divided by the average number of Customers for the period. This definition of ARPC may not be similar to ARPC measures of other companies. |
Residential / SMB Direct Expenses
Direct expenses increased $0.7 million, or 1.4%, and $1.2 million, or 1.2%, for the three and
six months ended June 30, 2010, respectively, as compared to the same periods in 2009. Video
direct costs increased $1.9 million, or 4.2%, and $2.6 million, or 2.8%, for the three and six
months ended June 30, 2010, respectively, as compared to the same periods in 2009, due to increases
in the average programming cost per subscriber partially offset by a decrease in average video
RGUs. Voice and data network costs for the three and six months ending June 30, 2010, excluding the
impact of settlements with providers of our voice and data network services, decreased by
$1.3 million, or 18.0%, and $1.7 million, or 11.8%, respectively, primarily due to a reduction in
voice RGUs and benefits achieved as a result of an ongoing network optimization initiative,
partially offset by an increase in data RGUs. Total settlements for the six months ended June 30,
2010 were $0.4 million and for the three and six months ended June 30, 2009 were $0.5 million and
$0.8 million, respectively. There were no settlements in the three months ended March 31, 2010.
Residential / SMB Selling, General and Administrative Expenses
SG&A, including stock-based compensation expense, increased by $2.0 million, or 3.7%, and $0.6
million, or 0.6%, for the three and six months ended June 30, 2010, respectively, as compared to
the same periods in 2009. SG&A in the Residential/SMB segment includes approximately $2.2 million
and $3.2 million of transaction costs related to the Merger Agreement during the three and six
months ended June 30, 2010, respectively. Excluding stock-based compensation expense and
transaction costs, SG&A decreased $0.5 million, or 0.9%, and $3.4 million, or 3.2%, respectively,
for the three and six months ended June 30, 2010, as compared to the same periods in 2009,
reflecting decreases in bad debt, sales commissions, billing and corporate overhead costs,
partially offset by increases in marketing, property taxes, facilities and other general and
administrative costs.
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Table of Contents
RCN Metro Optical Networks Operating Results
(dollars in thousands)
(dollars in thousands)
RCN Metro | ||||||||||||||||
For the three months ended June 30, | ||||||||||||||||
Fav(unfav) | Fav(unfav) | |||||||||||||||
2010 | 2009 | Variance | Var % | |||||||||||||
Revenue: |
||||||||||||||||
Transport Services |
$ | 37,805 | $ | 36,049 | $ | 1,756 | 4.9 | % | ||||||||
Data and Internet Services |
1,883 | 1,143 | 740 | 64.7 | % | |||||||||||
Co-location |
3,101 | 2,905 | 196 | 6.7 | % | |||||||||||
Leased Services |
4,997 | 5,171 | (174 | ) | (3.4 | %) | ||||||||||
Installation and other |
1,793 | 1,915 | (122 | ) | (6.4 | %) | ||||||||||
Total Revenue |
49,579 | 47,183 | 2,396 | 5.1 | % | |||||||||||
Direct expenses |
18,401 | 17,144 | (1,257 | ) | (7.3 | %) | ||||||||||
Selling, general and
administrative (excluding
stock-based compensation) |
15,196 | 14,470 | (726 | ) | (5.0 | %) | ||||||||||
Operating income before
depreciation and
amortization, stock-based
compensation, exit costs
and restructuring
charges, net |
$ | 15,982 | $ | 15,569 | $ | 413 | 2.7 | % | ||||||||
Reconciliation to Operating Income |
||||||||||||||||
Operating income before
depreciation and
amortization, stock-based
compensation, exit
costs and restructuring
charges, net |
$ | 15,982 | $ | 15,569 | ||||||||||||
Less: Stock-based
compensation |
653 | 520 | ||||||||||||||
Less: Depreciation and
amortization |
9,038 | 8,514 | ||||||||||||||
Less: Exit costs and
restructuring charges,
net |
| 1 | ||||||||||||||
Operating income |
$ | 6,291 | $ | 6,534 | ||||||||||||
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RCN Metro | ||||||||||||||||
For the six months ended June 30, | ||||||||||||||||
Fav(unfav) | Fav(unfav) | |||||||||||||||
2010 | 2009 | Variance | Var % | |||||||||||||
Revenue: |
||||||||||||||||
Transport Services |
$ | 75,430 | $ | 70,958 | $ | 4,472 | 6.3 | % | ||||||||
Data and Internet Services |
3,664 | 2,073 | 1,591 | 76.7 | % | |||||||||||
Co-location |
6,144 | 5,819 | 325 | 5.6 | % | |||||||||||
Leased Services |
10,023 | 10,177 | (154 | ) | (1.5 | %) | ||||||||||
Installation and other |
3,532 | 3,672 | (140 | ) | (3.8 | %) | ||||||||||
Total Revenue |
98,793 | 92,699 | 6,094 | 6.6 | % | |||||||||||
Direct expenses |
36,586 | 33,926 | (2,660 | ) | (7.8 | %) | ||||||||||
Selling, general and
administrative (excluding
stock-based compensation) |
29,559 | 28,726 | (833 | ) | (2.9 | %) | ||||||||||
Operating income before
depreciation and
amortization, stock-based
compensation, exit costs
and restructuring
charges, net |
$ | 32,648 | $ | 30,047 | $ | 2,601 | 8.7 | % | ||||||||
Reconciliation to Operating Income |
||||||||||||||||
Operating income
before depreciation
and amortization,
stock-based
compensation, exit costs and
restructuring charges, net |
$ | 32,648 | $ | 30,047 | ||||||||||||
Less: Stock-based compensation |
1,466 | 1,106 | ||||||||||||||
Less: Depreciation and amortization |
17,994 | 17,379 | ||||||||||||||
Less: Exit costs and restructuring
charges, net |
| (99 | ) | |||||||||||||
Operating income |
$ | 13,188 | $ | 11,661 | ||||||||||||
RCN Metro Revenues
Revenue increased $2.4 million, or 5.1%, and $6.1 million, or 6.6%, for the three and six
months ended June 30, 2010, respectively, as compared to the same periods in 2009, primarily due to
growth in transport and IP services to our carrier and enterprise customers. RCN Metro had
approximately 800 customers as of June 30, 2010. The top 20% of these customers have monthly
revenue in excess of $10,000 per customer, generating approximately 90% of RCN Metros total
revenue, and the top 4% of these customers have monthly revenue in excess of $100,000 per customer,
representing multiple locations and services purchased per customer, and generating approximately
60% of RCN Metros total revenue. From a customer segment perspective, RCN Metro generates
approximately 30% of its revenue each from telecommunications carriers, national wireless providers
and financial services enterprise customers, and the remainder from other enterprise customers.
RCN Metro Direct Expenses
Direct expenses increased $1.3 million, or 7.3%, and $2.7 million, or 7.9%, for the three and
six months ended June 30, 2010, respectively, as compared to the same periods in 2009, largely due
to added costs associated with the increase in revenue, including co-location costs, leased
circuits, building access fees, and rights of way costs.
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RCN Metro Selling, General and Administrative Expenses
SG&A, including stock-based compensation expense, increased $0.9 million, or 5.7%, and $1.1
million, or 4.0%, for the three and six months ended June 30, 2010, respectively, as compared to
the same periods in 2009. SG&A in the Metro segment includes $0.8 million and $1.1 million of
transaction costs related to the Merger Agreement for the three and six months ended June 30, 2010,
respectively. Excluding stock-based compensation expense and transaction costs, SG&A remained flat
and decreased $0.3 million, or 0.9%, for the three and six months ended June 30, 2010,
respectively.
Consolidated Depreciation and Amortization
Depreciation expense decreased $12.3 million, or 24.9%, to $37.1 million for the three months
ended June 30, 2010 and decreased $23.2 million, or 24.1%, to $73.2 million for the six months
ended June 30, as compared to the same periods in 2009 primarily due to fresh start assets which
became fully depreciated in the fourth quarter of 2009.
Amortization expense decreased $0.8 million, or 53.3%, to $0.7 million for the three months
ended June 30, 2010 and decreased $1.7 million, or 53.1%, to $1.5 million for the six months ended
June 30, 2010 as compared to the same periods in 2009, primarily due to trademarks which became
fully amortized in the later part of 2009.
Consolidated Exit Costs and Restructuring Charges, Net
During the three and six months ended June 30, 2010, exit costs and restructuring charges
primarily consisted of a gain from an early termination of a lease in Pennsylvania.
During the six months ended June 30, 2009 exit costs and restructuring charges primarily
consisted of employee termination benefits.
Consolidated Other Income (Expense) Items
Investment Income
Investment income for the three and six months ended June 30, 2010 decreased compared to the
same periods in 2009, driven primarily by lower yields from the Companys short-term investments
due to short-term market rates and lower weighted average investment balances.
Interest Expense
Interest expense decreased by $1.3 million, or 11.7%, to $9.7 million and decreased $2.5
million, or 11.5%, to $19.4 million for the three and six months ended June 30, 2010 compared to
the same periods in 2009. The decrease was due primarily to a reduction in our weighted average
interest rate, as well as a decrease in our weighted average debt balance.
Outstanding debt at June 30, 2010 was $713.0 million compared to $738.9 million at June 30,
2009. The weighted average interest rate, including the effect of interest rate swaps, for the
six months ended June 30, 2010 and June 30, 2009 was 4.9% and 5.4%, respectively.
Other Income, Net
For the six months ended June 30, 2010, other income consisted primarily of our receipt of
$2.1 million pursuant to a settlement agreement with a beneficial owner of our common stock
requiring the disgorgement of short swing profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934.
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Liquidity and Capital Resources
(dollars in thousands)
(dollars in thousands)
June 30, 2010 | December 31, 2009 | |||||||
Cash, cash equivalents and short-term investments |
$ | 80,381 | $ | 86,943 | ||||
Debt (including current maturities and capital
lease obligations) |
713,041 | 735,255 |
Subject to the risks outlined in our Cautionary Statements Regarding Forward-Looking
Statements, we expect to fund our ongoing investing and mandatory financing activities, excluding
the final maturity of our First-
Lien Credit Agreement in 2014, with cash on hand and cash flows from operating activities. If
our operating performance differs significantly from our forecasts, we may be required to reduce
our operating expenses and curtail capital spending, and we may not remain in compliance with our
debt covenants.
Operating Activities
Net cash provided by operating activities was $82.3 million for the six months ended June 30,
2010, which reflects an increase of $16.0 million compared to cash provided by operating activities
for the six months ended June 30, 2009. The increase was primarily due to improved customer
payments, a one-time settlement as discussed above in Other Income, net, and lower interest
payments.
During the six months ended June 30, 2010 and June 30, 2009, we made cash payments for
interest totaling $18.4 million and $20.8 million, respectively. The decrease in interest payments
was primarily the result of a decrease in the weighted average interest rate.
Investing Activities
Net cash used in investing activities was $91.0 million during the six months ended June 30,
2010, primarily consisting of $65.1 million in additions to property, plant, and equipment, $1.2
million investment in intangibles and a $27.8 million increase in short-term investments partially
offset by a $2.1 million decrease in restricted investments and $1.0 million in proceeds from the
sale of assets. Net cash used in investing activities was $45.3 million during the six months
ended June 30, 2009, primarily consisting of $49.4 million in additions to property, plant, and
equipment, partially offset by a $3.7 million decrease in restricted investments and $0.6 million
in proceeds from the sale of assets. Capital expenditures for 2010 are expected to be consistent
with 2009 levels, excluding business or customer acquisitions, and are expected to be funded by
cash flow from continuing operations as well as cash on hand.
Financing Activities
Net cash used in financing activities was $25.7 million for the six months ended June 30,
2010, primarily consisting of the repayment of long-term debt of $22.2 million, the purchase of
treasury stock totaling $3.9 million (resulting from the vesting of restricted shares), and
dividend payments of $0.5 million, partially offset by $0.9 million for the proceeds from the
exercise of stock options. Net cash used in financing activities was $10.0 million for the six
months ended June, 2009, primarily consisting of the repayment of long-term debt of $3.7 million,
dividend payments totaling $0.6 million, and the purchase of common stock totaling $5.7 million
(consisting of $5.1 million in common share repurchases and $0.6 million of treasury shares
resulting from the vesting of restricted shares).
In the event our Total Leverage Ratio is greater than 3:00:1 at December 31, 2010,
we will be required to repay 50% of Excess Cash Flow (as defined in
the First-Lien Credit Agreement) in April 2011. Pursuant to this Excess Cash Flow provision, we paid $18.6 million in April 2010,
related to the year ended December 31, 2009.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current
or future effect on our financial condition, results of operations, liquidity, capital expenditures
or capital resources.
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Description of Outstanding Debt
As of June 30, 2010, our total debt was $713.0 million, including $2.7 million of capital
lease obligations. The following is a description of our debt and the significant terms contained
in the related agreements.
First-Lien Credit Agreement
The Companys 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 Companys 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 Companys assets.
The term loan bears interest at the Administrative Agents 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 June
30, 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 Companys assets.
The Company is in compliance with all financial covenants under the First-Lien Credit
Agreement as of the date of this filing.
Recently Issued Accounting Pronouncements
See Note 1, Organization and Basis of Presentation, to the accompanying condensed
consolidated financial statements for a full description of recently issued accounting
pronouncements including the date of adoption and effects on results of operations and financial
condition.
Critical Accounting Judgments and Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make judgments, estimates and assumptions
regarding uncertainties 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 revenues and expenses during the reporting period. Management
periodically assesses the accuracy of these estimates and assumptions. Actual results could differ
from those estimates.
Inflation
Historically, the Companys results of operations and financial condition have not been
significantly affected by inflation. Subject to normal competitive conditions, the Company
generally has been able to pass along rising costs through increased selling prices. We do not
believe that our business is impacted by inflation to a significantly different extent than the
general economy in the United States.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There has been no material change to the information required under this item from what was
disclosed in our Annual Report.
Item 4. | Controls and Procedures |
Conclusions Regarding Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this Report (the Evaluation Date). Based on this evaluation, our
principal executive officer and principal financial officer concluded as of the Evaluation Date
that our disclosure controls and procedures were effective such that the information relating to
RCN, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to RCNs management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15(d) that occurred
during our most recently completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1. | Legal Proceedings |
Except as described below in this Item 1, there have been no material changes in our Legal
Proceedings as discussed in Item 3 of our Annual Report.
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.
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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 plaintiffs motions for a
preliminary injunction and expedited proceedings. We intend to continue to defend the Virginia
Action vigorously.
Item 1A. | Risk Factors |
In addition to the other information set forth in this Form 10-Q, you should carefully
consider the factors discussed in Part I, Item 1A Risk Factors of our Form 10-K for the year
ended December 31, 2009. The risks described in our Form 10-K are not the only risks that we face.
Additional risks not presently known to us or that we do not currently consider significant may
also have an adverse effect on us. If any of the risks actually occur, our business, results of
operations, cash flows or financial condition could suffer.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Equity Securities
During 2007, the Companys Board of Directors authorized the repurchase of up to $25 million
of the Companys 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
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 during the three and six months ended June 30, 2009,
respectively.
Item 6. | Exhibits |
10.1 | Amendment dated July 22, 2010 to Employment Agreement by and between the Company and Jose A. Cecin, Jr. |
|||
10.2 | Amendment dated July 23, 2010 to Employment Agreement by and between the Company and Michael T. Sicoli. |
|||
10.3 | Amendment dated July 22, 2010 to the Amended and Restated Change of Control Severance Plan of the Company. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
* | This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
RCN Corporation |
||
/s/ Michael T. Sicoli |
||
Michael T. Sicoli |
||
Executive Vice President and Chief Financial Officer |
||
Date: August 9, 2010 |
||
/s/ Leslie J. Sears |
||
Senior Vice President and Controller |
||
Date: August 9, 2010 |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
10.1 | Amendment dated July 22, 2010 to Employment Agreement by and between the Company and Jose A. Cecin, Jr. |
|||
10.2 | Amendment dated July 23, 2010 to Employment Agreement by and between the Company and Michael T. Sicoli. |
|||
10.3 | Amendment dated July 22, 2010 to the Amended and Restated Change of Control Severance Plan of the Company. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
* | This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
35