AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998 REGISTRATION NO. 333-47235
====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
AMENDMENT NO.4 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
21ST CENTURY TELECOM GROUP, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
ILLINOIS 36-4076758
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
WORLD TRADE CENTER, 350 NORTH ORLEANS, SUITE 600
CHICAGO, ILLINOIS 60654
(312) 470-2100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF COMPANY'S PRINCIPAL EXECUTIVE OFFICES)
GLENN W. MILLIGAN
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
21ST CENTURY TELECOM GROUP, INC.
WORLD TRADE CENTER, 350 NORTH ORLEANS, SUITE 600
CHICAGO, ILLINOIS 60654
(312) 470-2100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
EDWIN M. MARTIN, JR., ESQ.
PIPER & MARBURY, L.L.P.
1200 NINETEENTH STREET, N.W.
WASHINGTON, D.C. 20036
(202) 861-6315
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH
GENERAL INSTRUCTION G, PLEASE CHECK THE FOLLOWING BOX: [_]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST
THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING: [_]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(d) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING: [_]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX: [_]
CALCULATION OF REGISTRATION FEE
========================================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED
SECURITIES TO BE REGISTERED REGISTERED MAXIMUM MAXIMUM AMOUNT OF
AGGREGATE AGGREGATE REGISTRATION FEE
OFFERING PRICE OFFERING PRICE(2)
PER NOTE(1)
- ------------------------------------------------------------------------------------------------------------------------
12 1/4 SENIOR DISCOUNT NOTES DUE 2008 $363,135,000 55% $200,000,000 $ 0
- ------------------------------------------------------------------------------------------------------------------------
13 3/4 SENIOR CUMULATIVE EXCHANGEABLE $ 50,000,000 100% $ 50,000,000 $ 0
PREFERRED STOCK DUE 2010
========================================================================================================================
(1) ESTIMATED SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION FEE.
(2) CALCULATED PURSUANT TO RULE 457(o).
(3) A registration fee of $59,000 for the 12 1/4% Senior Discount Notes Due
2008 and $ 14,750 for the 13 3/4% of Senior Cumulative Exchangeable
Preferred Stock Due 2010 was paid at the time of the initial filing of this
registration statement.
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1998
Preliminary Prospectus
LOGO
21ST CENTURY TELECOM GROUP, INC.
Offer to Exchange (i) 12 1/4% Senior Discount Notes Due 2008, which have been
registered under the Securities Act of 1933, as amended, for any and all of its
outstanding 12 1/4% Senior Discount Notes Due 2008 and (ii) 13 3/4% Senior
Cumulative Exchangeable Preferred Stock Due 2010, which has been registered
under the Securities Act of 1933, as amended, for any and all of its outstanding
13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010
The Exchange Offer will expire at 5:00 p.m., Eastern Standard Time, on
June [_], 1998 unless extended.
21st Century Telecom Group, Inc. ("21st Century" or the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letters of transmittal (each a "Letter of
Transmittal," collectively the "Letters of Transmittal" and, together with this
Prospectus, the "Exchange Offer"), (i) to exchange its 12 1/4% Senior Discount
Notes Due 2008 (the "New Notes") which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for an equal
principal amount of its outstanding 12 1/4% Senior Discount Notes Due 2008 (the
"Old Notes" and, together with the New Notes, the "Notes"), of which, as of the
date of this Prospectus, there was outstanding $363,135,000 principal amount at
maturity and (ii) to exchange shares of its 13 3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010 (the "New Exchangeable Preferred Stock")
which have been registered under the Securities Act, pursuant to a Registration
Statement of which this Prospectus is a part, for an equal number of shares of
its outstanding 13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010
(the "Old Exchangeable Preferred Stock" and, together with the New Exchangeable
Preferred Stock, the "Exchangeable Preferred Stock"). Shares of the Old
Exchangeable Preferred Stock were originally sold on February 9, 1998 (the
"Issue Date") as a component of Units (the "Units") consisting of one share of
Old Exchangeable Preferred Stock and one Warrant (a "Warrant") to purchase
8.7774 shares of common stock, no par value, of the Company at an exercise price
of $.01 per share. An additional 1833.33 shares of Old Exchangeable Preferred
Stock will be issued on May 15, 1998 as the first dividend payment on the Old
Exchangeable Preferred Stock. The sale of the Old Notes and the Units is
referred to herein as the "Private Placement. "
The Company will accept for exchange any and all Old Notes or shares of Old
Exchangeable Preferred Stock that are validly tendered and not withdrawn on or
prior to 5:00 p.m., Eastern Standard Time, on the date the Exchange Offer
expires (the "Expiration Date"), which will be June [_], 1998 (30 days
following the commencement of the Exchange Offer), unless the Exchange Offer is
extended. Tenders of Old Notes or shares of Old Exchangeable Preferred Stock
may be withdrawn at any time prior to 5:00 p.m., Eastern Standard Time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes or minimum number of shares of Old Exchangeable
Preferred Stock being tendered for exchange. See "The Exchange Offer."
1
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Indenture (as defined), which governs both the Old Notes and the New Notes. The
form and terms of the New Notes and the New Exchangeable Preferred Stock
(together, the "New Securities") are substantially identical to the form and
terms of the Old Notes and the Old Exchangeable Preferred Stock (together, the
"Old Securities" and collectively with the New Securities, the "Securities"),
respectively, except that the offer of the New Securities will have been
registered under the Securities Act and, therefore, the New Securities will not
bear legends restricting the transfer thereof. See "Description of the New
Notes" and "Description of New Exchangeable Preferred Stock."
The New Notes will be issued at a substantial original issue discount ("OID"),
and the holders of the New Notes will be required to include such OID in gross
income for U.S. Federal income tax purposes on a constant yield to maturity
basis, in advance of the receipt of the cash payments to which such income is
attributable. See "Certain United States Federal Income Tax Consequences." The
price to investors for the New Notes shown below represents a yield to maturity
of 12 1/4% per annum (computed on a semiannual bond equivalent basis). The New
Notes will begin to accrue interest at a rate of 12 1/4% per annum commencing
February 15, 2003, and interest will be payable thereafter on February 15 and
August 15 of each year. The New Notes will not be redeemable at the option of
the Company prior to February 15, 2003, except that until February 15, 2001, the
Company may redeem, at its option, in the aggregate up to 35% of the Accreted
Value of the Notes at the redemption price set forth herein with the net
proceeds of one or more Equity Offerings (as defined) following which there is a
Public Market (as defined) if at least $236.0 million principal amount at
maturity of the Notes remains outstanding after any such redemption. On or after
February 15, 2003, the New Notes may be redeemed at the option of the Company,
in whole or in part, at the redemption prices set forth herein. Upon a Change of
Control, each holder of the New Notes may require the Company to purchase such
New Notes at a purchase price equal to 101% of their Accreted Value thereof plus
accrued and unpaid interest, if any, to the date of purchase.
The New Notes will be senior unsecured indebtedness of the Company and will rank
pari passu in right of payment with all unsubordinated, unsecured indebtedness
of the Company and will rank senior in right of payment to all subordinated
indebtedness of the Company. As of December 31, 1997, after giving effect to the
Private Placement and the application of the proceeds therefrom, the Company
would have had outstanding $200.2 million of unsubordinated indebtedness and no
subordinated indebtedness. The New Notes will be effectively subordinated to all
current and future indebtedness of the Company's subsidiaries, including trade
payables and other accrued liabilities. See "Description of the New Notes."
Dividends on the New Exchangeable Preferred Stock will accrue from the date of
issuance and will be payable quarterly in arrears on February 15, May 15, August
15 and November 15 of each year, commencing May 15, 1998, at a rate per annum of
13 3/4% of the liquidation preference of $1,000 per share. Dividends will be
payable in cash, except that on each dividend payment date occurring on or prior
to February 15, 2003, dividends may be paid, at the Company's option, by the
issuance of additional shares of New Exchangeable Preferred Stock (including
fractional shares) having an aggregate liquidation preference equal to the
amount of such dividends. It is not anticipated that the Company will pay any
dividends in cash for any period ending on or prior to February 15, 2003. The
Indenture for the Notes also contains certain covenants that, among other
things, limit the payment of dividends and other distributions by the Company
and its Restricted Subsidiaries in respect of their capital stock. The New
Exchangeable Preferred Stock will not be redeemable prior to February 15, 2003
except that, on or prior to February 15, 2001, the Company may redeem, at its
option, in whole but not in part, the outstanding Exchangeable Preferred Stock
with the net proceeds of an Equity Offering at a redemption price of 113 3/4% of
the liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption. On or after February 15, 2003, the New Exchangeable
Preferred Stock is redeemable at the option of the Company, at the prices set
forth herein plus accumulated and unpaid dividends, if any, to the date of
redemption. The Company is required to redeem the New Exchangeable Preferred
Stock on February 15, 2010, at a redemption price equal to 100% of the
liquidation preference thereof plus accumulated and unpaid dividends, if any, to
the date of redemption.
The New Exchangeable Preferred Stock will rank senior to all other classes of
equity securities of the Company outstanding upon consummation of the Exchange
Offer, including but not limited to the 1,554,871 shares of 8% cumulative
preferred stock issued pursuant to the January 1997 Stock Purchase Agreement.
The Company may not authorize any new class of Parity Stock (as defined) or
Senior Stock (as defined) without the approval of at least a majority of the
shares of Exchangeable Preferred Stock then outstanding, voting or consenting,
as the case may be, as one class.
On any scheduled dividend payment date, the Company may, at its option,
exchange all but not less than all the shares of Exchangeable Preferred Stock
then outstanding for the Company's 13 3/4% Subordinated Exchange Debentures Due
2010 (the "Exchange Debentures"). The Exchange Debentures will bear interest
at a rate of 13 3/4% per annum, payable semiannually in arrears on February 15
and August 15 of each year, commencing with the first such date to occur after
the date of exchange. The Exchange Debentures will be subordinated to all
existing and future Senior Indebtedness (as defined), including indebtedness
represented by the Notes, of the Company and to all indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries. See
"Description of the Exchange Debentures--Ranking."
2
The New Securities are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement, dated
February 2, 1998, among the Company and the other signatories thereto (the
"Registration Rights Agreement"). Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, the Company believes that the New Securities
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than any holder that is an
"affiliate" of the Company as defined under Rule 405 of the Securities Act),
provided that such New Securities are acquired in the ordinary course of such
holders' business and such holders are not engaged in, and do not intend to
engage in, a distribution of such New Securities and have no arrangement with
any person to participate in the distribution of such New Securities. However,
the staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances. By tendering the Old Securities in exchange for
the New Securities, each holder, other than a broker-dealer, will represent to
the Company that (i) it is not an affiliate of the Company (as defined under
Rule 405 of the Securities Act), (ii) any New Securities to be received by it
were acquired in its ordinary business and (iii) it is not engaged in, and does
not intend to engage in, a distribution of such New Securities and has no
arrangement or understanding to participate in a distribution of the New
Securities. Each broker-dealer that receives New Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Securities. The Letters of
Transmittal state that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Securities received in exchange for Old Securities, where
such Old Securities were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
starting on the Expiration Date and ending on the close of business 180 days
after the Expiration Date, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. Each broker-dealer that
acquired Old Securities directly from the Company, and not as a result of
market-making or trading activities, must, in the absence of an exemption,
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with the secondary resale of the New Securities and
cannot rely on the position of the staff of the Commission enunciated in
no-action letters issued to third parties. In addition, until [ , 1998] (90 days
after the date of this Prospectus), all dealers effecting transactions in the
New Notes or shares of New Exchangeable Preferred Stock may be required to
deliver a prospectus. See "Plan of Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Securities or the New Securities. If such a market were to develop, the New
Notes and the New Exchangeable Preferred Stock could trade at prices that may be
higher or lower than their principal amount or liquidation preference,
respectively. The Company does not intend to apply for listing or quotation of
the New Notes or New Exchangeable Preferred Stock on any securities exchange or
stock market. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Notes or New Exchangeable Preferred Stock or that an
active public market for the New Notes or New Exchangeable Preferred Stock will
develop. See "Risk Factors--Lack of Public Market."
Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and
BancBoston Securities Inc. (the "Initial Purchasers") have agreed that one or
more of them will act as market-makers for the New Securities. However, the
Initial Purchasers are not obligated to so act and they may discontinue any such
market-making at any time without notice. The Company will not receive any
proceeds from the Exchange Offer. The Company will pay all the expenses
incident to the Exchange Offer. No underwriter is being used in connection with
the Exchange Offer.
For a discussion of certain factors that should be considered by holders of Old
Securities who tender their Old Securities in the Exchange Offer, see "Risk
Factors" beginning on page __ of this Prospectus.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
3
"21st Century" is a trademark of the Company and is registered in certain
jurisdictions. This Prospectus also includes trademarks of companies other than
the Company.
4
PROSPECTUS SUMMARY
The following is a brief summary of the matters covered by this Prospectus and
is qualified in its entirety by the more detailed information (including the
financial statements and the notes thereto) included elsewhere herein. Unless
the context indicates otherwise, "21st Century" or the "Company" means 21st
Century Telecom Group, Inc. All information contained in this Prospectus gives
effect to the Company's 1,000-for-1 common stock split and an increase in the
authorized number of shares of the Company's common stock, which were effected
in January 1998.
THE COMPANY
21st Century is an integrated, facilities-based communications company which
seeks to be the first provider of bundled voice, video and high-speed data
services (including cable television, high-speed internet access, and local and
long distance telephone service) in selected midwestern markets beginning with
Chicago's Area 1, for which the Company has been awarded a non-exclusive 15-year
renewable franchise by the City of Chicago. Area 1 stretches more than 16 miles
along Chicago's densely populated lakefront skyline and includes the affluent
residential neighborhoods of the Gold Coast, Lincoln Park and Dearborn Park and
the nation's second largest business and financial district. The Company has
developed (and has begun to install and activate) an advanced fiber optic
network that employs a distributed ring-star architecture characterized by
fiber-richness, two-way interactivity and SONET-based redundancy and self-
healing attributes (the "DRS Network"). The DRS Network accommodates not only
traditional voice and video applications, but also the rapidly growing demand
for high-speed data services. Although it has claimed no intellectual property
rights in the DRS Network, the Company believes that the DRS Network provides
the Company with significant strategic advantages that will differentiate 21st
Century from its competitors, such as improved time-to-market, multiple revenue
streams, enhanced service quality and reliability and the ability to provide
attractively priced bundled services.
The Company has secured a non-exclusive 15-year renewable attachment agreement
with the Chicago Transit Authority (the "CTA"), which reduces costly and time-
consuming "make-ready" and underground construction for the DRS Network and
enables the Company to install and activate the DRS Network rapidly and
efficiently by taking advantage of access to the CTA's elevated and underground
rail systems. The Company also has secured non-exclusive pole attachment
agreements with Commonwealth Edison Company ("Commonwealth Edison") and a
subsidiary of Ameritech Corporation ("Ameritech") which provide 21st Century
access to scarce pole space within Area 1 to further facilitate deployment of
its DRS Network. The decentralized configuration of the DRS Network (which
includes distributed hubs and nodes that act "intelligently" to route network
traffic efficiently) together with the CTA and the pole attachment agreements,
enable network construction to be driven in large part by market demand and
revenue potential in contrast to the conventional approach of building a system
from the headend outward on a block-by-block basis. To fully exploit this
advantage, the Company's sales and marketing strategy is coordinated with
ongoing network construction and focused on securing bulk contracts with 125-
unit or larger multiple dwelling unit buildings ("MDUs"). The Company believes
that this strategy will help to identify the optimal sequence of node activation
on the DRS Network and tie capital expenditures more directly to revenue-
producing subscribers.
21st Century's DRS Network currently provides video, audio and data services.
These services include 110 analog video channels, 59 interactive information
channels with local content (e.g., train and airline schedules, restaurant
menus, local news and sports scores, stock quotes and expressway traffic
updates) and 22 specialty audio channels (e.g., international and foreign
language programming, BBC radio broadcasts, reading services for the blind,
commercial-free music categories and select distant-market FM stations), with
significant capacity for additional broadband and narrowband products and
services. The Company's data product is its 4 Mbps cable modem Internet access
service, which is delivered at symmetrical speeds more than 125 times faster
than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN
modem. The Company is also hosting websites for commercial customers. The
Company will also provide switched, facilities-based competitive local
exchange carrier ("CLEC") services with last mile connectivity and local dial
tone to both commercial accounts and selected residential subscribers upon
receipt of the necessary regulatory approval and installation of the requisite
telephony equipment. The Company currently provides telephony service on a test
basis and plans to begin offering in mid-1998 a broad range of competitive
telephony services (e.g., local, long distance and enhanced services) to
5
both commercial accounts and selected residential subscribers, most of whom
currently have no facilities-based alternative to the service provided over the
network of the incumbent local exchange carrier ("ILEC").
The City of Chicago is the third largest urban market in the United States and
Area 1 is the densest section of the city, characterized by a high concentration
of MDUs and commercial office buildings. Area 1 has several significant and
attractive attributes, including a relatively high density of 12,000 housing
units per square mile (compared with a density for the entire City of Chicago of
5,000 housing units per square mile); more than 300,000 homes (many of which are
located in upscale, demographically attractive lakefront neighborhoods);
existing cable penetration that the Company believes is significantly below the
national average for urban areas; and approximately 51,000 employers in the
City's prominent business and financial districts, which include such businesses
and landmarks as the Mercantile Exchange, Sears Tower, Chicago Board of Trade,
Chicago Board of Options Exchange, Federal Reserve, Hancock Building, Amoco
Tower, major banks and other premier businesses.
21st Century has taken significant steps to implement its business plan and
service offerings in Chicago's Area 1. In addition to securing the Area 1
franchise, the CTA attachment agreement and the Commonwealth Edison and
Ameritech pole attachment agreements, the Company has (i) constructed and
activated its network operations center ("NOC"), which includes a video
headend and a data operations center ("DOC"), (ii) completed the northern
fiber transport ring of the DRS Network, extending from the downtown business
district to the northern portions of the city bordering Evanston, (iii) secured
programming content for more than 170 channels of video and interactive
information programming, (iv) constructed and activated portions of the outside
fiber distribution network to reach selected MDUs, (v) initiated customer
installation processes, billing, call center and customer care services, (vi)
secured contracts for more than 4,000 residential subscribers (which include
more than 2,000 new subscribers under 5-year bulk MDU agreements as well as
subscribers acquired in early 1997 from an affiliated company) and (vii) passed
with its initial distribution facilities more than 15,800 additional potential
subscribers. The Company has completed installation of approximately 5 percent
of the fiber optic strand miles that will ultimately make up the DRS Network.
The Company has also entered into an agreement with Nortel for the acquisition
and installation of the switching and other ancillary equipment necessary for it
to provide telephony services.
BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES
The Company believes that it can exploit its innovative DRS Network, superior
product offerings and other strategic assets to compete strongly in Chicago's
Area 1 and other selected markets. 21st Century's strategy and competitive
advantages include the following key components:
DEVELOP HIGH-CAPACITY, FULL-SERVICE DRS NETWORK. 21st Century intends to
exploit the advantages of its innovative, internally-developed DRS Network
architecture to provide fully integrated voice, video and high-speed data
services. Key attributes of the DRS Network include (i) an advanced integrated
network design built to the rigorous Bellcore standards, (ii) the distribution
of switching and traffic routing mechanics at specific locations out on the DRS
Network (rather than being concentrated at one point as in conventional
networks), allowing the Company to efficiently and economically route traffic
regardless of penetration and usage levels, (iii) a SONET-based redundancy and
self-healing architecture with both circuit and route diversity, (iv) multiple
layers of power redundancy to ensure network reliability and (v) a large fiber
capacity permitting delivery of advanced two-way, fully-interactive broadband
services, as well as significant unutilized capacity to allow the Company to
upgrade services, add applications and develop new product offerings without
service interruption or interference.
DEPLOY DRS NETWORK COST-EFFECTIVELY ON A REVENUE-DRIVEN BASIS. The
decentralized configuration of the DRS Network, combined with the CTA and pole
attachment agreements, allows the Company to rapidly and efficiently deploy the
DRS Network to accommodate market demand on a revenue-driven basis. This
strategy contrasts sharply with the typical approach of building a conventional
coaxial cable system from the headend outward on a block-by-block basis. This
DRS Network advantage will also allow the Company to efficiently utilize its
capital resources to secure larger MDU bulk video contracts which will be used
as the basis for node activation;
6
thus, more significant revenue streams should be realized earlier in the planned
3-4 year construction buildout than would be realized by a conventional coaxial
cable system buildout. After a large MDU is activated within a node, the Company
will then market its premium cable and pay-per-view video services, as well as
its high-speed data and, when available, telephony services, to its cable
subscribers in order to leverage MDU subscriber relationships. In addition, 21st
Century will market its full range of voice, video and high-speed data services
to the other MDUs and homes passed (collectively, "Homes Passed") which are
located between the node and the transport ring. For commercial subscribers, the
Company will seek initially to deploy the DRS Network in Chicago's dense central
downtown area to (i) small to mid-sized commercial accounts and communications-
intensive businesses that have an interest in the Company's high-speed data and
Internet services and (ii) organizations such as the Building Owners Management
Association and other facilities management companies that influence the
selection of communications facilities installed at multiple buildings, as well
as industry associations which the Company believes will encourage member
companies to use the Company's services.
PROVIDE SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS. The Company believes
that its voice, video and high-speed data product offerings will be superior to
competitive products currently available in Area 1 in terms of (i) the breadth
and quality of the individual product offerings, (ii) the extent of the enhanced
service features offered to the customer and (iii) the ability to bundle such
product offerings into a simple, convenient and attractively priced package. The
Company's current video offering includes 110 analog video channels, 59
interactive information channels and 22 specialty audio channels, with
significant capacity for additional broadband and narrowband products and
services. 21st Century's fiber-rich DRS Network is designed with only one to
four amplifiers in cascade between its NOC and the subscriber (compared to up to
40 amplifiers used by conventional networks). This reduction in amplifiers
significantly reduces signal degradation and results in higher video quality and
telephony reliability, a superior audio component and greater data transmission
accuracy. The Company's interactive information channels, which provide useful
local content and information, are currently not available from any other single
source in Area 1. The Company's high-speed data offering includes cable modems
that provide access to the Internet at 4 Mbps, which is approximately 125 times
faster than the prevalent 28.8 Kbps telephone modem and 25 times faster than an
ISDN modem. Beginning in mid-1998, the Company expects to begin marketing a
broad range of competitive telephony services (e.g., local, long distance, call
waiting, call forwarding, caller ID and three-way calling) to both commercial
accounts and selected residential subscribers, most of whom currently have no
facilities-based alternative to the service provided over the ILEC's network.
The Company's bundled service offering will provide customers with convenient
"one-stop shopping," attractive pricing through significant bundled discounts,
a single source for installation and service and the ease of a single monthly
bill.
LEVERAGE STRATEGIC ASSETS. The Company's core strategic assets include (i)
the 15-year renewable franchise granted by the City of Chicago, which permits
the construction and installation of a network serving the entirety of Chicago's
Area 1 and (ii) the attachment agreement negotiated with the CTA and the pole
attachment arrangements negotiated with Commonwealth Edison and Ameritech, which
facilitate the timely and efficient buildout of the DRS Network through the
utilization of scarce pole space and city infrastructure rights-of-way. Each of
these assets is a valuable and important component of the Company's facilities-
based business strategy and together would be difficult for another entrant to
replicate.
SECURE FIRST-TO-MARKET ADVANTAGES. The Company seeks to be the first-to-
market in offering bundled voice, video and high-speed data services in
Chicago's Area 1 and other selected markets. The Company believes that the rapid
buildout of the DRS Network will enable it to acquire a significant customer
base and will give it a competitive advantage over other prospective bundled and
single-service providers.
CONTINUE TO ATTRACT EXPERIENCED MANAGEMENT. The Company's management team
has extensive and diverse experience in the cable television, Internet, data and
telecommunications industries. During the past year, the Company's senior
management has demonstrated its expertise by constructing and activating the
NOC, completing the northern fiber transport ring of the DRS Network, securing
necessary programming content and initiating services. The Company intends to
continue to attract qualified senior-level management with demonstrated
expertise from the various industries comprising the Company's service offering.
7
FOCUS ON SUPERIOR CUSTOMER CARE. The Company is committed to providing
superior customer care to differentiate 21st Century from its competitors. To
accomplish this, the Company has (i) contracted with a third party to provide a
single billing statement for its voice, video and data services (which will
facilitate bundled discounting for multiple services, permit customized billing
statements and permit monthly, transactional and metered billing to support the
Company's planned product lines) and (ii) established a relationship with a
leading call center services provider to staff and operate a 24-hour call
center. The Company believes that the quality and reliability of its services
will result in fewer in-bound subscriber complaints, service requests and other
non-revenue producing calls. In addition, the Company has installed
sophisticated status monitoring equipment in the NOC and throughout its DRS
Network, which should allow the Company to become aware of and remedy many
potential problems before they are detectable by subscribers.
EXPAND TO ADDITIONAL MARKETS. The Company intends to expand its operations
to selected midwestern markets which have the size, demographics and
geographical location suitable for its business strategy. Although the Company
may consider stand-alone systems, the Company expects to focus on markets in
which it can use its Chicago DRS Network and NOC to achieve synergies and
economies of scale. The Company has applied for franchises in a number of cities
in suburban Chicago, central, southcentral and southwestern Michigan and
northern Indiana.
CURRENT INVESTORS
In addition to the $1.9 million initial equity investment by the Company's
founding common shareholders, the Company obtained a $21.8 million investment in
the form of convertible 8% cumulative preferred stock in January 1997 from a
group of private equity investors which includes various entities affiliated
with Purnendu Chatterjee and Soros Management Fund; various entities affiliated
with William Farley, chairman of Fruit of the Loom, Inc.; Chicago-based
telecommunications investment specialists JK&B Capital; and Boston Capital
Ventures. In September and November 1997, the Company issued an additional $1.15
million of convertible 8% cumulative preferred stock, $1.0 million of which was
issued to Consolidated Communications, a wholly owned subsidiary of McLeod, Inc.
In January 1998, several common shareholders and certain other persons and
entities purchased approximately $1.5 million of convertible 8% cumulative
preferred stock.
8
THE EXCHANGE OFFER
Registration Agreement The Old Securities were sold by the Company on February
9, 1998 (the "Issue Date"), to Credit Suisse First
Boston Corporation, BancAmerica Robertson Stephens and
BancBoston Securities Inc. (the "Initial Purchasers"),
which placed such Old Securities with institutional
investors. In addition, 1833.33 shares of Old
Exchangeable Preferred Stock will be issued on May 15,
1998 as the first dividend payment on the Old
Exchangeable Preferred Stock. In connection therewith,
the Company executed and delivered for the benefit of
the holders of the Old Securities the Registration
Rights Agreement obligating the Company to file with
the Commission within 45 days after the date of
issuance of the Old Securities, a registration
statement under the Securities Act relating to (i) an
exchange offer for the Old Notes (the "Notes Exchange
Offer") and (ii) an exchange offer for shares of Old
Exchangeable Preferred Stock (the "Preferred Stock
Exchange Offer" and, together with the Notes Exchange
Offer, the "Exchange Offer") and to use its best
efforts to cause such registration statement to become
effective within 150 days after the Issue Date.
The Exchange Offer New Notes are being offered in exchange for an equal
principal amount at maturity of Old Notes. As of the
date hereof, there was outstanding $363,135,000
principal amount at maturity of Old Notes. New
Exchangeable Preferred Stock is being offered in
exchange for an equal number of shares of Old
Exchangeable Preferred Stock. Because the New Notes and
New Exchangeable Preferred Stock will be recorded in
the Company's accounting records at the same carrying
value as the Old Notes and Old Exchangeable Preferred
Stock, respectively, no gain or loss will be recognized
by the Company upon the consummation of the Exchange
Offer. See "The Exchange Offer--Accounting Treatment."
Holders of the Old Notes or Old Exchangeable Preferred
Stock do not have appraisal or dissenter's rights in
connection with the Exchange Offer under the Illinois
Business Corporation Act (the "IBCA"), the governing
law of the state of incorporation of the Company.
Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to
third parties, the Company believes that the New
Securities issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by
holders thereof (other than any holder who is an
"affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of
the Securities Act; provided, however, that such New
Securities are acquired in the ordinary course of the
holder's business and such holders are not engaged in,
and do not intend to engage in, a distribution of such
New Securities and have no arrangement with any person
to participate in a distribution of such New
Securities. The staff of the Commission has not
considered the Exchange Offer in the context of a no-
action letter and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each
broker-dealer that receives New Securities for its own
account in exchange for Old Securities, where such Old
Securities were acquired by such broker-dealer as a
result of market-making activities or other
9
trading activities, must acknowledge that it
will deliver a prospectus in connection with
any resale of such New Securities. See "Plan
of Distribution." To comply with the
securities laws of certain jurisdictions, it
may be necessary to qualify for sale or
register the New Notes or New Exchangeable
Preferred Stock prior to offering or selling
such New Notes or New Exchangeable Preferred
Stock. The Company has agreed, pursuant to the
Registration Agreement and subject to certain
specified limitations therein, to register or
qualify the New Notes and New Exchangeable
Preferred Stock for offer or sale under the
securities or "blue sky" laws of such
jurisdictions as may be necessary to permit
the holders of New Securities to trade such
New Securities without any restrictions or
limitations under the securities laws of the
several states of the United States. If a
holder of Old Securities does not exchange
such Old Securities for New Securities
pursuant to the Exchange Offer, such Old
Securities will continue to be subject to the
restrictions on transfer contained in the
legend thereon. In general, the Old Securities
may not be offered or sold, unless registered
under the Securities Act, except pursuant to
an exemption from, or in a transaction not
subject to, the Securities Act and applicable
state securities laws. See "Risk Factors--
Consequences of Failure to Exchange."
Expiration Date 5:00 p.m. Eastern Standard Time, on June
[__], 1998 (30 days following the commencement
of the Exchange Offer), unless the Exchange
Offer is extended, in which case the term
"Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Conditions to the Exchange Offer The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company. See "The Exchange Offer--
Conditions." Except for the requirements of
applicable Federal and state securities laws,
there are no Federal or state regulatory
requirements to be complied with or obtained
by the Company in connection with the Exchange
Offer. NO VOTE OF THE COMPANY'S SECURITY
HOLDERS IS REQUIRED TO EFFECT THE EXCHANGE
OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS
BEING SOUGHT HEREBY.
Procedures for Tendering
Old Notes Each holder of Old Notes wishing to accept the
Notes Exchange Offer must complete, sign and
date the appropriate Letter of Transmittal
(the "Notes Letter of Transmittal"), or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Notes Letter of
Transmittal, or such facsimile together with
the Old Notes to be exchanged and any other
required documentation to the Notes Exchange
Agent (as defined) at the address set forth
herein and therein. See "The Exchange Offer--
Procedures for Tendering."
Procedures for Tendering Old
Exchangeable Preferred Stock Each holder of Old Exchangeable Preferred
Stock wishing to accept the Preferred Stock
Exchange Offer must complete, sign and date
the
10
appropriate Letter of Transmittal (the
"Preferred Stock Letter of Transmittal"), or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Preferred Stock
Letter of Transmittal, or such facsimile
together with the Old Exchangeable Preferred
Stock to be exchanged and any other required
documentation to the Preferred Stock Exchange
Agent (as defined) at the address set forth
herein and therein. See "The Exchange Offer--
Procedures for Tendering."
Withdrawal Rights Tenders of Old Securities may be withdrawn at
any time prior to 5:00 p.m., Eastern Standard
Time, on the Expiration Date. To withdraw a
tender of Old Securities, a written or
facsimile transmission notice of withdrawal
must be received by the Exchange Agent (as
defined) at its address set forth below under
"Exchange Agent" prior to 5:00 p.m., Eastern
Standard Time, on the Expiration Date.
Acceptance of Old Securities and
Delivery of New Securities Subject to certain conditions, the Company
will accept for exchange any and all Old
Securities which are properly tendered in the
Exchange Offer prior to 5:00 p.m., on the
Expiration Date. The New Securities issued
pursuant to the Exchange Offer will be
delivered promptly following the Expiration
Date. See "The Exchange Offer--Terms of the
Exchange Offer."
Exchange Agents State Street Bank and Trust Company is serving
as exchange agent (the "Notes Exchange Agent")
in connection with the Notes Exchange Offer.
Boston EquiServe Trust Company, N.A. is
serving as exchange agent (the "Preferred
Stock Exchange Agent") in connection with the
Preferred Stock Exchange Offer. Each of the
Notes Exchange Agent and the Preferred Stock
Exchange Agent are also referred to herein as
the "Exchange Agent."
Use of Proceeds There will be no proceeds to the Company from
the Exchange Offer. The net proceeds to the
Company from the Private Placement were
approximately $240.3 million (after deduction
of discounts and estimated offering expenses).
The Company will continue using such proceeds
for capital expenditures associated with the
continued expansion of the DRS Network in
Chicago's Area 1 and for additional working
capital and other general corporate purposes,
including funding operating deficits.
11
SUMMARY OF TERMS OF NEW NOTES AND
NEW EXCHANGEABLE PREFERRED STOCK
The Exchange Offer relates to the exchange of Old Notes for an equal
principal amount at maturity of New Notes and Old Exchangeable Preferred Stock
for an equal number of shares of New Exchangeable Preferred Stock. The New
Notes will be obligations of the Company evidencing the same indebtedness as the
Old Notes and will be entitled to the benefits of the same Indenture (as
defined), which governs both the Old Notes and the New Notes. The form and
terms of the New Notes and the New Exchangeable Preferred Stock are
substantially identical to the form and terms of the Old Notes and the Old
Exchangeable Preferred Stock, respectively, except that the offer of the New
Securities will have been registered under the Securities Act and, therefore,
the New Securities will not bear legends restricting the transfer thereof.
COMPARISON WITH OLD NOTES AND OLD EXCHANGEABLE PREFERRED STOCK
Freely Transferable Generally, the New Securities will be freely
transferable under the Securities Act by
holders who are not affiliates of the Company.
The New Notes and New Exchangeable Preferred
Stock otherwise will be substantially
identical in all material respects to the Old
Notes and Old Exchangeable Preferred Stock,
respectively. See "The Exchange Offer--Terms
of the Exchange Offer."
Registration Rights The holders of Old Securities currently are
entitled to certain registration rights
pursuant to a registration rights agreement
(the "Registration Rights Agreement") dated as
of February 2, 1998, between the Company and
the Initial Purchasers. However, upon
consummation of the Exchange Offer, subject to
certain exceptions, holders of Old Securities
who do not exchange their Old Securities for
New Securities in the Exchange Offer will no
longer be entitled to registration rights and
will not be able to offer or sell their Old
Securities, unless such Old Securities are
subsequently registered under the Securities
Act (which, subject to certain limited
exceptions, the Company will have no
obligation to do), except pursuant to an
exemption from, or in a transaction not
subject to, the Securities Act and applicable
state securities laws. See "Risk Factors--
Consequences of Failure to Exchange."
THE NEW NOTES
TERMS OF THE NEW NOTES
Maturity February 15, 2008.
Yield and Interest The issue price per New Note represents a
yield to maturity on the New Notes of 12 1/4%
(computed on a semi-annual bond equivalent
basis) calculated from the Issue Date. Except
as described herein, no cash interest will
accrue or be payable on the New Notes prior to
February 15, 2003. Thereafter, cash interest
will accrue at a rate of 12 1/4% per annum,
and cash interest will be payable on February
15 and August 15 of each year, commencing
August 15, 2003.
12
Original Issue Discount For U.S. Federal income tax purposes, the New
Notes will be issued with OID. Each holder of
a New Note must include such OID in gross
income for U.S. Federal income tax purposes in
advance of the receipt of the cash payments to
which such income is attributable. See
"Certain United States Federal Income Tax
Consequences."
Optional Redemption The New Notes will not be redeemable at the
option of the Company prior to February 15,
2003, except that until February 15, 2001, the
Company may redeem, at its option, in the
aggregate up to 35% of the principal amount at
maturity of the Notes at the redemption price
set forth herein with the net proceeds of one
or more Equity Offerings following which there
is a Public Market if at least $236.0 million
principal amount at maturity of the Notes
remains outstanding after any such redemption.
On or after February 15, 2003, the New Notes
may be redeemed at the option of the Company,
in whole or in part, at the redemption prices
set forth herein, together with accrued and
unpaid interest, if any, to the date of
redemption. See "Description of the New
Notes--Optional Redemption."
Change of Control Upon a Change of Control, each holder of New
Notes may require the Company to purchase all
or any portion of such holder's New Notes at a
purchase price equal to 101% of the Accreted
Value thereof plus accrued and unpaid
interest, if any, to the date of purchase.
There can be no assurance that the Company
will be able to raise sufficient funds to meet
this purchase obligation should it arise. See
"Description of the New Notes--Change of
Control."
Ranking The New Notes will be unsecured senior
obligations of the Company and will rank pari
passu in right of payment with all
unsubordinated, unsecured indebtedness of the
Company and will be senior in right of payment
to all subordinated indebtedness of the
Company. As of December 31, 1997, after giving
effect to the Private Placement and the
application of the proceeds therefrom, the
Company would have had outstanding $200.2
million of unsubordinated indebtedness and no
subordinated indebtedness. The Notes will be
effectively subordinated to all current and
future indebtedness of the Company's
subsidiaries, including trade payables and
other accrued liabilities.
Restrictive Covenants The Indenture (as defined) contains certain
covenants that, among other things, limit (i)
the incurrence of additional Indebtedness by
the Company and its Restricted Subsidiaries
(as defined), (ii) the payment of dividends
and other distributions by the Company and its
Restricted Subsidiaries in respect of their
capital stock, (iii) investments or other
restricted payments by the Company and its
Restricted Subsidiaries, (iv) asset sales, (v)
certain transactions with affiliates, (vi) the
sale or issuance of capital stock of
Restricted Subsidiaries, (vii) the incurrence
of liens and the entering into of
sale/leaseback transactions and (viii) mergers
and consolidations. The Indenture also
prohibits certain restrictions on
distributions from Restricted Subsidiaries.
All of these limitations and prohibitions,
however, are subject to a number of important
qualifications and exceptions. See
"Description of the New Notes--Certain
Covenants."
13
Use of Proceeds There will be no proceeds to the Company from
the Exchange Offer. The net proceeds to the
Company from the Private Placement were
approximately $240.3 million (after deduction
of discounts and estimated offering expenses).
The Company will continue using such proceeds
for capital expenditures associated with the
continued expansion of the DRS Network in
Chicago's Area 1 and for additional working
capital and other general corporate purposes,
including funding operating deficits.
THE NEW EXCHANGEABLE PREFERRED STOCK
TERMS OF THE NEW EXCHANGEABLE PREFERRED STOCK
Liquidation Preference $1,000 per share.
Dividends Dividends on the New Exchangeable Preferred
Stock will accrue at a rate of 13 3/4% per
annum of the liquidation preference thereof
and will be payable quarterly in arrears on
February 15, May 15, August 15 and November 15
of each year commencing May 15, 1998.
Dividends will be payable in cash, except that
on each dividend payment date occurring on or
prior to February 15, 2003, dividends may be
paid, at the Company's option, by the issuance
of additional shares of New Exchangeable
Preferred Stock (including fractional shares)
having an aggregate liquidation preference
equal to the amount of such dividends. It is
not anticipated that the Company will pay any
dividends in cash for any period ending on or
prior to February 15, 2003.
Ranking The New Exchangeable Preferred Stock will rank
senior to all other classes of equity
securities of the Company outstanding upon
consummation of the Exchange Offer, including
but not limited to the 1,554,871 shares of 8%
cumulative preferred stock issued pursuant to
the January 1997 Stock Purchase Agreement. The
Company may not authorize any new class of
Parity Stock or Senior Stock without the
approval of at least a majority of the shares
of Exchangeable Preferred Stock then
outstanding, voting or consenting, as the case
may be, as one class. See "Description of the
New Exchangeable Preferred
Stock--Ranking."
Optional Redemption The New Exchangeable Preferred Stock will not
be redeemable prior to February 15, 2003,
except that, on or prior to February 15, 2001,
the Company may redeem in whole but not in
part, at its option, the outstanding New
Exchangeable Preferred Stock at a redemption
price of 113 3/4% of the liquidation
preference thereof, plus accumulated and
unpaid dividends to the date of redemption,
with the net proceeds of an Equity Offering.
On or after February 15, 2003, the New
Exchangeable Preferred Stock is redeemable at
the option of the Company, in whole or in
part, at the redemption prices set forth
herein plus accumulated and unpaid dividends,
if any, to the date of redemption. See
"Description of the New Exchangeable Preferred
Stock--Optional Redemption."
14
Mandatory Redemption The New Exchangeable Preferred Stock is
subject to mandatory redemption at its
liquidation preference, plus accumulated and
unpaid dividends, if any, on February 15,
2010, out of any funds legally available
therefor.
Change of Control In the event of a Change of Control (as
defined), the Company shall offer to purchase
all outstanding shares of New Exchangeable
Preferred Stock, in whole or in part, at a
purchase price equal to 101% of the aggregate
liquidation preference thereof, plus
accumulated and unpaid dividends, if any, to
the date of purchase.
In the event the Company is not permitted by
applicable law or by the terms of any
indebtedness of the Company to make the offer
referred to above or to purchase any shares of
New Exchangeable Preferred Stock pursuant to
such offer, holders of a majority of the
Exchangeable Preferred Stock will designate an
Independent Financial Advisor (as defined) to
determine the appropriate dividend rate (the
"reset rate") that the New Exchangeable
Preferred Stock should bear so that, after the
dividend rate on the New Exchangeable
Preferred Stock is reset to such reset rate,
the New Exchangeable Preferred Stock would
have a market value of 101% of the liquidation
preference. After determination of the reset
rate, the New Exchangeable Preferred Stock
shall accrue and accumulate dividends at the
reset rate from and after the date of
occurrence of the Change of Control; provided,
however, that the reset rate shall in no event
be less than 13 3/4% per annum (the initial
dividend rate on the New Exchangeable
Preferred Stock) or greater than 15% per
annum. See "Description of the New
Exchangeable Preferred Stock--Change of
Control."
Voting Rights Holders of the New Exchangeable Preferred
Stock will have limited voting rights,
including (i) those required by law and (ii)
that holders of the outstanding shares of New
Exchangeable Preferred Stock, voting together
as a class with the holders of any other
series of preferred stock upon which like
rights have been conferred and are
exercisable, upon the failure of the Company
(1) to pay dividends for six or more dividend
periods (whether or not consecutive), (2) to
satisfy any mandatory redemption obligation
with respect to the New Exchangeable Preferred
Stock, (3) to comply with the covenants set
forth in the Amended Articles (as defined) or
(4) to make certain payments on certain
Indebtedness, will be entitled to elect the
lesser of (x) two members to the Board of
Directors of the Company and (y) that number
of directors constituting 25% of the members
of the Board of Directors of the Company. See
"Description of the New Exchangeable Preferred
Stock--Voting Rights."
Restrictive Covenants The Amended Articles (as defined herein) limit
(i) the incurrence of additional Indebtedness
by the Company and its Restricted
Subsidiaries, (ii) the payment of dividends
and other distributions by the Company and its
Restricted Subsidiaries in respect of their
capital stock, (iii) investments or other
restricted payments by the Company and its
Restricted Subsidiaries, (iv) asset sales, (v)
certain transactions with affiliates, (vi) the
sale or issuance of capital stock of
Restricted
15
Subsidiaries and (vii) mergers and
consolidations. The Amended Articles will also
prohibit certain restrictions on distributions
from Restricted Subsidiaries. All these
limitations and prohibitions, however, are
subject to a number of important
qualifications. See "Description of the New
Exchangeable Preferred Stock--Certain
Covenants."
Senior Debt Restrictions The Company's debt instruments, including the
Indenture for the Notes, contain provisions
which restrict, and if a default under any
thereof exists prohibit, redemption or
repurchase of the New Exchangeable Preferred
Stock, including upon a Change of Control or
through the issue of Exchange Debentures, and
the payment of cash dividends on the New
Exchangeable Preferred Stock. See "Risk
Factors" and "Description of the New Notes--
Certain Covenants."
Exchange Feature On any scheduled dividend payment date, the
Company may, at its option, exchange all but
not less than all the shares of Exchangeable
Preferred Stock then outstanding for Exchange
Debentures in a principal amount equal to the
liquidation preference of the shares of
Exchangeable Preferred Stock held by such
holder at the time of such exchange.
THE EXCHANGE DEBENTURES
Securities Offered 13 3/4% Subordinated Exchange Debentures Due
2010 issuable in exchange for the Exchangeable
Preferred Stock in an aggregate principal
amount equal to the sum of the liquidation
preference of the Exchangeable Preferred
Stock, plus accumulated and unpaid dividends
to the date of exchange.
Maturity February 15, 2010.
Interest The Exchange Debentures will bear interest at
the rate of 13 3/4% per annum, payable semi-
annually in arrears on February 15 and August
15, commencing with the first of such dates to
occur after the date of exchange (the
"Exchange Date"). On or prior to February 15,
2003, interest may, at the option of the
Company, be paid by issuing additional
Exchange Debentures with a principal amount
equal to such interest. After February 15,
2003, interest on the Exchange Debentures may
be paid only in cash.
Ranking The Exchange Debentures will be general
unsecured obligations of the Company,
subordinated in right of payment to all
existing and future Senior Indebtedness
(including the Notes) of the Company and to
all indebtedness and other liabilities
(including trade payables) of the Company's
subsidiaries. As of December 31, 1997 after
giving effect to the Private Placement and the
application of the proceeds therefrom, the
Company would have had $200.2 million of
outstanding indebtedness, all of which would
have been senior in right of payment to the
Exchange Debentures. See "Description of the
Exchange Debentures--Ranking."
16
Optional Redemption The Exchange Debentures will not be redeemable
prior to February 15, 2003, except that, until
February 15, 2001, the Company may redeem in
whole but not in part, at its option, the
Exchange Debentures at a redemption price of
113 3/4% of the principal amount thereof,
plus accrued and unpaid interest to the date
of redemption, with the net proceeds of an
Equity Offering. On or after February 15,
2003, the Exchange Debentures are redeemable
at the option of the Company, in whole or in
part, at the redemption prices set forth
herein plus accrued and unpaid interest, if
any, to the date of redemption. See
"Description of the Exchange Debentures--
Optional Redemption."
Change of Control In the event of a Change of Control, holders
of the Exchange Debentures will have the right
to require the Company to purchase their
Exchange Debentures, in whole or in part, at a
price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. See
"Description of the Exchange Debentures--
Change of Control."
Restrictive Covenants The indenture under which the Exchange
Debentures will be issued (the "Exchange
Indenture") limits (i) the incurrence of
additional Indebtedness by the Company and its
Restricted Subsidiaries, (ii) the payment of
dividends and other distributions by the
Company and its Restricted Subsidiaries in
respect of their capital stock, (iii)
investments or other restricted payments by
the Company and its Restricted Subsidiaries,
(iv) asset sales, (v) certain transactions
with affiliates, (vi) the sale or issuance of
capital stock of Restricted Subsidiaries and
(vi) mergers and consolidations. The Exchange
Indenture also prohibits certain restrictions
on distributions from Restricted Subsidiaries.
All these limitations and prohibitions,
however, are subject to a number of important
qualifications. See "Description of the
Exchange Debentures--Certain Covenants."
RISK FACTORS
See "Risk Factors" for certain factors that should be considered by holders of
Old Securities before tendering their Old Securities in the Exchange Offer.
17
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial and operating data for the
Company. The summary financial data as of and for the periods ended March 31,
1995, 1996 and 1997 have been derived from the audited financial statements of
the Company. The summary financial and operating data as of and for the nine
months ended December 31, 1996 and 1997 have been derived from the unaudited
financial statements of the Company and, in the opinion of the Company, include
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of such information. Operating results for the nine months ended
December 31, 1997 are not necessarily indicative of the results that may be
expected for the entire year. The summary financial and operating data set forth
below should be read in conjunction with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements included elsewhere in this Prospectus.
NINE MONTHS ENDED
Year Ended March 31, ------------------------------
--------------------------------------- DECEMBER 31,
------------------------------
1995 1996 1997 1996 1997
----------- ------------ ------------ ------------- ---------------
Statement of Operations Data:
Subscriber revenues $ -- $ -- $ 27,480 $ -- $ 123,532
Operating expenses -- 9,617 200,911 190,817 413,979
Selling, general and administrative 624,963 694,122 7,276,439
expenses 2,337,534 1,572,936
Depreciation and amortization 38,923 108,182 170,108 114,734 643,427
---------- ----------- ------------ ----------- ------------
Operating loss (663,886) (811,921) (2,681,073) (1,878,487) (8,210,313)
Interest income -- -- 301,624 142,603 484,678
Interest expense (115,428) (214,688) (437,843) (376,828) (119,226)
---------- ----------- ------------ ----------- ------------
Net loss (779,314) (1,026,609) (2,817,292) (2,112,712) (7,844,861)
Preferred stock requirements -- -- (478,981) -- (2,287,928)
---------- ----------- ------------ ----------- ------------
Net loss attributable to common
shares $ (779,314) $(1,026,609) $ (3,296,273) $(2,112,712) $(10,132,789)
========== =========== ============ =========== ============
Net loss per common share $(.52) $(.64) $(1.66) $(1.11) $(4.26)
========== =========== ============ =========== ============
Weighted average common
shares 1,508,000 1,609,129 1,988,365 1,900,527 2,380,926
OTHER DATA:
Capital expenditures $ -- $ -- $ 246,863 $ 47,118 $ 15,007,751
Number of subscribers
(end of period) -- -- 1,734 -- 3,019
Deficiency in earnings to
cover combined fixed charges (3) $ 779,314 $ 1,026,609 $ 3,296,273 $ 2,112,712 $ 10,132,789
Deficiency in earnings to cover
interest charges (3) $ 779,314 $ 1,026,609 $ 2,817,292 $ 2,112,712 $ 7,844,861
Deficiency in earnings to cover
preferred stock requirements (3) N/A N/A $ 2,840,046 N/A $ 9,865,538
PRO FORMA (2):
Net loss $(29,640,225) $ 27,767,075)
Preferred stock requirements (8,586,459) (8,274,205)
----------- -----------
Net loss attributable to common
shares $(38,226,684) $(36,041,280)
=========== ===========
Net loss per common share (19.23) (15.14)
=========== ===========
Deficiency in earnings to cover
combined fixed charges (3) $ 38,226,684 $ 36,041,280
=========== ===========
Deficiency in earnings to cover
interest charges (3) $ 29,640,225 $ 27,767,075
Deficiency in earnings to cover
preferred stock requirements (3) $ 10,947,524 $ 15,851,815
=========== ===========
December 31, 1997
----------------------------
Actual AS ADJUSTED(1)
------------ ------------
Balance Sheet Data:
Total assets $23,835,488 $265,392,870
Total liabilities 15,874,148 207,874,148
Total Class A Convertible 8%
Cumulative Preferred Stock 19,974,325 --
Total Exchangeable Preferred
Stock Due 2010 -- 45,455,300
Total shareholders' equity (12,012,985) 12,063,422
(1) Adjusted to give effect to the Private Placement and the application of the
net proceeds therefrom, certain revisions made to the Class A Convertible 8%
Cumulative Preferred Stock Agreement, the receipt of approximately $1.5
million of proceeds received from the issuance by the Company in January
1998 of 95.4 shares of Class A Convertible 8% Cumulative Preferred Stock and
reflects the repayment of $8.0 million outstanding under the Interim Credit
Facility.
(2) The year ended March 31, 1997 and nine months ended December 31, 1997, net
loss, preferred stock requirements, net loss attributable to common shares,
net loss per common share, ratio of earnings to combined fixed charges,
ratio of earnings to interest charges and ratio of earnings to preferred
stock requirements have been adjusted to reflect the impacts of the interest
expense, amortization of deferred debt costs, preferred stock dividends and
accretion associated with the Private Placement. The year ended March 31,
1997 and nine months ended December 31, 1997 reflect the first twelve and
nine months of interest expense, amortized debt costs, preferred stock
dividends, and accretion respectively.
(3) The Company has a deficiency of earnings necessary to cover its combined
fixed charges, interest payments and preferred dividend requirements,
historically and on a pro forma basis.
(4) The pro forma net income for the year ended March 31, 1997 includes twelve
months of pro forma interest expense totaling $27,260,776 which includes
$437,843 of historical interest expense as well as $25,276,002 of accretion
related to the original issue discount on the senior discount notes and
$1,546,931 of amortization of deferred issuance costs related to the senior
discount notes. The pro forma net income for the nine months ended December
31, 1997 includes nine months of pro forma interest expense totaling
$20,041,440 which includes $119,226 of historical interest expense as well
as $18,763,176 of accretion related to the original issue discount on the
senior discount notes and $1,159,038 of amortization of deferred issuance
costs related to the senior discount notes. The pro forma calculations
related to the senior discount notes were performed using the effective
interest method based on the following components: (1) the original carrying
value of the senior discount notes of $363,135,000 less the original issue
discount of $163,135,000 for a net carrying value of $200,000,000 and (2)
total issuance costs incurred in relation to the senior discount notes of
$7,886,824.
(5) The pro forma preferred stock requirements (dividends and accretion) for the
year ended March 31, 1997 totals $8,586,459 which includes $478,981 of
historical preferred stock requirements as well as twelve months of
preferred dividend requirements, $7,237,405, and twelve months of accretion,
$870,073, related to the senior exchangeable preferred stock. The pro forma
preferred stock requirements for the nine months ended December 31, 1997
totals $8,274,205 which includes $2,287,928 of historical preferred stock
requirements as well as nine months of preferred dividend requirements,
$5,335,255, and nine months of accretion, $651,022, related to the senior
exchangeable preferred stock. The pro forma calculations related to the
senior exchangeable preferred stock were performed using the effective
interest rate method based on the following components: (1) the redemption
value of the redeemable preferred stock of $50,000,000, (2) the portion of
the proceeds assigned to the related warrants of $2,605,500, (3) total
issuance costs incurred in relation to the senior exchangeable preferred
stock of $1,939,200, (4) quarterly compounding of preferred dividends, and
(5) dividend rate of 13 3/4%. This results in an initial carrying value of
$45,455,300 related to the senior exchangeable preferred stock.
18
RISK FACTORS
Holders of Old Securities should carefully consider the following risk
factors, as well as other information set forth in this Prospectus, before
tendering the Old Securities in the Exchange Offer. The risk factors below
(other than "Consequences of Failure to Exchange") are generally applicable to
the Old Securities as well as the New Securities.
This Prospectus contains certain forward-looking statements regarding the
Company's operations, economic performance and financial condition, in
particular, statements made as to plans to develop and construct the DRS
Network, add and upgrade facilities and offer services, the Company's intention
to connect certain subscribers to the DRS Network, the development of the
Company's businesses, the markets for the Company's services and products, the
Company's anticipated capital expenditures, the Company's anticipated sources of
capital and effects of regulatory reform and competitive and technological
developments. Such forward-looking statements are subject to known and unknown
risks and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors, including those identified in
this Section and elsewhere in this Prospectus. Such risks include, but are not
limited to, the Company's ability to successfully market its services to new
subscribers, access markets, finance network developments, and obtain rights-of-
way, building access rights and any required governmental authorizations,
franchises and permits, all in a timely manner, at a reasonable cost and on
satisfactory terms and conditions, as well as regulatory, legislative, judicial,
competitive and technological developments that could cause actual results to
vary materially from the future results indicated, expressed or implied, in such
forward-looking statements. Certain of these and other risk factors are more
completely described below.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Securities who do not exchange their Old Securities for New
Securities pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Securities as set forth in the legend
thereon as a consequence of the issuance of the Old Securities pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Securities may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Securities
under the Securities Act. Based on interpretations by the staff of the
Commission, as set forth in no-action letters to third parties, the Company
believes that the New Securities issued pursuant to the Exchange Offer in
exchange for Old Securities may be offered for resale, resold or otherwise
transferred by the holders thereof (other than any such holder that is an
"affiliate" of the issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act provided that such New Securities are acquired in the
ordinary course of such holders' business and such holders are not engaged in,
and do not intend to engage in, a distribution of such New Securities and have
no arrangement or understanding with any person to participate in the
distribution of such New Securities. The staff of the Commission has not
considered the Exchange Offer in the context of a no-action letter and there can
be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer. Each broker-dealer that
receives New Securities for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Securities. The Letters of Transmittal state that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning or the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Securities received in
exchange for Old Securities where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. Each broker-dealer that acquired Old
Securities directly from the Company, and not as a result of market-making or
trading activities, must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the secondary resale of the New Securities and cannot rely on
the position of the staff of the Commission enunciated in no-action letters
issued to third parties. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the New Securities may
not be offered or sold unless they have been registered or
19
with. To the extent that Old Securities are tendered and accepted in the
Exchange Offer, the trading market for the untendered and the tendered but
unaccepted Old Securities could be adversely affected. As indicated in the
Company's Summary Financial and Operating Data, footnote (3), the Company has a
deficiency of earnings necessary to cover its preferred dividend requirements,
historically and on a pro forma basis.
HISTORY OF LOSSES; EXPECTATION OF FUTURE LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS
The Company has had a cumulative net loss attributable to common shares of
$15,655,619 from its inception in 1992 through December 31, 1997, and incurred
net losses attributable to common shares of $3,296,273 and $10,132,789 for its
fiscal year ended March 31, 1997 and the nine months ended December 31, 1997,
respectively. At December 31, 1997, the Company had an accumulated deficit of
$15,655,619. Taking into consideration nine months and twelve months of interest
expense, amortized debt costs, preferred stock dividends and accretion related
to the Private Placement, the pro forma net loss attributable to common shares
for the nine months ended December 31, 1997 and year-ended March 31, 1997 are
$36,041,280 and $38,226,684, respectively. The implementation of the Company's
business plan to build out the DRS Network and commence construction of new
networks involves significant additional expenditures and substantially
increased depreciation and amortization expenses. Revenues currently are minimal
and may be slow in growing as services are new and may be subject to start-up
and other delays. Accordingly, the Company expects that it will incur net losses
and significant negative cash flow (after capital expenditures) during the next
several years as it continues to expand its operations. In addition to timely
and cost-effective construction efforts, the ability of the Company to achieve
profitability and positive cash flow will depend in large part on the successful
marketing of the voice, video and high-speed data services offered or to be
offered by the Company. There can be no assurance that the Company can
successfully compete in obtaining subscribers for its broadband services or that
the Company will generate sufficient revenues such that the Company's operations
will become profitable or generate positive cash flows in the future. If the
Company cannot achieve operating profitability or positive cash flows from
operating activities, it may not be able to meet its working capital or debt
service requirements, including its obligations under the New Notes, which would
cause an event of default under the Indenture and would substantially reduce or
eliminate the value of the New Exchangeable Preferred Stock. Moreover, if the
Company cannot achieve operating profitability or positive cash flows from
operating activities, it may not be able to meet its obligation to manditorily
redeem the New Exchangeable Preferred Stock in 2010. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's business requires substantial investment to finance capital
expenditures and related expenses to construct the DRS Network in Chicago, to
construct additional networks, to fund subscriber equipment, to purchase
equipment to initiate telephony services, to fund operating deficits as it
builds its subscriber base and to maintain the quality of its networks. The
Company estimates that its aggregate capital expenditure requirements related to
DRS Network construction will total approximately $270 million, of which between
approximately $90 million to $120 million is expected to be spent during
calendar year 1998. Actual costs and the timing thereof may vary significantly
from these estimates and will depend in part on the number of miles of the DRS
Network to be constructed in a particular period, other factors affecting
construction costs, the number of subscribers, the mix of services purchased,
the cost of subscriber equipment paid for or financed by the Company and other
factors. The Company has entered into a commitment letter with BankBoston, N.A.
and Bank of America NT&SA for a $50 million bank revolving credit facility to
provide supplemental financing. There are currently no amounts outstanding under
this facility. Although the Company's management believes that the proceeds from
the Private Placement, together with operating cash flow, will provide
sufficient funds to complete the DRS Network, the Company may need additional
financing to complete the DRS Network, to expand into additional cities, for new
business activities or in the event it decides to make acquisitions. Sources of
additional capital may include public and private equity and debt financing, and
the $50 million bank revolving credit facility referred to above. There can be
no assurance that the proposed bank financing or other financing will be
available to the Company on acceptable terms or at all. If the Company is not
successful in obtaining sufficient funds it may be required to defer or abandon
its expansion plans, which could limit the Company's growth and prospects, and
reduce some of the economies of scale the Company expects to obtain, including
with respect to purchases of equipment programming and advertising, which could
have an adverse effect on the Company's results of operations and financial
condition. Moreover, if the Company cannot achieve operating profitability or
positive cash flows from operating activities, it may not be able to meet its
obligation to manditorily redeem the New Exchangeable Preferred Stock in 2010.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
20
At December 31, 1997, on a pro forma basis, after giving effect to the Private
Placement and the application of the net proceeds therefrom, the Company would
have had $200.2 million of indebtedness, $45.5 million of Exchangeable Preferred
Stock and $12.1 million of shareholders' equity. The Indenture and the Amended
Articles limit, but do not prohibit, the incurrence of additional indebtedness
by the Company and its subsidiaries, and the Company may incur substantial
additional indebtedness to finance the construction of the DRS Network and
purchase related equipment. All additional indebtedness of the Company will rank
senior in right of payment to any payment obligations with respect to the New
Exchangeable Preferred Stock and the Exchange Debentures (to the extent that
such additional indebtedness represents Senior Indebtedness) and may be secured
debt, pari passu with or structurally senior to the New Notes. See "--Holding
Company Structure; Priority of Secured Debt." The debt service requirements of
any additional indebtedness would make it more difficult for the Company to meet
its payment obligations with respect to the New Notes, the New Exchangeable
Preferred Stock and the Exchange Debentures.
The level of the Company's indebtedness could adversely affect the Company in
a number of ways, including the following (i) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment (after ten
years) of the principal of and (after five years), of interest on the Notes and
will not be available for other purposes, (ii) the ability of the Company to
obtain any necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited, (iii)
the Company's level of indebtedness could limit its flexibility in planning for,
or reacting to, changes in its business, (iv) the Company may be more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage and (v) the Company's degree of indebtedness may make it more
vulnerable to a downturn in its business or the economy generally.
There can be no assurance that the Company will be able to meet its debt
service obligations, including its obligations under the New Notes. As indicated
in the Company's Summary Financial and Operating Data, footnote (3), the Company
has a deficiency of earnings necessary to cover its preferred dividend
requirements, historically and on a pro forma basis. In order to meet its debt
service obligations, the Company must successfully implement its strategy,
including constructing the DRS Network in Chicago, increasing the number of
subscribers for video and high-speed data services, initiating and obtaining
subscribers for its voice services and generating significant and sustained
growth in the Company's cash flow. There can be no assurance that the Company
will successfully implement its strategy or that the Company will be able to
generate sufficient cash flow from operating activities to meet its debt service
obligations and its working capital requirements. In the event the
implementation of the Company's strategy is delayed or is unsuccessful or the
Company does not generate sufficient cash flow to meet its debt service
obligations and its working capital requirements, the Company may need to seek
additional financing. There can be no assurance that any such financing could be
obtained on terms that are acceptable to the Company, or at all. In the absence
of such financing, the Company could be forced to dispose of assets in order to
make up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. There can be no assurance that the Company's assets could be sold
quickly enough or for sufficient amounts to enable the Company to meet its
obligations, including its obligations with respect to the Notes.
The Indenture and the Amended Articles impose, and future indebtedness may
impose, operating and financial restrictions on the Company and its
subsidiaries. These restrictions affect, and in certain cases significantly
limit or prohibit, among other things, the ability of the Company and its
subsidiaries to incur additional indebtedness, create liens upon assets, apply
the proceeds from the disposal of assets, make investments, make dividend
payments and other distributions on capital stock and redeem capital stock. The
limitations in the Indenture and the Amended Articles are subject to a number of
important qualifications and exceptions.
If the Company is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments from new financings or from asset
sales, or if the Company otherwise fails to comply with the various covenants in
its indebtedness, it would be in default under the terms thereof, which would
permit the holders of such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness of the Company.
Such defaults could delay or preclude payment of interest or principal on the
New Notes or the payment of dividends on the New Exchangeable Preferred Stock.
The ability of the Company to meet its obligations
21
will be dependent upon the future performance of the Company, which will be
subject to prevailing economic conditions and to financial, business and other
factors. See "Description of Certain Indebtedness," "Description of the New
Notes--Certain Covenants" and "Description of the New Exchangeable Preferred
Stock--Certain Covenants."
HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT
The Company is (or shortly after the Exchange Offer will be) a holding company
with no direct operations and no significant assets other than the stock of its
subsidiaries. The Company currently has three wholly-owned subsidiaries: 21st
Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.; and
21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom
Group of Michigan, Inc. has two wholly-owned subsidiaries: 21st Century Cable TV
of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company is
(or will be) dependent on the cash flows of its subsidiaries to meet its
obligations, including the payment of the principal of and interest on the Notes
and the payment of dividends on the Exchangeable Preferred Stock. The Company's
subsidiaries are (or will be) separate legal entities that have no obligation to
pay any amounts due pursuant to the Notes or the Exchangeable Preferred Stock or
to make any funds available therefor, whether by dividends, loans or other
payments. The ability of the Company's subsidiaries to make such dividends and
other payments to the Company will be subject to, among other things, the
availability of funds, the terms of such subsidiaries' indebtedness and
applicable state laws. Because the Company's subsidiaries will not guarantee the
payment of the principal of or interest on the Notes or the payment of dividends
on the Exchangeable Preferred Stock, any right of the Company to receive the
assets of any of its subsidiaries upon its liquidation or reorganization (and
the consequent right of holders of the Notes or the Exchangeable Preferred Stock
to participate in the distribution or realize proceeds from those assets) will
be effectively subordinated to the claims of the creditors of any such
subsidiary (including trade creditors and holders of indebtedness of such
subsidiary), except if and to the extent that the Company is itself a creditor
of such subsidiary, in which case the claims of the Company would still be
effectively subordinated to any security interest in the assets of such
subsidiary held by other creditors.
The New Notes are unsecured and therefore will be effectively subordinated in
right of payment to any secured indebtedness of the Company. The Indenture
permits the Company and its subsidiaries to incur an unlimited amount of
indebtedness to finance the acquisition of equipment, inventory and network
assets and to secure such indebtedness. Up to $50 million of bank indebtedness
may be secured by liens on all assets of the Company and its subsidiaries. In
the event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding with respect to the Company, the holders of any secured indebtedness
will be entitled to proceed against the collateral that secures such
indebtedness and such collateral will not be available for satisfaction of any
amounts owed under the Notes until such other creditors have been paid in full.
In addition, to the extent such assets did not satisfy in full the secured
indebtedness, the holders of such indebtedness would have a claim for any
shortfall that would be pari passu (or effectively senior if the indebtedness
were issued by a subsidiary) with the New Notes. Accordingly, there may only be
a limited amount of assets available to satisfy any claims of the holders of the
New Notes upon an acceleration of the New Notes. See "Description of the New
Notes--Ranking."
ABILITY TO PAY DIVIDENDS ON THE NEW EXCHANGEABLE PREFERRED STOCK
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and its ability to pay cash dividends on the New
Exchangeable Preferred Stock after February 15, 2003, will be subject to the
terms of the Indenture and any other indebtedness of the Company then
outstanding. The Indenture contains certain covenants that, among other things,
limit the payment of dividends and other distributions by the Company and its
Restricted Subsidiaries in respect of their capital stock. There can be no
assurance that the Indenture or the terms of other indebtedness of the Company
will permit the Company to pay cash dividends on the New Exchangeable Preferred
Stock. Moreover, under Illinois law the Company is permitted to pay dividends on
its capital stock, including the New Exchangeable Preferred Stock, only out of
its surplus, or in the event that it has no surplus, out of its net profits for
the year in which a dividend is declared or for the immediately preceding fiscal
year. Surplus is defined as the excess of a company's total assets over the sum
of its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends in cash, the Company must have surplus or net profits
equal to the full amount of the cash
22
dividends at the time such dividend is declared. The Company cannot predict what
the value of its assets or the amount of its liabilities will be in the future
and, accordingly, there can be no assurance that the Company will be able to pay
cash dividends on the New Exchangeable Preferred Stock.
RANKING OF THE NEW EXCHANGEABLE PREFERRED STOCK
The Company's obligations with respect to the New Exchangeable Preferred Stock
are subordinate and junior in right of payment to all present and future
indebtedness of the Company and its subsidiaries, including the New Notes, but
will rank senior to existing equity securities of the Company (other than the
Old Exchangeable Preferred Stock), including but not limited to the 1,554,871
shares of 8% cumulative preferred stock issued pursuant to the January 1997
Stock Purchase Agreement. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the New Exchangeable Preferred Stock only after all holders
of indebtedness, and all other creditors, of the Company have been paid, and
there may not be sufficient assets remaining to pay amounts due on any or all of
the New Exchangeable Preferred Stock then outstanding. See "Description of the
New Exchangeable Preferred Stock--Ranking."
While any shares of New Exchangeable Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock that ranks senior to or pari passu with the New Exchangeable
Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up without the consent of the holders of a
majority of the outstanding shares of Exchangeable Preferred Stock. However,
without the consent of any holder of Exchangeable Preferred Stock, the Company
may create additional classes of stock, increase the authorized number of shares
of preferred stock or issue a new series of stock that ranks junior to the New
Exchangeable Preferred Stock with respect to the payment of dividends and
amounts upon liquidation, dissolution or winding up.
SUBORDINATION OF THE EXCHANGE DEBENTURES
The payment of principal, premium, if any, and interest on or any other
amounts owing in respect of, the Exchange Debentures, if issued, will be
subordinated to the prior payment in full of all existing and future Senior
Indebtedness, including indebtedness represented by the New Notes, and will be
effectively subordinated to all indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries. The Indenture and the Exchange
Indenture permit the incurrence by the Company and its subsidiaries of
additional indebtedness, all of which may constitute Senior Indebtedness, under
certain circumstances. In addition, the Company may not pay principal of,
premium, if any, or interest on or any other amounts owing in respect of, the
Exchange Debentures, or purchase, redeem or otherwise retire the Exchange
Debentures, if (i) the obligations with respect to the Notes are not paid when
due or (ii) any other event of default has occurred under the Indenture, and is
continuing or would occur as a consequence of such payment. In the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Exchange Debentures only
after all Senior Indebtedness has been paid, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Exchange Debentures
then outstanding. See "Description of the Exchange Debentures--Ranking."
COMPETITION
The cable television, Internet and telephone service businesses are highly
competitive and the level of competition is increasing. The ability of the
Company to compete will depend in part on the technical advantages of its
systems, the quality and performance of the DRS Network, the Company's focus on
customer service, the pricing of its services and its ability to offer a bundle
of services not available from any other single vendor. There can be no
assurance that the Company will be able to compete successfully, that customers
will prefer bundled to single services or that competitive pressures will not
have a material adverse effect on the Company's business, operating results or
financial condition. See "Business--Competition." Also, there can be no
assurance that the market for
23
cable, Internet or telephone services will not ultimately be dominated by
approaches other than approaches marketed by the Company. Many of the Company's
competitors and potential competitors have longer operating histories, greater
name recognition, a larger subscriber base and significantly greater financial,
marketing, technical and other competitive resources than the Company. As a
result, they may be able to adapt more quickly to changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than can the Company. There can be no assurance that the Company's
current or potential competitors will not develop products comparable or
superior to those developed by the Company, adapt more quickly than the Company
to new technologies, evolving industry trends or changing customer requirements
or be more successful than the Company in marketing their products. Competition
could increase if new companies enter the market, which could result in price
reductions and loss of market share and could have a material adverse effect on
the Company's financial condition or results of operations. Although the Company
believes it has certain technological and other advantages over its competitors,
such advantages require continued investment by the Company in research,
development, DRS Network implementation and sales and marketing, and the Company
may not realize upon or maintain such advantages.
Television. In providing cable television service, the Company currently
competes with other cable television providers in Chicago, including TCI
Communications, Inc., which conducts business under the trade name Chicago Cable
("Chicago Cable"), a subsidiary of Tele-Communications, Inc. ("TCI"), and
competes or may compete with other means of video distribution, including
broadcast television stations, direct broadcast satellite ("DBS") companies,
microwave multipoint distribution systems ("MMDS"), satellite master antenna
television ("SMATV") and private home dish earth stations. Additional
competition may also come from new wireless local multipoint distribution
services ("LMDS") authorized by the Federal Communications Commission (the
"FCC"). In addition, the Telecommunications Act of 1996 (the "1996 Telecom Act")
repealed the cable television cross ownership ban and telephone companies will
now be permitted to provide cable television service within their service areas.
The Company also faces competition from other communications and entertainment
media, including newspapers, movie theaters, live sporting events and entities
that make videotaped movies and programs available for home rental.
Internet Services. In providing Internet access and high-speed data services,
the Company will compete with other network providers of such services,
providers of satellite-based Internet services, long-distance carriers that
offer Internet services and other cable television companies that offer or may
in the future offer Internet services. Technologies such as integrated services
digital network ("ISDN"), digital subscriber line ("DSL") and DBS offer high-
speed or broadband connections to the Internet, which address the basic
requirements for most Internet consumers today. In providing Internet services,
the Company likely will compete with companies such as DirecPC, one of the
principal providers of satellite-based Internet services in the United States,
long-distance carriers such as AT&T Corp. ("AT&T") and MCI Communications
Corporation ("MCI") and cable modem services such as @Home, a joint venture
among TCI and other large cable companies, and such Internet services providers
("ISPs") as WorldCom, Inc. ("WorldCom") and Teleport Communications Group
("TCG"), which also compete with 21st Century in the telephone and cable
industries. The Company will also compete with Ameritech, which recently
announced that it is providing high-speed Internet access using asynchronous
digital subscriber line ("ADSL") technology and will be collaborating with
Microsoft Corporation to facilitate the installation of its ADSL service.
Ameritech has announced plans to provide high-speed Internet access initially in
Ann Arbor, Michigan, and expects to offer such access in the Chicago area by
mid-1998.
Telephone. Once the Company begins providing local and long-distance
telephone service and long-distance access services, the Company will compete
with Ameritech, presently the only facilities-based provider available to the
local residential market, as well as with WorldCom and TCG. The Company will
also compete with long-distance carriers such as AT&T, MCI and Sprint
Corporation ("Sprint"), both in long-distance service and potentially in local
service. In January 1998, AT&T entered into an agreement to acquire all of the
outstanding common stock of TCG. The Company's ability to compete successfully
in telephony will depend on the overall bundle of services the Company is able
to offer, including price, features and customer service.
24
ABILITY TO COMPLETE DRS NETWORK CONSTRUCTION
The timing of completion of the various phases of construction of the DRS
Network is subject to numerous uncertainties. See "--Franchise Compliance and
Renewal" and "Legislation and Regulation." Although the CTA, Commonwealth
Edison and Ameritech attachment agreements reduce the need for underground
construction, the Company still will be required to build significant portions
of the DRS Network underground, and also must complete connections through
wiring of multiple units in MDUs and other multi-unit buildings. Delays in
receiving the necessary financing, in performing the "make-ready" work to use
essential utility facilities (e.g., to attach the cable to utility poles), in
receiving necessary permits and approvals for underground and other
construction, and in conducting the construction itself (due to inclement
weather, labor problems and other causes) could adversely affect the Company's
schedule. In order to develop the DRS Network, the Company must obtain building
access agreements, certain permits and certain rights-of-way and fiber capacity
from entities such as telecommunications companies and other utilities,
railroads, highway authorities, local governments and transit authorities. There
can be no assurance that the Company will be able to maintain its existing
franchises, permits and rights or obtain the other permits, building access
agreements and rights needed to implement its business plan on acceptable terms
and in a timely manner. In constructing the DRS Network, the Company also will
be dependent on the performance of contractors and other third parties. There
can be no assurance that the Company will be able to secure a sufficient number
of contractors or other third parties to construct the DRS Network at an
acceptable price or at all or that such contractors or other third parties will
perform in accordance with the Company's expectations. Any delay in implementing
or constructing the DRS Network or installing necessary equipment will have an
adverse effect on the Company's results of operations and financial condition.
ABILITY TO MANAGE GROWTH
The Company's plan is to obtain subscribers quickly and to grow rapidly. To
date, the Company's operations have been limited, and rapid growth may place a
significant strain on the Company's DRS Network and management, administrative,
operational and financial resources. The Company's ability to manage its growth
successfully will require the Company to further enhance its operational,
management, financial and information systems and controls. The Company's
success will also depend in part upon its ability to hire and retain qualified
sales, marketing, administrative, operating and technical personnel. In
addition, as the Company increases its service offerings and expands its
targeted markets, there will be additional demands on the Company's customer
support, sales, marketing and administrative resources as well as on the DRS
Network infrastructure. While the Company's DRS Network is operational, it has
not been tested under circumstances consistent with the more significant volume
of activity anticipated upon buildout of the DRS Network and increase of the
Company's subscriber base. The Company's inability to effectively manage its
growth could have a significant adverse effect on the Company, its results of
operations and financial condition.
While the Company does not currently intend to pursue an acquisition strategy,
the Company may acquire existing companies or networks under certain
circumstances. If the Company acquires existing companies or networks, or enters
into joint ventures as part of its expansion plan, it will be subject to the
risks generally attendant to an acquisition strategy or joint venture. Such
risks include the acquired company or joint venture not having all the benefits
that are anticipated, the diversion of resources and management time, the
integration of the acquired business or joint venture with the Company's
operations, the potential impairment of relationships with employees or
customers as a result of the acquisition or joint venture, the additional debt
burden or dilution incurred to pay the purchase price or capital investment
requirements, and other matters. There are also additional risks in
participating in joint ventures, including the risk that the other joint venture
partners may at any time have economic, business or legal interests or goals
that are inconsistent with those of the joint venture or the Company or that a
joint venture partner may be unable to meet its economic or other obligations in
the joint venture and that the Company may be required to fulfill some or all of
those obligations.
25
SALES AND DISTRIBUTION STAFFING
As of March 31, 1998, the Company had 32 employees in sales and marketing,
many of whom have been employed by the Company for less than one year. In order
to increase its direct sales effort, the Company will need to increase the size
of its internal sales and marketing staff, and will be required to obtain
marketing personnel who have experience in all three components of its broadband
service. There can be no assurance that the Company will be able to identify and
attract sufficient numbers of qualified personnel or that the Company's sales
and marketing operations will successfully compete against the more extensive
and well-funded sales and marketing operations of many of the Company's current
and future competitors.
UNCERTAIN DEMAND FOR BROADBAND SERVICES
The Company's business strategy to provide broadband services is comparatively
untested and subject to certain risks such as future competition, pricing,
regulatory uncertainties and operating and technical difficulties. The demand
for such services, at the prices proposed to be charged by the Company, is
uncertain. In addition, some of the broadband services being considered by the
Company, including high-speed data transmission services for residential
subscribers, are not currently available to business or residential subscribers.
The Company's business could be adversely affected if demand for an integrated
bundle of broadband services (voice, video and high-speed data) is materially
lower than anticipated.
FRANCHISE COMPLIANCE AND RENEWAL
The Company's franchise for Chicago Area 1 contains many conditions, such as
time limitations on commencement and completion of system construction (four
years from the grant of the franchise), customer service standards, minimum
number of channel requirements (80 channels), the provision of free service to
schools and certain other public institutions and payment of a franchise fee
equal to 5% of the annual gross revenues of the Company's wholly owned
subsidiary that holds the franchise. While the Company believes that the
conditions in its Chicago Area 1 franchise are typical for the industry, to the
extent that the Company fails to meet these conditions, it may be subject to
certain monetary penalties or revocation of the franchise.
The Company's franchise for the Chicago system is non-exclusive and expires in
June 2011. The Communications Act of 1934, as amended, provides for a reasonable
expectation of franchise renewal, limits the ability of local franchise
authorities to fail to renew a franchise and specifies a procedure and period
within which local franchise authorities must act. Nonetheless, the Company's
franchise may be subject to non-renewal under certain circumstances. Failure of
the Company to obtain renewal of its franchise would have a material adverse
effect on the Company's business.
COMMENCEMENT OF TELEPHONY SERVICES
The Company does not yet offer telephony services but has completed a number
of steps toward that end, including regulatory approval as a local exchange
carrier from the Illinois Commerce Commission, completion of a direct
interconnection agreement with Ameritech, and completion of an agreement with
Nortel to provide the switching and other equipment necessary to offer telephony
services. The Company must, however, complete several additional steps before it
can begin offering telephony services, including installation of necessary
switching and other equipment and negotiating long-distance and other service
arrangements. The Company also is seeking additional management, technical and
sales personnel with particular expertise in the telephony business to assist in
implementing its telephony strategy. Although the company expects to begin
offering telephony services in mid-1998, there is no assurance that it will be
able to do so. Installing necessary equipment and completing the DRS Network,
negotiating or implementing long-distance and other service arrangements,
securing necessary personnel, delays in receiving additional regulatory
approvals, or any other delay in the telephony service offering, could adversely
affect the Company and its results of operations and financial condition.
26
DEPENDENCE ON INTEGRATED BILLING AND INFORMATION SYSTEMS AND CUSTOMER CARE
OPERATIONS
The Company outsources certain of its billing and customer service operations
and is therefore dependent on others to provide sophisticated information and
processing systems, monitor costs, bill subscribers, fill subscriber orders and
achieve operating efficiencies. As the Company increases its provision of
broadband services, its dependence on integrated billing and information
management systems will increase significantly. Integrated billing systems for
voice, video and data broadband services are in beta testing phase, but are not
currently available for commercial use. The inability of the Company to
adequately identify all of its information and processing needs or to obtain
upgraded billing and information systems as necessary, could have a material
adverse impact on the Company's ability to expand its business and on its
results of operations and financial condition. Further, the failure of third-
party providers to adequately provide billing and customer care services could
adversely affect the Company.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes in
technology and changes in subscriber requirements and preferences. The Company
may be required to select, in advance, one technology over another, but at a
time when it would be impossible to predict with any certainty which technology
will prove to be the most economic, efficient or capable of attracting
subscriber usage. There can be no assurance that subsequent technological
developments will not reduce the competitiveness of the Company's DRS Network
and require upgrades or additional equipment that could be expensive and time
consuming.
EQUIPMENT COST AND AVAILABILITY
The ability of the Company to compete effectively and to expand its customer
base will depend, in part, upon the cost and availability of the set-top box to
be used with its video and audio offerings. There can be no assurance that the
Company will be able to obtain such set-top boxes in a timely manner and in
sufficient quantities to enable it to buildout the DRS Network to additional
subscribers, or at a cost that enables it to price its video and audio offerings
competitively. If the Company cannot obtain such set-top boxes in a timely
manner, in sufficient quantities and at an appropriate cost, its business,
financial condition and results of operations may be adversely affected.
DEPENDENCE ON THE INFRASTRUCTURE AND COMMERCIAL VIABILITY OF THE INTERNET
The success of the Company's bundled service offering will depend in part upon
the development and commercial viability of an infrastructure for providing
Internet access and services. Because global commerce and online exchange of
information on the Internet and other similar open wide-area-networks are new
and evolving, it is difficult to predict with any assurance whether the Internet
will prove to be a viable commercial marketplace. The Internet has experienced,
and is expected to continue to experience, significant growth in the number of
users and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols to handle
increased levels of Internet activity or due to
27
increased governmental regulation. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable commercial marketplace, the Company's results of operations
or financial condition could be materially adversely affected.
EVOLVING REGULATORY ENVIRONMENT
Although the 1996 Telecom Act, together with the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and other recent
laws and regulations, eliminated most limitations on competition in the
broadband service business, the 1996 Telecom Act is complex and in many areas
sets forth policy objectives to be implemented by regulation. It is generally
expected that the 1996 Telecom Act will undergo considerable interpretation and
implementation through regulation and court decisions over the next several
years. There can be no assurance that such interpretation or implementing
regulations will be favorable to the Company. In certain areas, particularly
telephony, further regulation is expected to affect the Company's provision of
service. The Company's ability to compete successfully in the provision of
telephone service will depend in part on the timing of the implementation of
such regulations and whether they are favorable to the Company. It is also
important to the Company that the provisions limiting the ability of franchise
authorities to deny awarding or renewing franchises not change in a manner
adverse to the Company. See "Legislation and Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, marketing and product development
personnel. The Company's business is currently managed by a small number of key
management and operating personnel. The Company does not maintain "key man"
insurance on these or any other employees. The Company believes that its future
success will depend in large part upon its ability to attract and retain highly
skilled managerial, sales, marketing and product development personnel. The loss
of the services of key personnel, or the inability to attract, recruit and
retain sufficient or additional qualified personnel, could have a material
adverse effect on the Company. See "Management."
DEPENDENCE ON LOCAL/REGIONAL ECONOMY
Because the Company's initial market is limited to Chicago's Area 1, it is
dependent on the vitality of the local and regional economy. As such, a
significant regional or local economic downturn could materially affect the
Company's financial condition and results from operations.
ABSENCE OF PRIOR MARKET FOR SECURITIES
The Securities are new securities for which there is currently no market.
Although the Initial Purchasers have informed the Company that they intend to
make a market in the Securities and, if issued, the Exchange Debentures, they
are not obligated to do so, and any such market-making may be discontinued at
any time without notice. Although the Securities and, if issued, the Exchange
Debentures, are expected to be tradable in the PORTAL market, the Company does
not intend to apply for listing of the Securities or, if issued, the Exchange
Debentures, on any securities exchange or for quotation through The Nasdaq Stock
Market, Inc. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Securities or, if issued, the Exchange
Debentures. If a market for the Securities or, if issued, the Exchange
Debentures, were to develop, the Securities or, if issued, the Exchange
Debentures, may trade at prices that may be higher or lower than their initial
offering prices depending upon many factors, including prevailing interest
rates, the Company's operating results and the markets for similar securities.
Historically, the markets for securities such as the Securities and the Exchange
Debentures have been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the Securities. There can be
no assurance that, if a market for the Securities or, if issued, the Exchange
Debentures, were to develop, such a market would not be subject to similar
disruptions. Such disruptions may materially and adversely affect such liquidity
and trading independent of the financial performance of, and prospects for, the
Company.
CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT ON NOTES
28
The New Notes will be issued at a substantial discount from their principal
amount. Consequently, purchasers of the New Notes generally will be required to
include amounts in gross income for Federal tax purposes in advance of receipt
of the cash payments to which the income is attributable, and no cash payments
of interest will be made until after February 15, 2003.
Moreover, the New Notes will constitute "applicable high yield discount
obligations" ("AHYDOs") because the yield to maturity of the New Notes
exceeds the relevant applicable Federal rate (the "AFR") at the time of issue
by more than 5 percentage points. For February 1998, the annual long-term AFR is
5.93% and the annual mid-term AFR is 5.69% (based on semi-annual compounding).
The appropriate AFR depends upon the weighted average maturity of the New Notes.
Because the New Notes constitute AHYDOs, the Company will not be entitled to
deduct OID accruing with respect thereto until such amounts are actually paid.
See "Certain United States Federal Income Tax Consequences" for a more
detailed discussion of the Federal income tax consequences to holders of New
Notes.
If a bankruptcy proceeding is commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the New Notes, the claim of
a holder of New Notes may be limited to an amount equal to the sum of (i) the
initial offering price for the Notes and (ii) that portion of the original issue
discount that is not deemed to constitute "unmatured interest" for purposes of
the United States Bankruptcy Code. Any original issue discount that was not
amortized as of the commencement of any such bankruptcy proceeding would
constitute "unmatured interest."
LIMITATION ON CHANGE OF CONTROL
Unless the Company has consummated a Qualified Public Offering (as defined
below under "Description of Capital Stock"), beginning on the fourth
anniversary of the Issue Date and terminating on the earlier to occur of three
years thereafter and the consummation of a Qualified Public Offering by the
Company, holders of the Company's Class A Convertible 8% Cumulative Preferred
Stock will have the right to require the sale of the Company subject to certain
conditions. A Change of Control may occur in such a transaction. In addition, a
Change of Control may result from other transactions which could occur at any
time. Under the Indenture (in the case of the New Notes), the Amended Articles
(in the case of the New Exchangeable Preferred Stock) and the Exchange Indenture
(in the case of the Exchange Debentures), in the event of a Change of Control,
(i) each holder of New Notes may require the Company to purchase all or any
portion of such holder's New Notes at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any to the date of
purchase, (ii) the Company is required to offer to purchase all outstanding
shares of New Exchangeable Preferred Stock, in whole or in part, at a purchase
price equal to 101% of the aggregate liquidation preference thereof, plus
accumulated and unpaid dividends, if any to the date of purchase and (iii) each
holder of Exchange Debentures may require the Company to purchase such holder's
Exchange Debentures, in whole or in part, at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest, if any
to the date of purchase. The Company is not required to provide any credit
support or otherwise set aside funds for any obligation to purchase the New
Notes, the New Exchangeable Preferred Stock or the Exchange Debentures in the
event of a Change of Control. Accordingly, there can be no assurance that the
Company will have sufficient funds to satisfy any such repurchase obligations.
See "Description of the New Notes--Change of Control," "Description of the
New Exchangeable Preferred Stock--Change of Control," "Description of the
Exchange Debentures--Change of Control," "Description of Capital Stock--Right
to Require Sale" and "Description of the Warrants--Take Along Rights."
CONTROL BY HOLDERS OF CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK
Although no single shareholder has control over the corporate decisions of the
Company, the holders of the Class A Convertible 8% Cumulative Preferred Stock
are collectively in a position to control the taking of many
29
significant corporate actions by the Company, including the making of any
significant capital commitments, the incurrence of any significant indebtedness,
mergers and the payment of dividends on the Common Stock, pursuant to agreements
which provide that prior to taking such actions, the Company will need to obtain
the approval of the nominees to the Board of Directors of the holders of the
Class A Convertible 8% Cumulative Preferred Stock. These restrictions terminate
upon the consummation of a Qualified Public Offering. In addition, in the event
that a Qualified Public Offering is not completed before the fourth anniversary
of the Issue Date, the holders of the Class A Convertible 8% Cumulative
Preferred Stock have the right to require the sale of the Company, subject to
certain conditions. See "Description of Capital Stock."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital stock
and does not anticipate paying cash dividends on its capital stock in the
foreseeable future. It is the current policy of the Company's Board of Directors
to retain earnings to finance the expansion of the Company's operations. Future
declaration and payment of dividends, if any, will be determined in light of the
then-current conditions, including the Company's earnings, operations, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors. In addition, the Company's ability to pay dividends is limited by
the terms of the Indenture, the Amended Articles and the terms of the Company's
existing preferred stock. See "Description of the New Notes," "Description of
the New Exchangeable Preferred Stock" and "Description of Capital Stock."
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer. The net
proceeds to the Company from the Private Placement were approximately $240.3
million (after deduction of discounts and estimated offering expenses). The
Company will continue using such proceeds for capital expenditures associated
with the continued expansion of the DRS Network in Chicago's Area 1 and for
additional working capital and other general corporate purposes, including
funding operating deficits.
The Company estimates that capital expenditures in calendar year 1998 for
continued construction of the DRS Network in Chicago Area 1, including the
installation of telephony equipment to commence voice services for certain
customers, will be approximately $90 million to $120 million. Actual costs, and
the timing thereof, may vary from this range and will depend in part on factors
affecting construction costs, the number of subscribers, the mix of services
purchased, the cost of subscriber equipment paid for or financed by the Company
and other factors.
30
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company as
of December 31, 1997 on a historical basis after reflecting an increase in
authorized common shares and a 1,000-for-1 common stock split and as adjusted to
reflect the Private Placement, the sale of Class A Convertible 8% Cumulative
Preferred Stock and the application of the net proceeds therefrom and the
impacts of certain revisions to the Class A Preferred Stock Purchase Agreement.
See ''Use of Proceeds'' and ''Selected Financial Data.''
December 31, 1997
-------------------------------------
Historical AS ADJUSTED
------------------ -----------------
Cash and cash equivalents(1)(2)................................................ $ 1,404,975 $235,162,357
============ ============
Debt(1):
12/1//4% Senior Discount Notes Due 2008...................................... $ -- $200,000,000
Interim credit facility(1)................................................... 8,000,000 --
Debentures and related interest payable...................................... 227,185 227,185
------------ ------------
Total debt................................................................... 8,227,185 200,227,185
Redeemable preferred stock:
13/3//4% Senior Cumulative Exchangeable Preferred Stock Due 2010
$.01 par value, redemption value $50,000,000, 0 shares authorized,
issued and outstanding at September 30, 1997; 100,000 shares
authorized, 50,000 issued and outstanding, as adjusted..................... -- 45,455,300
Class A Convertible 8% Cumulative Preferred Stock, no par value, 500,000
shares authorized at December 31, 1997, 1,453.1 shares issued and
outstanding(7)............................................................. 19,974,325 --
Shareholders' equity:
Class A Convertible 8% Cumulative Preferred Stock, no par value, 500,000
shares authorized at December 31, 1997, 1,548.5 shares issued and
outstanding, as adjusted(2)(7)............................................. -- 20,865,388
Common Stock, no par value, 50,000,000 shares authorized, 2,388,743.5 shares
issued and outstanding at December 31, 1997, and 1,222,569.0 common
share warrants outstanding and 2,939,106.5 shares issued and outstanding,
1,302,868.7 common share warrants outstanding and Non-Voting Common Stock,
no par value, 1,000,000 shares authorized, 550,362.3 shares issued and
outstanding as adjusted(3)(4)(6)........................................... 7,023,934 7,640,253
Additional paid-in-capital(5)................................................ -- 2,594,700
Accumulated deficit and other................................................ (19,036,919) (19,036,919)
------------ ------------
Total shareholders' equity................................................... (12,012,985) 12,063,422
------------ ------------
Total capitalization........................................................... $ 16,188,525 $257,745,907
============ ============
(1) The Company entered into the Interim Credit Facility in November 1997.
Borrowings outstanding under the Interim Credit Facility were $8.0 million
at December 31, 1997 and $9.0 million at January 31, 1998. The Company used
a portion of the proceeds from the Private Placement to repay borrowings
outstanding under the Interim Credit Facility, together with accrued and
unpaid interest, and to terminate such facility.
(2) The as adjusted number includes 95.4 shares of Class A Preferred Stock which
the Company issued to several common shareholders and others in January 1998
for an aggregate consideration of approximately $1.5 million.
(3) Excludes 728,667.7 shares of Common Stock issuable upon exercise of options
outstanding on December 31, 1997.
(4) The as adjusted number includes 28,330 shares of common stock and 28,330
shares of non-voting common stock which the Company issued in conjunction
with the January 1998 sale of Class A Preferred Stock.
(5) Of the $50 million gross proceeds from the issuance of the Units offered
hereby, $47.3 million has been allocated to the 13/3//4% Senior Cumulative
Exchangeable Preferred Stock Due 2010 and $2.7 million has been allocated to
additional paid-in-capital to reflect the issuance of 50,000 Warrants. Each
Warrant can be exercised to purchase 8.7774 shares of common stock at an
exercise price of $.01 per share for a total of 438,870 shares. No assurance
can be given that the value allocated to the Warrants will be indicative of
the price at which the Warrants may actually trade.
(6) The as adjusted number includes 522,032.3 shares of both voting and non-
voting common stock, for a total of 1,044,064.6 shares. These shares reflect
those that were issued to the Class A Convertible 8% Cumulative Preferred
Stock shareholders in conjunction with a revision to the related preferred
stock purchase agreement. This revision replaced the initial and debt
warrants with shares of voting and non-voting common stock.
(7) The as adjusted number reflects the classification of the Class A
Convertible 8% Cumulative Preferred Stock as equity at December 31, 1997.
This reclassification was performed to reflect a revision to the Class A
Convertible 8% Cumulative Preferred Stock Agreement that removed a put
arrangement and replaced it with the ability to compel to sale.
31
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data for the
Company. The selected financial data as of and for the periods ended March 31,
1995, 1996 and 1997 have been derived from the audited financial statements of
the Company. The selected financial and operating data as of and for the periods
ended March 31, 1993 and 1994, and the nine months ended December 31, 1996 and
1997 have been derived from the unaudited financial statements of the Company
and, in the opinion of the Company, include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of such
information. Operating results for the nine months ended December 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
year. The selected financial and operating data set forth below should be read
in conjunction with ''Use of Proceeds,'' ''Management's Discussion and Analysis
of Financial Condition and Results of Operations'' and the Financial Statements
included elsewhere in this Offering Circular.
NINE MONTHS ENDED
Period From YEAR ENDED MARCH 31, DECEMBER 31,
10/29/92- ----------------------------------------------------- ---------------------------
3/31/93 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -------------
Statement of Operations Data:
Subscriber revenues $ -- $ -- $ -- $ -- $ 27,480 $ -- $ 123,532
Operating expenses -- -- -- 9,617 200,911 190,817 413,979
Selling, general and
administrative expenses 117,604 253,205 624,963 694,122 2,337,534 1,572,936 7,276,439
Depreciation and
amortization -- 11,770 38,923 108,182 170,108 114,734 643,427
---------- ---------- ----------- ----------- ----------- ----------- -------------
Operating loss (117,604) (264,975) (663,886) (811,921) (2,681,073) (1,878,487) (8,210,313)
Interest income -- -- -- -- 301,624 142,603 484,678
Interest expense -- (38,055) (115,428) (214,688) (437,843) (376,828) (119,226)
---------- ---------- ----------- ----------- ----------- ----------- -------------
Net loss (117,604) (303,050) (779,314) (1,026,609) (2,817,292) (2,112,712) (7,844,861)
Preferred stock
requirements -- -- -- -- (478,981) -- (2,287,928)
---------- ---------- ----------- ----------- ----------- ----------- -------------
Net loss attributable to
common shares $ (117,604) $ (303,050) $ (779,314) $(1,026,609) $(3,296,273) $(2,112,712) $ (10,132,789)
========== ========== =========== =========== =========== =========== =============
Net loss per common share $(.08) $(.21) $(.52) $(.64) $(1.66) $(1.11) $(4.26)
========== ========== =========== =========== =========== =========== =============
Weighted average common
shares 1,443,497 1,470,288 1,508,000 1,609,129 1,988,365 1,900,527 2,380,926
PRO FORMA (1):
Net loss (3) (29,640,225) (27,767,025)
Preferred stock
requirements (4) (8,586,459) (8,274,205)
----------- -------------
Net loss attributable
to common shares (38,226,684) (36,041,280)
=========== =============
Net loss per common
share (19.23) (15.14)
=========== =============
Deficiency in earnings to cover
combined fixed charges (2) $38,226,684 $ 36,041,280
=========== =============
Deficiency in earnings to cover
interest charges (2) $29,640,225 $ 27,767,075
=========== =============
Deficiency in earnings to
cover preferred stock
requirements (2) $10,947,524 $ 15,851,815
=========== =============
Other Data:
Capital expenditures $ -- $ -- $ -- $ -- $ 246,863 $ 47,118 $ 15,007,751
Number of subscribers
(end of period) -- -- -- -- 1,734 -- 3,019
Deficiency in earnings to cover
combined fixed charges (2) $ 117,604 $ 303,030 $ 779,314 $1,026,609 $ 3,296,273 $ 2,112,712 $ 10,132,789
Deficiency in earnings to cover
interest charges (2) $ 117,604 $ 303,030 $ 779,314 $1,026,609 $ 2,817,292 $ 2,112,712 $ 7,844,861
Deficiency in earnings to
cover preferred stock
requirements (2) N/A N/A N/A N/A $ 2,840,046 N/A $ 9,865,538
BALANCE SHEET DATA
(END OF PERIOD):
Total assets $ 428,914 $ 847,659 $ 1,664,877 $15,553,488 $ 23,835,488
Total liabilities 726,450 1,910,781 3,409,433 1,718,862 15,874,148
Total redeemable preferred
stock -- -- -- 16,794,963 19,974,325 (1)
Total shareholders' equity (297,536) (1,063,122) (1,744,556) (2,960,337) (12,012,985)(1)
- --------------
(1) The year ended March 31, 1997 and nine months ended December 31, 1997, net
loss, preferred stock requirements, net loss attributable to common shares,
net loss per common share, ratio of earnings to combined fixed charges,
ratio of earnings to interest charges and ratio of earnings to preferred
stock requirements have been adjusted to reflect the impacts of the interest
expense, amortization of deferred debt costs, preferred stock dividends and
accretion associated with the Private Placement. The year ended March 31,
1997 and nine months ended December 31, 1997 reflect the first twelve and
nine months of interest expense, amortized debt costs, preferred stock
dividends and accretion, respectively.
(2) The Company has a deficiency of earnings necessary to cover its combined
fixed charges, interest payments and preferred dividend requirements,
historically and on a pro forma basis.
(3) The pro forma net income for the year ended March 31, 1997 includes twelve
months of pro forma interest expense totaling $27,260,776 which includes
$437,843 of historical interest expense as well as $25,276,002 of accretion
related to the original issue discount on the senior discount notes and
$1,546,931 of amortization of deferred issuance costs related to the senior
discount notes. The pro forma net income for the nine months ended December
31, 1997 includes nine months of pro forma interest expense totaling
$20,041,440 which includes $119,226 of historical interest expense as well
as $18,763,176 of accretion related to the original issue discount on the
senior discount notes and $1,159,038 of amortization of deferred issuance
costs related to the senior discount notes. The pro forma calculations
related to the senior discount notes were performed using the effective
interest method based on the following components: (1) the original carrying
value of the senior discount notes of $363,135,000 less the original issue
discount of $163,135,000 for a net carrying value of $200,000,000 and (2)
total issuance costs incurred in relation to the senior discount notes of
$7,886,824.
(4) The pro forma preferred stock requirements (dividends and accretion) for the
year ended March 31, 1997 totals $8,586,459 which includes $478,981 of
historical preferred stock requirements as well as twelve months of
preferred dividend requirements, $7,237,405, and twelve months of accretion,
$870,073, related to the senior exchangeable preferred stock. The pro forma
preferred stock requirements for the nine months ended December 31, 1997
totals $8,274,205 which includes $2,287,928 of historical preferred stock
requirements as well as nine months of preferred dividend requirements,
$5,335,255, and nine months of accretion, $651,022, related to the senior
exchangeable preferred stock. The pro forma calculations related to the
senior exchangeable preferred stock were performed using the effective
interest rate method based on the following components: (1) the redemption
value of the redeemable preferred stock of $50,000,000, (2) the portion of
the proceeds assigned to the related warrants of $2,605,500, (3) total
issuance costs incurred in relation to the senior exchangeable preferred
stock of $1,939,200, (4) quarterly compounding of preferred dividends, and
(5) dividend rate of 13 3/4%. This results in an initial carrying value of
$45,455,300 related to the senior exchangeable preferred stock.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Company's Financial
Statements included elsewhere in this Prospectus.
GENERAL
21st Century was awarded a franchise in 1996 by the City of Chicago that
allows for the construction of the DRS Network in Chicago's Area 1. Under this
15-year renewable license, the Company is granted unrestricted access to the
public right-of-way to construct, operate and maintain its DRS Network to all
residential and commercial subscribers. From inception through the date of this
Prospectus, the Company's principal focus has been the development of its
communications business in Chicago's Area 1.
The Company has incurred net losses in each quarter since its inception, and
as of December 31, 1997, the Company had an accumulated deficit of $14,519,473
The Company anticipates that it will continue to incur net losses during the
next several years as it continues to expand its operations as a result of
substantially increased depreciation and amortization from the construction of
networks and operating expenses as it builds its subscriber base. There can be
no assurance that growth in the Company's revenues or subscriber base will occur
or that the Company will be able to achieve or sustain profitability or positive
cash flow. See ''Risk Factors--History of Losses; Expectation of Future Losses
and Negative Cash Flows from Operations.''
RESULTS OF OPERATIONS
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996.
Revenues. The Company generated subscriber revenues of $123,532 for the nine
months ended December 31, 1997. No subscriber revenues were generated for the
nine months ended December 31, 1996. The commencement of subscriber revenues
resulted principally from the purchase of 1,734 bulk subscribers from an
affiliated entity during January 1997.
Expenses. The Company incurred operating expenses of $413,979 for the nine
months ended December 31, 1997 which represent primarily local access and
origination programming support as required by the franchise agreement and the
start up of basic programming fees. Operating expenses of $190,817 for the nine
months ended December 31, 1996 represent primarily local access and origination
programming support as required by the franchise agreement. General and
administrative expenses were $7,276,439 and $1,572,936 for the nine months ended
December 31, 1997 and December 31, 1996, respectively. Depreciation and
amortization costs were $643,427 and $114,734 for the nine months ended December
31, 1997 and December 31, 1996, respectively. The commencement of operating
expenses and the increase in general and administrative expenses as well as
depreciation and amortization reflects the Company's acquisition of subscribers,
the addition of employees and the expansion of the DRS Network, and $849,700 of
compensation expense related to stock options granted in October 1997. Interest
expense decreased from $376,828 to $119,226 due to the lower levels of
borrowings outstanding for the nine months ended December 31, 1997 caused by the
conversion of certain subordinated debentures into common stock and the
repayment in January 1997 of the June 21, 1996 loan and security agreement.
Interest Income. Interest income increased $342,075 for the nine months ended
December 31, 1997. The higher interest income is the result of primarily two
factors. The first factor is the higher overall cash balance created by the
infusion of cash associated with the preferred equity offering in January 1997.
This factor accounts for approximately $265,000 of the increase. The second
factor is the inclusion of nine months of accrued interest related to the
prepaid franchise fees in December 31, 1997 compared to approximately six months
included in December 31, 1996. This factor accounts for approximately $77,000 of
the increase.
Net Loss. For the nine months ended December 31, 1997 the Company incurred a
net loss of $7,844,861, and for the nine months ended December 31, 1996 the
Company incurred a net loss of $2,112,712. The Company expects its net losses to
continue to increase as it introduces new services and as the Company continues
to build-out the DRS Network and seeks to expand its business. See ''Risk
Factors--History of Losses; Expectation of Future Losses and Negative Cash Flows
from Operations.''
33
Year Ended March 31, 1997 Compared to the Year Ended March 31, 1996.
The Company's net loss of $2,817,292 in fiscal 1997 was an increase over the
net loss of $1,026,609 in 1996. The higher losses reflect primarily the
additional activities undertaken to prepare for the initiation of services in
1997. These activities accelerated in February 1997 with the close of the
Company's initial private preferred stock offering. Operating expenses increased
to $200,911 in fiscal 1997 from $9,617 in fiscal 1996 primarily due to local
access and origination programming support as required by the franchise
agreement. Selling, general and administrative expenses increased to $2,337,534
in fiscal 1997 from $694,122 in fiscal 1996. This increase was primarily due to
higher payroll-related costs of $675,574, increased legal and professional fees
of $561,167, higher bank fees of $130,706 and increased occupancy costs of
$122,991. Interest expense increased by $223,155 due to the additional interest
on the revolving credit note outstanding for most of fiscal 1997. Depreciation
and amortization increased due to higher balances subject thereto. Interest
income was $301,624 for the year ended March 31, 1997. There was no interest
income for the year ended March 31, 1996. The increase in the interest income is
the result of primarily two factors. The first factor relates to the accrued
interest associated with prepayment of the franchise fees in June and July 1996.
This factor accounts for approximately $217,000 of the increase. The second
factor is the higher overall cash balance created by the infusion of cash
associated with the preferred equity offering in January 1997. This factor
accounts for approximately $84,000 of the increase.
Year Ended March 31, 1996 Compared to the Year Ended March 31, 1995.
The Company's results of operations for the fiscal year 1996 were comparable
to fiscal 1995. Operating expenses in fiscal 1996 of $9,617 represent mapping
and design charges. The $69,159 increase in selling, general and administrative
expenses is primarily due to increases of $95,569 in professional fees, $31,122
in office expense and $15,051 in travel and entertainment. These increases were
offset by a $79,039 decrease in payroll-related costs. Interest expense
increased by $99,260 due to the increased balance of debentures and notes
payable outstanding during the period. Depreciation and amortization increased
due to higher balances subject thereto.
LIQUIDITY AND CAPITAL RESOURCES
The cost of development, construction and start-up activities of the Company
will require substantial capital. As of March 31, 1997, the Company had expended
more than $3,800,000 related to the acquisition of the franchise for Chicago's
Area 1, including $3,000,000 to the City of Chicago for prepaid franchise fees.
The Company also purchased 1,734 bulk video subscribers from an affiliated
entity in January 1997 for $3,381,300.
Net cash used in operating activities was $5,987,369 for the nine months ended
December 31, 1997, $6,910,766 for the year ended March 31, 1997, $611,227 for
the year ended March 31, 1996 and $264,216 for the year ended March 31, 1995.
Net cash used in operating activities for the nine months ended December 31,
1997 resulted principally from the Company's net loss from operations, offset by
increases in accounts payable and the compensation expense recognized related to
the stock option plan of $849,700. Net cash used in operating activities for the
year ended March 31, 1997 resulted from the net loss from operations and
increases in prepayments consisting primarily of the $3,000,000 prepayment of
franchise fees to the City of Chicago and decreases in various payables made
possible by the equity infusion of approximately $20 million. Net cash required
for operations in 1996 and 1995 resulted primarily from net losses and increases
in deferred legal costs offset by increases in various payables incurred during
the acquisition of the Area 1 franchise.
Cash flow used in investing activities totaled $10,014,597 in the nine months
ended December 31, 1997 and $3,628,163 in the year ended March 31, 1997. Cash
requirements in the nine months ended December 31, 1997 consisted primarily of
the cost of building and equipping the NOC, facilitating the corporate
headquarters and network construction. Cash requirements in the year ended March
31, 1997 consisted primarily of the purchase of 1,734 Area 1 bulk subscribers
for $3,381,300.
34
Cash flow from financing activities was $9,175,999 in the nine months ended
December 31, 1997, $18,768,915 in the year ended March 31, 1997, $608,765 in the
year ended March 31, 1996 and $266,429 in the year ended March 31, 1995. In the
nine months ended December 31, 1997, cash flow from financing activities was
generated through borrowings under the interim credit facility of $8,000,000,
and through the private sale of preferred equity totaling $1,175,999. For the
year ended March 31, 1997 approximately $20,000,000 of cash flow was generated
through the private sale of preferred equity. In fiscal 1996, cash flow from
financing activities was generated by the private sale of $342,000 in common
stock to a small group of Chicago investors and the sale of $266,765 in
convertible debentures to existing shareholders. In fiscal 1995, cash flow from
financing activities was generated by the sale of $266,429 in convertible
debentures.
The Company estimates that its aggregate capital expenditure requirements
related to DRS Network construction in Area 1 for the period from the date of
this Prospectus to the end of the current fiscal year, March 31, 1998 and for
the fiscal years 1999, 2000 and 2001, the time frame in which construction of
the DRS Network in Area 1 is expected to be completed, will total approximately
$270 million, of which between approximately $90 million to $120 million is
expected to be spent during calendar year 1998. The Company will fund these
expenditures from the net proceeds of the Private Placement and operating cash
flows. In order to retain funds available to support its operations, the Company
has no expectation of paying cash interest on the Notes or cash dividends on the
Exchangeable Preferred Stock prior to February 15, 2003. The Company may require
additional financing in the future if it begins to develop additional franchise
areas or if the development of Area 1 in Chicago is delayed or requires costs in
excess of current expectations. The Company has entered into a commitment letter
with BankBoston, N.A. and Bank of America NT&SA for a $50 million bank revolving
credit facility to provide supplemental financing. There can be no assurance
that the Company will be able to obtain such proposed bank financing or any such
additional debt or equity financing, or that the terms thereof will not be
unfavorable to the Company or its existing creditors or investors. See ''Risk
Factors--Significant Capital Requirements.''
YEAR 2000 POTENTIAL PROBLEMS
While the Year 2000 considerations are not expected to materially impact the
Company's internal operations, they may have an effect on some of its customers
and suppliers, and thus indirectly affect the Company. It is not possible to
quantify the aggregate cost to the Company with respect to customers and
suppliers with Year 2000 problems, although the Company does not anticipate it
will have a material adverse impace in its business.
HOLDING COMPANY STRUCTURE
Shortly after the Exchange Offer, the Company plans to become a holding
company with no direct operations and no significant assets other than the stock
of its subsidiaries. The Company currently has three wholly-owned subsidiaries:
21st Century Cable TV of Illinois, Inc.; 21st Century Telecom of Illinois, Inc.;
and 21st Century Telecom Group of Michigan, Inc. Moreover, 21st Century Telecom
Group of Michigan, Inc. has two wholly-owned subidiaries: 21st Century Cable TV
of Grand Rapids, Inc. and 21st Century Telecom of Michigan, Inc. The Company
will be dependent on the cash flows of its subsidiaries to meet its obligations,
including the payment of the principal of and interest on the Notes and the
payment of dividends on the Exchangeable Preferred Stock. The Company's
subsidiaries will be separate legal entities that have no obligation to pay any
amounts due pursuant to the Notes or the Exchangeable Preferred Stock or to make
any funds available therefor, whether by dividends, loans or other payments. The
ability of the Company's subsidiaries to make such dividends and other payments
to the Company will be subject to, among other things, the availability of
funds, the terms of such subsidiaries' indebtedness and applicable state laws.
Because the Company's subsidiaries will not guarantee the payment of the
principal of or interest on the Notes or the payment of dividends on the
Exchangeable Preferred Stock, any right of the Company to receive the assets of
any of its subsidiaries upon its liquidation or reorganization (and the
consequent right of holders of the Notes or the Exchangeable Preferred Stock to
participate in the distribution or realize proceeds from those assets) will be
effectively subordinated to the claims of the creditors of any such subsidiary
(including trade creditors and holders of indebtedness of such subsidiary),
except if and to the extent that the Company is itself a creditor of such
subsidiary, in which case the claims of the Company would still be effectively
subordinated to any security interest in the assets of such subsidiary held by
other creditors.
35
THE EXCHANGE OFFER
TERMS OF EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Securities pursuant to a Purchase
Agreement dated as of February 2, 1998, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Rights Agreement, dated February 2, 1998.
Under the Registration Rights Agreement, the Company is obligated to (i)
file the Registration Statement of which this Prospectus is a part for a
registered exchange offer with respect to an issue of New Notes and New
Exchangeable Preferred Stock with terms substantially identical in all material
respects to the Old Notes and Old Exchangeable Preferred Stock, respectively
(except that such New Notes and New Exchangeable Preferred Stock will not
contain terms with respect to transfer restrictions), within 45 days after
February 9, 1998, the date the Old Notes and Old Exchangeable Preferred Stock
were originally issued (the "Issue Date") and (ii) use its best efforts to cause
the Registration Statement to be declared effective within 150 days after the
Issue Date. For each Old Note surrendered pursuant to the Notes Exchange Offer,
the holder of such Old Note will receive a New Note having a principal amount at
maturity equal to that of the surrendered Old Note. For each share of Old
Exchangeable Preferred Stock surrendered pursuant to the Preferred Stock
Exchange Offer, the holder of such share of Old Exchangeable Preferred Stock
will receive a share of New Exchangeable Preferred Stock having a liquidation
preference equal to that of the surrendered share of Old Exchangeable Preferred
Stock. The Exchange Offer being made hereby if commenced and consummated within
such applicable time periods will satisfy those requirements under the
Registration Rights Agreement. See "Description of the New Notes--Exchange
Offer, Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letters of Transmittal (which together constitute the Exchange
Offer), the Company will accept for exchange all Old Securities validly tendered
and not withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date. The Company will issue New Notes in exchange for an equal principal
amount at maturity of outstanding Old Notes accepted in the Exchange Offer and
will issue New Exchangeable Preferred Stock in exchange for an equal number of
shares of outstanding Old Exchangeable Preferred Stock accepted in the Exchange
Offer. As of the date of this Prospectus, there was outstanding $363,135,000
aggregate principal amount at maturity of Old Notes.
This Prospectus, together with the Letters of Transmittal, is being sent to
all registered holders as of May [__],1998. The Company's obligation to
accept Old Securities for exchange pursuant to the Exchange Offer is subject to
certain conditions as set forth herein under "--Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Notes Exchange Agent. The Notes Exchange Agent will act as agent for the
tendering holders of Old Notes for the purposes of receiving the New Notes from
the Company and delivering New Notes to such holders. The Company shall be
deemed to have accepted validly tendered Old Exchangeable Preferred Stock when,
as and if the Company has given oral or written notice thereof to the Preferred
Stock Exchange Agent. The Preferred Stock Exchange Agent will act as agent for
the tendering holders of Old Exchangeable Preferred Stock for the purposes of
receiving the New Exchangeable Preferred Stock from the Company and delivering
New Exchangeable Preferred Stock to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Securities. In
such event, holders of Old Securities seeking liquidity in their investment
would have to rely on exemptions to registration requirements under the U.S.
securities laws. See "Risk Factors--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
36
The term "Expiration Date" shall mean June [__] , 1998 (30 days following
the commencement of the Exchange Offer), unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended. In order to
extend the Expiration Date, the Company will notify each Exchange Agent of any
extension by oral or written notice and will mail to the record holders of Old
Securities an announcement thereof, each prior to 9:00 a.m., Eastern Standard
Time, on the next business day after the previously scheduled Expiration Date.
Such announcement may state that the Company is extending the Exchange Offer for
a specified period of time.
Notwithstanding any extension of the Exchange Offer, if for any reason the
Exchange Offer is not consummated before August 3, 1998, the Company will, at
its own expense, (a) as promptly as practicable, file a shelf registration
statement covering resales of the Old Securities (a "Shelf Registration
Statement"), (b) use its best efforts to cause a Shelf Registration Statement to
be declared effective under the Securities Act and (c) keep the Shelf
Registration Statement effective until the earlier of 24 months following the
Issue Date and such time as all of the Old Securities have been sold thereunder,
or otherwise can be sold pursuant to Rule 144 without any limitations under
clauses (c), (e), (f) and (h) of Rule 144. The Company will, in the event a
Shelf Registration Statement is filed, among other things, provide to each
holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Securities. A holder selling such Old Securities pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
The Company reserves the right (i) to delay accepting any Old Securities,
to extend the Exchange Offer or to terminate the Exchange Offer and not accept
Old Securities not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Securities. Any such delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written notice thereof.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
in a manner reasonably calculated to inform the holders of the Old Securities of
such amendment and the Company will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to holders of the Old Securities, if the Exchange Offer
would otherwise expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Securities do not have any appraisal or dissenters' rights
in connection with the Exchange Offer under the Illinois Business Corporation
Act, the governing law of the state of incorporation of the Company.
PROCEDURES FOR TENDERING
37
To tender in the Exchange Offer, a holder must complete, sign and date the
Notes Letter of Transmittal or Preferred Stock Letter of Transmittal, as the
case may be, or a facsimile thereof, have the signatures thereon guaranteed if
required by such Letter of Transmittal and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with any other required documents, to
the Notes Exchange Agent or Preferred Stock Exchange Agent, as the case may be,
prior to 5:00 p.m. Eastern Standard Time, on the Expiration Date. In addition,
either (i) certificates for such tendered Old Securities must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
of a book-entry transfer (a "Book-Entry Confirmation") of such Old Securities,
if such procedure is available, into the Exchange Agent's account at the
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
OLD SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SECURITIES SHOULD BE SENT TO
THE COMPANY. To be tendered effectively, the Old Securities, the Letter of
Transmittal and all other required documents must be received by the appropriate
Exchange Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date. Delivery of all documents must be made to the appropriate Exchange Agent
at the addresses set forth below. Holders may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such holders.
The tender by a holder of Old Securities will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth therein and in the Letter of Transmittal.
Only a holder of Old Securities may tender such Old Securities in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Notes or Old Exchangeable Preferred Stock are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial owner whose Old Securities are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender shall contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Securities, either
make appropriate arrangements to register ownership of the Old Securities in
such owner's name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Securities tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Securities listed therein, such Old Securities must
be endorsed or accompanied by bond powers or stock powers, as the case may be,
and a proxy which authorizes such person to tender the Old Securities on behalf
of the registered holder, in each case as the name of the registered holder or
holders appears on the Old Securities.
38
If the Letter of Transmittal of any Old Securities bond powers or stock
powers are signed by trustees, executors, administrators, guardians, attorneys-
in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such person should so indicate when signing, and unless
waived by the Company, evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
All questions as the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Securities will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Securities not
properly tendered or any Old Securities which, if accepted by the Company,
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any irregularities or conditions of tender as to
particular Old Securities. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letters of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Securities must be
cured within such time as the Company shall determine. None of the Company, the
Notes Exchange Agent, the Preferred Stock Exchange Agent or any other person
shall be under any duty to give notification of defects or irregularities with
respect to tenders of Old Securities, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Securities will not be
deemed to have been made until such irregularities have been cured or waived.
Any Old Securities received by an Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived will
be returned without cost to such holder by such Exchange Agent to the tendering
holders of such Old Securities, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture and the Amended Articles, to (i) purchase or
make offers for any Old Securities that remain outstanding subsequent to the
Expiration Date or, as set forth under "--Conditions," to terminate the Exchange
Offer in accordance with the terms of the Registration Rights Agreement and (ii)
to the extent permitted by applicable law, purchase Old Securities in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchase or offers could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the company that (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act),
(ii) any New Securities to be received by it were acquired in the ordinary
course of its business and (iii) at the time of commencement of the Exchange
Offer, it was not engaged in, and did not intend to engage in, a distribution of
such New Securities and had no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of the
New Securities. If a holder of Old Securities is an affiliate of the Company,
and is engaged in or intends to engage in a distribution of the New Securities
or has any arrangement or understanding with respect to the distribution of the
New Securities to be acquired pursuant to the Exchange Offer, such holder could
not rely on the applicable interpretations of the staff of the Commission and
must comply with the registration and prospectus delivery requirement of the
Securities Act in connection with any secondary resale transaction. Each broker
or dealer that receives New Securities for its own account in exchange for Old
Securities, where such Old Securities were acquired by such broker or dealer as
a result of market-making activities, or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Securities. Each broker-dealer that acquired Old Securities directly
from the Company, and not as a result of market-making or trading activities,
must, in the absence of an exemption, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with the
secondary resale of the New Securities and cannot rely on the position of the
staff of the Commission enunciated in no-action letters issued to third parties.
See "Plan of Distribution."
ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF NEW SECURITIES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Securities
properly tendered and will issue the New Securities promptly after acceptance of
the Old Securities. See "--Conditions" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Notes Exchange Agent, and shall be deemed to have accepted
validly tendered Old Exchangeable Preferred Stock for exchange when, as and if
the Company has given oral or written notice thereof to the Preferred Stock
Exchange Agent.
39
For each Old Note for exchange, the holder of such Old Note will receive a
New Note having a principal amount at maturity equal to that of the surrendered
Old Note, and for each share of Old Exchangeable Preferred Stock for exchange,
the holder of such share will receive a share of New Exchangeable Preferred
Stock having a principal amount equal to that of the surrendered share of Old
Exchangeable Preferred Stock.
If (i) by March 26, 1998 (45 days after the Issue Date), neither the
Exchange Offer Registration Statement nor the Shelf Registration Statement has
been filed with the SEC, (ii) by August 8, 1998 (180 days after the Issue Date),
the Exchange Offer is not consummated and, if applicable, the Shelf Registration
Statement is not declared effective or (iii) after either the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared
effective, such Registration Statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Old
Securities or New Securities in accordance with and during the periods specified
in the Registration Rights Agreement (each such event referred to in clauses (i)
through (iii) a "Registration Default"), additional interest or dividends, as
the case may be, will accrue or accumulate on the applicable Old Securities and
New Securities at the rate of 0.50% per annum from and including the date on
which any such Registration Default shall occur to but excluding the date on
which all Registration Defaults have been cured. Such interest or dividends, as
the case may be, will be payable in cash and will be in addition to any other
interest or dividends payable from time to time with respect to the Old
Securities and the New Securities.
In all cases, issuance of New Securities for Old Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the appropriate Exchange Agent of certificates for such Old
Securities or a timely Book-Entry Confirmation of such Old Securities into such
Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Old Securities are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Old Securities are
submitted for a greater principal amount or larger number of shares, as the case
may be, than the holder desires to exchange, such unaccepted or nonexchanged Old
Securities will be returned without expense to the tendering holder thereof (or,
in the case of Old Securities tendered by book-entry transfer procedures
described below, such nonexchanged Old Securities will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Notes Exchange Agent and the Preferred Stock Exchange Agent will make a
request to establish an account with respect to the Old Notes and the Old
Exchangeable Preferred Stock, respectively, at the Book-Entry Transfer facility
for purposes of the Exchange Offer within two business days after the date of
the Prospectus. Any financial institution that is a participant in the Book-
Entry Transfer Facility's systems may make book-entry delivery of Old Securities
by causing the Book-Entry Transfer Facility to transfer such Old Securities into
the appropriate Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Securities may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or
facsimile thereof with any required signature guarantees and any other required
documents must, in any case, be transmitted to and received by the appropriate
Exchange Agent at one of the addresses set forth below under "--Exchange Agents"
on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Securities desires to tender such Old
Securities, the Old Securities are not immediately available, or time will not
permit such holder's Old Securities or other required documents to reach the
appropriate Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent received from such Eligible
Institution a properly completed and
40
duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of such Old Securities and the amount of Old Securities
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Securities, in proper form to transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
appropriate Exchange Agent and (iii) the certificate for all physically tendered
Old Securities, in proper form for transfer, or a Book-Entry Confirmation, as
the case may be, and all other documents required by the Letter of Transmittal
are received by the appropriate Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Securities may be withdrawn at any time prior to 5:00 p.m.
Eastern Standard Time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the appropriate Exchange Agent at one of the addresses set forth
below under "--Exchange Agents." Any such notice of withdrawal must specify the
name of the person having tendered the Old Securities to be withdrawn, identify
the Old Securities to be withdrawn (including the principal amount of such Old
Notes and the number of shares of such Old Exchangeable Preferred Stock) and
(where certificates for Old Securities have been transmitted) specify the name
in which such Old Securities are registered, if different from that of the
withdrawing holder. If certificates for the Old Securities have been delivered
or otherwise identified to an Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Securities have been tendered pursuant to the
procedures of book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Securities and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Securities so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Securities which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Securities tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Securities will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Securities) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Securities may be retendered by
following one of the procedures described under the "--Procedures for Tendering"
above at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Securities in exchange for,
any Old Securities and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Securities, if because of any changes
in law, or applicable interpretations thereof by the Commission, the Company
determines that it is not permitted to effect the Exchange Offer. In addition,
the Company has no obligation to, and will not knowingly, accept tenders of Old
Securities from affiliates of the Company (within the meaning of Rule 405 under
the Securities Act) or from any other holder or holders who are not eligible to
participate in the Exchange Offer under applicable law or interpretations
thereof by the Commission, or if the New Securities to be received by such
holder or holders of Old Securities in the Exchange Offer, upon receipt, will
not be tradeable by such holder without restriction under the Securities Act and
the Exchange Act and without material restriction under the "blue sky" or
securities law of substantially all of the states.
41
EXCHANGE AGENTS
State Street Bank and Trust Company has been appointed as Notes Exchange
Agent in connection with the Notes Exchange Offer. Questions and requests for
assistance in connection with the Notes Exchange Offer and requests for
additional copies of this Prospectus or of the Notes Letter of Transmittal
should be directed to the Notes Exchange Agent addressed as follows:
By Registered or Certified Mail;
By Overnight Courier; or By Hand:
State Street Bank and Trust Company
Two International Place, 4th Floor
Boston, Massachusetts 02110-2804
Attention: Corporate Trust Department
By Facsimile: (617) 664-5371
Attention: Corporate Trust Department
Telephone: (617) 664-5635
Boston EquiServe Trust Company, N.A. has been appointed as Preferred Stock
Exchange Agent in connection with the Preferred Stock Exchange Offer. Questions
and requests for assistance in connection with the Preferred Stock Exchange
Offer and requests for additional copies of this Prospectus or of the Preferred
Stock Letter of Transmittal should be directed to the Preferred Stock Exchange
Agent addressed as follows:
By Registered or Certified Mail;
By Overnight Courier; or By Hand:
Boston EquiServe Trust Company, N.A.
Mail Stop 45-01-40
150 Royall Street
Canton, Massachusetts 02021
Attention: Corporate Reorganization Department
By Facsimile: (781) 575-2549
Attention: Corporate Reorganization Department
Telephone: (781) 575-4325
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tender pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
each Exchange Agent reasonable and customary fees for its services and will
reimburse such Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-
42
pocket expenses incurred by them in forwarding copies of the Prospectus and
related documents to the beneficial owners of the Old Securities, and in
handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of each Exchange Agent, the
Trustee (as hereinafter defined), the Transfer Agent (as hereinafter defined)
and accounting, legal printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Securities pursuant to the Exchange Offer. If, however, certificates
representing New Securities or Old Securities for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Securities tendered, or if tendered Old Securities are registered in the name of
any person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than exchange of Old Securities
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes and New Exchangeable Preferred Stock will be recorded in the
Company's accounting records at the same carrying values as the Old Notes and
Old Exchangeable Preferred Stock, respectively, as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes will be recognized upon the consummation of the Exchange
Offer. The expense of the Exchange Offer will be amortized by the Company over
the term of the New Notes and New Exchangeable Preferred Stock in accordance
with generally accepted accounting principles.
43
BUSINESS
GENERAL
21st Century is an integrated, facilities-based communications company, which
seeks to be the first provider of bundled voice, video and high-speed data
services (including cable television, high-speed internet access, and local and
long distance telephone services) in selected midwestern markets beginning with
Chicago's Area 1, for which the Company has been awarded a non-exclusive 15-year
renewable franchise by the City of Chicago. Area 1 stretches more than 16 miles
along Chicago's densely populated lakefront skyline and includes the affluent
residential neighborhoods of the Gold Coast, Lincoln Park and Dearborn Park and
the nation's second largest business and financial district. The Company has
developed (and has begun to install and activate) the DRS Network, which employs
a distributed ring-star architecture characterized by fiber-richness, two-way
interactivity and SONET-based redundancy and self-healing attributes. The DRS
Network accommodates not only traditional voice and video applications, but also
the rapidly growing demand for high-speed data services. Although it has claimed
no intellectual property rights in the DRS Network, the Company believes that
the DRS Network provides the Company with significant strategic advantages that
will differentiate 21st Century from its competitors, such as improved time-to-
market, multiple revenue streams, enhanced service quality and reliability, and
the ability to provide attractively priced bundled services.
The Company has secured a non-exclusive 15-year renewable attachment agreement
with the CTA, which reduces costly and time-consuming "make-ready" and
underground construction for the DRS Network and enables the Company to install
and activate the DRS Network rapidly and efficiently by taking advantage of
access to the CTA's elevated and underground rail systems. The Company also has
secured non-exclusive pole attachment agreements with Commonwealth Edison and
Ameritech which provide 21st Century access to scarce pole space within Area 1
to further facilitate deployment of its DRS Network. The decentralized
configuration of the DRS Network, which includes distributed hubs and nodes that
act "intelligently" to route network traffic efficiently, together with the CTA
and the pole attachment agreements, enable network construction to be driven in
large part by market demand and revenue potential in contrast to the
conventional approach of building a system from the headend outward on a block-
by-block basis. To fully exploit this advantage, the Company's sales and
marketing strategy is coordinated with ongoing network construction and focused
on securing bulk contracts with 125-unit or larger MDUs. The Company believes
that this strategy will help to identify the optimal sequence of node activation
on the DRS Network and tie capital expenditures directly to revenue-producing
subscribers.
21st Century's DRS Network currently provides video, audio and data services.
These services include 110 analog video channels, 59 interactive information
channels with local content (e.g., train and airline schedules, restaurant
menus, local news and sports scores, stock quotes and expressway traffic
updates) and 22 specialty audio channels (e.g., international and foreign
language programming, BBC radio broadcasts, reading services for the blind,
commercial-free music categories and select distant-market FM stations), with
significant capacity for additional broadband and narrowband products and
services. The Company's data product is its 4 Mbps cable modem Internet access
service, which is delivered at symmetrical speeds more than 125 times faster
than the prevalent 28.8 Kbps telephone modem and 25 times faster than an ISDN
modem. The Company is also hosting websites for commercial customers. The
Company will also provide switched, facilities-based CLEC services with last
mile connectivity and local dial tone to both commercial accounts and selected
residential subscribers upon receipt of the necessary regulatory approval and
installation of the requisite telephony equipment. The Company currently
provides telephony service on a test basis and plans to begin offering in mid-
1998 a broad range of competitive telephony services (e.g., local, long distance
and enhanced services) to both commercial accounts and selected residential
subscribers, most of whom currently have no facilities-based alternative to the
service provided over the ILEC's network.
21st Century has taken significant steps to implement its business plan and
service offerings in Chicago's Area 1. In addition to securing the Area 1
franchise, the CTA attachment agreement and the Commonwealth Edison and
Ameritech pole attachment agreements, the Company has (i) constructed and
activated its NOC, which includes a video headend and its DOC, (ii) completed
the northern fiber transport ring of the DRS Network, extending from
44
the downtown business district to the northern portions of the city bordering
Evanston, (iii) secured programming content for more than 170 channels of video
and interactive information programming, (iv) constructed and activated portions
of the outside fiber distribution network to reach selected MDUs, (v) initiated
installation processes, billing, call center and customer care services, (vi)
secured contracts for more than 4,000 residential subscribers (which includes
more than 2,000 new subscribers under 5-year bulk MDU agreements as well as
subscribers acquired in early 1997 from an affiliated company) and (vii) passed
with its initial distribution facilities more than 15,800 additional potential
subscribers. The Company has completed installation of approximately 5 percent
of the fiber optic strand miles that will ultimately make up the DRS Network.
The Company has also entered into an agreement with Nortel for the acquisition
and installation of the switching and other ancillary equipment necessary for it
to provide telephony services.
BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES
The Company believes that it can exploit its innovative DRS Network, superior
product offerings and other strategic assets to compete strongly in Chicago's
Area 1 and other selected markets. 21st Century's strategy and competitive
advantages include the following:
DEVELOP HIGH-CAPACITY, FULL-SERVICE DRS NETWORK. 21st Century intends to
exploit the advantages of its innovative, internally-developed DRS Network
architecture to provide fully integrated voice, video and high-speed data
services. Key attributes of the DRS Network include (i) an advanced integrated
network design built to the rigorous Bellcore standards, (ii) the distribution
of switching and traffic routing mechanics at specific locations out on the DRS
Network (rather than being concentrated at one point as in conventional
networks), allowing the Company to efficiently and economically route traffic
regardless of penetration and usage levels, (iii) a SONET-based redundancy and
self-healing architecture with both circuit and route diversity, (iv) multiple
layers of power redundancy to ensure network reliability and (v) a large fiber
capacity permitting delivery of advanced two-way, fully-interactive broadband
services, as well as significant unutilized capacity to allow the Company to
upgrade services, add applications and develop new product offerings without
service interruption or interference.
DEPLOY DRS NETWORK COST-EFFECTIVELY ON A REVENUE-DRIVEN BASIS. The
decentralized configuration of the DRS Network, combined with the CTA and pole
attachment agreements, allows the Company to rapidly and efficiently deploy the
DRS Network to accommodate market demand on a revenue-driven basis. This
strategy contrasts sharply with the typical approach of building a conventional
coaxial cable system from the headend outward on a block-by-block basis. This
DRS Network advantage will also allow the Company to efficiently utilize its
capital resources to secure larger MDU bulk video contracts which will be used
as the basis for node activation; thus, more significant revenue streams should
be realized earlier in the planned 3-4 year construction buildout than would be
realized by a conventional coaxial cable system buildout. After a large MDU is
activated within a node, the Company will then market its premium cable and pay-
per-view video services, as well as its high-speed data and, when available,
telephony services, to its cable subscribers in order to leverage MDU subscriber
relationships. In addition, 21st Century will market its full range of voice,
video and high-speed data services to Homes Passed. For commercial subscribers,
the Company will seek initially to deploy the DRS Network in Chicago's dense
central downtown area to (i) small to mid-sized commercial accounts and
communications-intensive businesses that have an interest in the Company's high-
speed data and Internet services and (ii) organizations such as the Building
Owners Management Association and other facilities management companies that
influence the selection of communications facilities at multiple buildings, as
well as industry associations which the Company believes will encourage member
companies to use the Company's services.
PROVIDE SUPERIOR PRODUCT OFFERINGS ON A BUNDLED BASIS. The Company believes
that its voice, video and high-speed data product offering will be superior to
competitive products currently available in Area 1 in terms of (i) the breadth
and quality of the individual product offerings, (ii) the extent of the enhanced
service features offered to the customer and (iii) the ability to bundle such
product offerings into a simple, convenient and attractively priced package. The
Company's current video offering includes 110 analog video channels, 59
interactive information channels and 22 specialty audio channels, with
significant capacity for additional broadband and narrowband
45
products and services. 21st Century's fiber-rich DRS Network is designed with
only one to four amplifiers in cascade between its NOC and the subscriber
(compared to up to 40 amplifiers used by conventional networks). This reduction
in amplifiers significantly reduces signal degradation and results in higher
video quality and telephony reliability, a superior audio component and greater
data transmission accuracy. The Company's interactive information channels,
which provide useful local content and information, are currently not available
from any other single source in Area 1. The Company's high-speed data offering
includes cable modems that provide access to the Internet at 4 Mbps, which is
approximately 125 times faster than the prevalent 28.8 Kbps telephone modem and
25 times faster than an ISDN modem. Beginning in mid-1998, the Company expects
to begin marketing a broad range of competitive telephony services (e.g., local,
long distance, call waiting, call forwarding, caller ID and three-way calling)
to both commercial accounts and selected residential subscribers, most of whom
currently have no facilities-based alternative to the service provided over the
ILEC's network. The Company's bundled service offering will provide customers
with convenient "one-stop shopping," attractive pricing through significant
bundled discounts, a single source for installation and service and the ease of
a single monthly bill.
LEVERAGE STRATEGIC ASSETS. The Company's core strategic assets include (i)
the 15-year renewable franchise granted by the City of Chicago, which permits
the construction and installation of a network serving the entirety of Chicago's
Area 1 and (ii) the attachment agreement negotiated with the CTA and the pole
attachment arrangements negotiated with Commonwealth Edison and Ameritech, which
facilitate the timely and efficient buildout of the DRS Network through the
utilization of scarce pole space and city infrastructure rights-of-way. Each of
these assets is a valuable and important component of the Company's facilities-
based business strategy and together would be difficult for another entrant to
replicate.
SECURE FIRST-TO-MARKET ADVANTAGES. The Company seeks to be the first-to-
market in offering bundled voice, video and high-speed data services in
Chicago's Area 1 and other selected markets. The Company believes that the rapid
buildout of the DRS Network will enable it to acquire a significant customer
base and will give it a competitive advantage over other prospective bundled and
single-service providers.
CONTINUE TO ATTRACT EXPERIENCED MANAGEMENT. The Company's management team
has extensive and diverse experience in the cable television, Internet, data and
telecommunications industries. During the past year, the Company's senior
management has demonstrated its expertise by constructing and activating the
NOC, completing the northern fiber transport ring of the DRS Network, securing
necessary programming content, and initiating services. The Company intends to
continue to attract qualified senior-level management with demonstrated
expertise from the various industries comprising the Company's service offering.
FOCUS ON SUPERIOR CUSTOMER CARE. The Company is committed to providing
superior customer care to differentiate 21st Century from its competitors. To
accomplish this, the Company has (i) contracted with a third party to provide a
single billing statement for its voice, video and data services (which will
facilitate bundled discounting for multiple services, permit customized billing
statements and permit monthly, transactional and metered billing to support the
Company's planned product lines) and (ii) established a relationship with a
leading call center services provider to staff and operate a 24-hour call
center. The Company has provided a dedicated toll-free number to the call center
for all subscriber needs and has established call center performance parameters
under which (i) at least 90% of customer calls are to be answered within 30
seconds, (ii) customers are to receive a busy signal less than 3% of the time
and (iii) customer-abandoned calls are to account for less than 5% of all calls.
The Company believes that the quality and reliability of its services will
result in fewer in-bound subscriber complaints, service requests and other non-
revenue producing calls. In addition, the Company has installed sophisticated
status monitoring equipment in the NOC and throughout its DRS Network, which
should allow the Company to become aware of and remedy many potential problems
before they are detectable by subscribers.
EXPAND TO ADDITIONAL MARKETS. The Company intends to expand its operations
to selected midwestern markets which have the size, demographics and
geographical location suitable for its business strategy. Although the Company
may consider stand-alone systems, the Company expects to focus on markets in
which it can use its Chicago DRS Network and NOC to achieve synergies and
economies of scale. The Company has applied for
46
franchises in a number of cities in suburban Chicago, central, south-central and
south-western Michigan and northern Indiana.
MARKET OVERVIEW
The City of Chicago is the third largest urban market in the United States and
Area 1 is the densest section of the city, characterized by a high concentration
of MDUs and commercial office buildings. Area 1 has several significant and
attractive attributes, including a relatively high density of 12,000 housing
units per square mile (compared with a density for the entire City of Chicago of
5,000 housing units per square mile); more than 300,000 homes (many of which are
located in upscale, demographically attractive lakefront neighborhoods);
existing cable penetration that the Company believes is significantly below the
national average for urban areas and approximately 51,000 employers in the
City's prominent business and financial districts, which include such businesses
and landmarks as the Mercantile Exchange, Sears Tower, Chicago Board of Trade,
Chicago Board of Options Exchange, Federal Reserve, Hancock Building, Amoco
Tower, major banks and other premier businesses.
INTERACTIVE BROADBAND DRS NETWORK
DRS NETWORK COMPONENTS. The DRS Network consists of six main components: the
NOC, the Transport Ring, Transport Hubs, Campus Rings, Campus Hubs and Nodes.
The following graphic depicts the design of the DRS Network.
[PICTURE OF NETWORK]
The NOC processes voice, video and data signals before they are transported to
the rest of the system. The DOC and a video headend are located at the NOC and,
when the Company begins to offer telephony service, a telephone switch will also
be located at the NOC. The NOC also functions as a gateway to other networks
outside the DRS Network. The NOC monitors DRS Network activity and receives
real-time information regarding DRS Network performance and power supply status.
When the Company begins to offer telephony service, the NOC will monitor the
activation of equipment at the premises of the Company's telephony subscribers.
The Transport Ring, a group of fiber-optic cables that run along the CTA
right-of-way, carries voice, video and high-speed data signals between the NOC
and the Transport Hubs. Transport Hubs connect the Transport Ring and the Campus
Rings and also provide a diagnostic function by trouble-shooting potential
problems on the DRS Network. The Campus Rings are groups of fiber-optic cables
that carry voice, video and high-speed data signals between the Transport Hubs
and the Campus Hubs. The Campus Hubs connect the Campus Rings and the lines that
feed the Nodes and provide a diagnostic function similar to the Transport Hubs.
The Nodes connect the subscribers to the Campus Hubs via coaxial cable. The
Nodes represent the point in the DRS Network where light sent over the DRS
Network via fiber-optic cable is translated into radio frequencies for delivery
to the subscriber. The Nodes also monitor the DRS Network and detect potential
problems. The "star distribution" of the DRS Network refers to the star-shaped
DRS Network components branching off each Node to the subscribers.
Delivery of telephony services over the DRS Network will require the
installation of switching and other ancillary equipment at the NOC and at the
Nodes, where the existing twisted-pair telephone wire will connect to the DRS
Network. The Company has entered into an agreement with Nortel for the
acquisition and installation of such equipment.
DESIGN ATTRIBUTES. The Company's DRS Network was conceived and designed by
the Company's engineers and incorporates SONET, Ring and Star architectures as
well as wave-division multi-plexing elements, and includes certain attributes of
Hybrid Fiber Coax ("HFC"). Key attributes of the DRS Network include (i) an
advanced integrated network design built to the rigorous Bellcore standards,
(ii) the distribution of switching and traffic
47
routing mechanics at specific locations out on the DRS Network (rather than
being concentrated at one point as in conventional networks), allowing the
Company to efficiently and economically route traffic regardless of penetration
and usage levels, (iii) a SONET-based redundancy and self-healing architecture
with both circuit and route diversity, (iv) multiple layers of power redundancy
to ensure network reliability and (v) a large fiber capacity permitting delivery
of advanced two-way, fully-interactive broadband services, as well as
significant unutilized capacity to allow the Company to upgrade services, add
applications and develop new product offerings without service interruption or
interference. In addition, the DRS Network is designed with only one to four
amplifiers in cascade between its NOC and the subscriber (compared to up to 40
amplifiers used by conventional networks). This reduction in amplifiers
significantly reduces signal degradation and results in higher video quality and
telephony reliability, a superior audio component and greater data transmission
accuracy.
The DRS Network uses signal processing techniques to deliver communication
services such as Internet access and high-speed data, Shared Tenant Services
("STS"), Small Business Services and Plain Old Telephone Services, which the
Company intends to provide directly or in conjunction with strategic business
partners. The DRS Network is able to separate data and voice signals from the
video signals, which will enable it to provide higher reliability and the
advanced network management necessary for residential and commercial data
communications and telephony services.
DRS NETWORK ADVANTAGES. The DRS Network has several advantages including (i)
intelligent routing of network traffic, (ii) advanced functionality at
subscribers' premises, (iii) efficient introduction of new switched and
broadband services and (iv) dedicated, two-way, high-speed data connectivity.
INTELLIGENT ROUTING OF TRAFFIC. The DRS Network routes traffic
intelligently using grooming and hairpinning techniques. Grooming is a
technique by which voice, video and data signals are kept on the DRS Network,
thereby decreasing the reliance on and the costs incurred by using other
companies' communications networks. Hairpinning, a type of grooming, is a
technique that allows voice, video and data signals to be diverted away from
the Company's NOC, where network traffic is likely to be heavy, and routed by
Campus Hubs or Transport Hubs.
ADVANCED FUNCTIONALITY AT SUBSCRIBERS' PREMISES. The Company uses an
advanced analog set-top box with 512K RAM and flash memory, which will allow
it to provide subscribers additional functions and features. Among such
functions and features are interactive data channel capability, impulse pay-
per-view, fully computerized addressability, forward and return path
capability, bit-mapped graphics, downloadable software capability, fully
interactive seven-day electronic program guide, enhanced signal theft
protection and dataport connectivity to printers, faxes and personal
computers. The Company believes that this terminal is designed to readily
convert to digital technology at a cost that is competitive with analog
industry standards. See "Risk Factors--Equipment Cost and Availability."
EFFICIENT INTRODUCTION OF NEW SWITCHED AND BROADBAND TECHNOLOGIES. 21st
Century should be able to introduce most new switched and broadband
technologies to its subscribers without causing service interruption or
interference. The DRS Network's architecture has reserved bandwidth from
750MHz to 860MHz. This bandwidth has been allocated for future digital video
services representing approximately 90 to 100 channels. While the Company does
not anticipate conversion to digital in the near future given the DRS
Network's initial 110 analog video channel offering, the DRS Network's large
fiber capacity will allow the Company to upgrade services, add applications
and develop new product offerings without service interruption or
interference.
DEDICATED, TWO-WAY, HIGH-SPEED DATA CONNECTIVITY. The DOC allows true
two-way (duplex), high-speed interactivity. At the DOC a redundant series of
routers, servers and switches are installed, from which typical ISP
functionalities (Domain Naming System, Mail, News, Proxy, etc.) are
administered and dual connections to national ISPs are maintained. 21st
Century will store the most popular Web pages, along with local content, in
servers located in the DOC. By storing these Web pages and local content
within the DOC and
48
providing cable modem access to these resources, subscribers can receive any
of this information at up to four Mbps, or approximately 125 times faster than
the prevalent 28.8 Kbps telephone modem. As a further benefit, since the cable
modem is connected directly from the subscriber's PC to the coaxial portion of
the DRS Network, there is no need for a second telephone line to access the
Internet, no delay associated with dialing into and signing onto a typical
ISP's modem service and no surcharge for making a call into the DOC (as is
typically the case with 128 Kbps ISDN service).
As an integral part of the DRS Network design, the Company has reserved fiber-
optic capacity dedicated for providing a wide variety of high-speed data
services, including high-speed (up to OC-12) private line quality access to the
Internet. The use of multi-protocol switching platforms in both the Campus and
Transport hubs and the DRS Network's high fiber count will allow the Company to
offer private virtual networks to link offices, buildings and campuses located
in Area 1. Further, the high-speed data network will extend to both commercial
as well as residential areas and will support a host of other applications,
including telecommuting, distance-learning, software distribution, site
mirroring, bulk data transfer and teleconferencing.
BROADBAND SERVICES
The Company's service offering will include a wide range of voice, video and
high-speed data services that the Company expects to provide on a bundled basis.
The Company's bundled service offering will provide customers with convenient
"one-stop shopping," attractive pricing through significant bundled discounts,
a single source for installation and service and the ease of a single monthly
bill.
VIDEO AND AUDIO. The Company currently offers 110 analog video channels, 59
interactive information channels with local content and 22 specialty audio
channels, with significant capacity for additional broadband and narrowband
products and services. The 110 analog video channels include a basic package of
84 channels, one of the largest basic packages in the United States, designed to
appeal to Chicago's ethnic and cultural diversity. Basic video channels for
business customers also include specialized business programming such as
Bloomberg, CNN, CNN Financial and Knowledge TV. This specialized business
programming will be combined with downlink teleconferencing from the NOC.
Programming for the Company's video offering comes from national and local
networks, including most major networks such as ESPN, HBO, Showtime, Disney and
CourtTV and local networks such as local affiliates of ABC, CBS, NBC and Fox.
The video offering includes an on-screen 7-day interactive program guide, one-
button VCR recording and near-video-on-demand pay-per-view movies, with start
times every 30 minutes, 24 hours per day. The Company also plans to offer a
custom camera-monitored security channel for apartment and condominium buildings
that execute master agreements with the Company.
Also included in the Company's basic video package are 59 interactive
information channels, which include local bus and train schedules, airline
schedules, employment ads, restaurant menus, local news and sports scores, stock
quotes, expressway traffic updates, personal ads and other relevant local
content (including building-specific information for large MDU accounts). The
Company plans to expand its interactive information offering to 100 channels
during 1998. This server-delivered information is accessed on the customer's
television via a specialized universal remote control.
The Company's 22 specialty audio channels include international and foreign
language broadcasts (selected to appeal to concentrations of nationalities
residing in Chicago's Area 1), BBC radio broadcasts, reading services for the
blind, commercial-free music categories and select distant-market FM stations.
HIGH-SPEED DATA AND INTERNET SERVICES. The Company will provide high-speed
Internet access services using a high-speed cable modem in much the same way
customers currently receive Internet services over a modem linked to the local
telephone network. The cable modems presently being used with the Company's DRS
Network will operate at 4 Mbps, which is approximately 25 times faster than ISDN
modems and more than 125 times faster than the prevalent 28.8 Kbps analog
modems. The customer's cable line (with cable modem) will be connected
49
directly into the Internet. Because the cable modem connects through a cable
line rather than through a telephone line, the Internet connection will always
be active and there will be no need to dial up for access to the Internet or
wait to connect through a port leased by an ISP. The Company is also hosting
websites for commercial customers and expects to offer private virtual networks
to link offices, buildings or campuses located throughout the franchise area. In
addition to supporting cable modem services for Internet access, the DRS Network
is capable of connecting computers or computer networks via a separate fiber
connection. By connecting computers or computer networks at multiple locations,
subscribers can establish virtual local area networks, over which they can
transport data. The Company expects to offer such connections, which will enable
subscribers to conduct video conferences, provide Internet-protocol telephony
services, conduct electronic commerce, connect hospitals and universities for
tele-medicine and distance-learning applications and access their office
networks with the same speed and functionality as though they were using their
office desktop computers.
TELEPHONY. The Company has received regulatory approval from the Illinois
Commerce Commission to provide CLEC services. The DRS Network will allow the
Company, after installation of the requisite telephony equipment, to act as a
facilities-based CLEC offering telecommunications services with last mile
connectivity and local dial tone. The Company anticipates that the necessary
equipment and installation will cost approximately $40 million over five years
and that the installation necessary for the Company to begin providing telephony
service will take approximately five to six months. The Company plans to begin
offering in mid-1998 a broad range of competitive telephony services (e.g.,
local, long distance and enhanced services) to both commercial accounts and
selected residential subscribers, most of whom currently have no facilities-
based alternative to the service provided over the ILEC's network. The selected
residential customers to which the Company will offer telephony services
initially will be limited to those residing in, or in close proximity to, MDUs
containing 24 or more residences, but the Company expects that the threshold
number of residences in MDUs to which this service can be viably offered will be
reduced over time. The Company anticipates that it s telecommunications service
offerings will include local service, long-distance and enhanced service
packages. Enhanced services will include custom calling features such as call
waiting, call forwarding and three-way calling. The Company also expects to
offer more advanced custom local area signaling services ("CLASS") features,
such as caller ID and caller masking and plans to offer voice mail as an
optional service. The Company expects to provide long-distance service on a
resale basis from one or more national interexchange carriers. The Company also
plans to make available to businesses Centrex services and PBX trunk
provisioning. The Company anticipates that it will establish wireless and paging
services on a resale basis.
The Company will be required to rely on local exchange carriers ("LECs") and
interexchange carriers to provide communications capacity or interconnection for
its local and long-distance telephone service. The Company has entered into a
direct interconnection agreement with Ameritech. The terms of the
interconnection agreement require the approval of the Illinois Commerce
Commission. The 1996 Telecom Act established certain requirements and standards
for interconnection arrangements, and the Company's interconnection agreement
with Ameritech is based in part on such requirements. However, these
requirements and standards are still being developed and implemented by the FCC
in conjunction with the states through a process of negotiation and arbitration.
See "Risk Factors--Commencement of Telephony Services" and "Legislation and
Regulation--Federal Regulation of Telecommunications Services."
The DRS Network is capable of providing telephony services, but will require
the installation of switching and other ancillary equipment at the NOC and at
the nodes, where the customer's existing twisted-pair telephone wire will
connect to the DRS Network. The Company has entered into an agreement with
Nortel for the acquisition and installation of such equipment.
50
FUTURE BROADBAND SERVICES. The Company believes that the DRS Network will
enable it to provide additional broadband services in the future, including (i)
high-speed data transmission connecting homes and offices ("extranets"), (ii)
wholesale transport and interconnection (local loop) services to connect long-
distance carriers to their customers, (iii) security services, including closed-
circuit television security monitoring and alarm systems and (iv) interactive
energy management services, which involve active monitoring by the customer of
energy usage and cost. The Company expects to commence trials of certain of
these services in 1998. The Company plans to seek strategic partnerships and
alliances to provide a number of these services. See "Risk Factors--Uncertain
Demand for Broadband Services."
SALES AND MARKETING
21st Century seeks to capitalize on its position as a new communications
company that brings competition, choice and an innovative bundle of
communications products to the residential and commercial markets covered by its
DRS Network.
RESIDENTIAL MARKETING. The Company's marketing plan for residential
customers is initially focused on establishing relationships with the managers
of residential rental properties and presidents of condominium associations
which the Company expects will lead to long-term bulk video service contracts
with the residents of targeted MDUs. Once the Company has entered into bulk MDU
contracts and has connected its DRS Network to the buildings, the Company will
then market its premium cable and pay-per-view video services, as well as its
high-speed data and, when available, telephony services, to its cable
subscribers in order to leverage its existing MDU subscriber relationships. In
addition, the Company will utilize direct mail and personal sales calls to
market its full range of voice, video and data services to Homes Passed.
COMMERCIAL MARKETING. The Company's commercial marketing plan is initially
focused on Chicago's central downtown area due to the heavy concentration of
potential commercial accounts. Further, the Company expects to focus on small to
mid-sized commercial accounts (under 50 employees), a market that the Company
believes has been underserved by the incumbent providers and which has the
potential for higher margins and greater interest in switching carriers for
better pricing and customer care. Because the Company is not yet widely known,
it will seek to acquire visibility and recognition by selling to well-known,
communications-intensive accounts that have an interest in the Company's high-
speed data and Internet services. At the same time, the Company's sales staff
will seek to develop relationships with organizations such as the Building
Owners Management Association and other facilities management companies that
influence the selection of communications facilities installed at multiple
buildings, as well as industry associations which the Company believes will
encourage member companies to use the Company's services.
The Company will also focus its marketing efforts on the commercial market
outside of Chicago's central downtown area, which is made up primarily of small
businesses operating in shopping strips, commercial boulevards or small-
office/home-office environments. This market has an expanding diversity of
communications needs which 21st Century believes are well-suited to the bundled
products offered by the Company. The Company plans to focus its marketing
efforts to these subscribers on its high-speed data service capabilities, which
the Company believes will be an attractive alternative to data connectivity via
the lower-speed, twisted-pair copper lines that are currently available.
SALES AND MARKETING STAFF. The Company's sales and marketing staff currently
consists of 25 individuals. The Company expects to increase this staff to
approximately 28 during the first quarter of 1998. The sales and marketing staff
is comprised of a commercial division and a residential division, each of which
is headed by a manager who supervises various account executives. In addition,
the Company has contracted with a third-party organization for sales support on
an interim basis to assist the Company in marketing and selling its services to
certain Homes Passed. The Company has selected its account executives for the
collective diversity of their industry experience across the cable television,
telephony and data service sectors.
51
CUSTOMER CARE
The Company believes that customer care is an essential element of its
operations and is committed to providing superior customer care to differentiate
it from its competitors. The Company believes that the quality and reliability
of its services will result in fewer in-bound subscriber complaints, service
requests and other non-revenue producing calls. In addition, the Company has
installed sophisticated status-monitoring and diagnostic equipment on both the
NOC and its DRS Network which should allow the Company to become aware of and
remedy many potential problems before they are detectable by subscribers.
BILLING. The Company has contracted with a third party to provide a single
billing statement for its voice, video and data services. This technology will
facilitate bundled discounting for multiple services, permit customized billing
statements and permit monthly, transactional and metered billing to support the
Company's planned product lines. The third party's billing and information
management system is currently integrated for video and data services, and is in
the beta testing phase for integrated voice, video and data services. If an
integrated billing and information management system for all three services is
not commercially available when the Company begins providing telephony service,
the Company's customers will still receive a single billing statement, but such
statement will be generated from two separate billing and information management
systems.
CUSTOMER SERVICE REPRESENTATIVES. The Company has established a relationship
with a leading call-center services provider to outsource its customer service
operations. The call center is currently staffed with six full-time customer
service representatives ("CSRs") trained to handle calls 24 hours per day, 365
days per year. An additional 20 CSRs have been trained and will be available to
the Company as demand requires. Each CSR is required to have a thorough
understanding of the Company's service offerings. The Company has provided a
dedicated toll-free number to the call center for all subscriber needs and has
established call center performance parameters under which (i) at least 90% of
customer calls are to be answered within 30 seconds, (ii) customers are to
receive a busy signal less than 3% of the time and (iii) customer-abandoned
calls are to account for less than 5% of all calls.
COMPETITION
VIDEO SERVICE
Cable television providers compete for subscribers in local markets with other
providers of television services and other providers of entertainment, news and
information. The competition in these markets includes broadcast television and
radio, satellite and wireless video distribution systems and competitive
television operations, newspapers, magazines and other printed sources of
information and entertainment. The enactment of the 1996 Telecom Act may create
more competition in providing cable television because it allows LECs to provide
video services in their local service areas.
CABLE SYSTEMS AND OTHER VIDEO PROVIDERS. There are existing cable television
operations and other video providers in Chicago's Area 1. In addition, because
Federal law prohibits cities from granting exclusive cable franchises and from
unreasonably refusing to grant additional competitive franchises, additional
cable television operators could obtain franchises in the future. An increasing
number of cities are exploring the feasibility of owning their own cable systems
in a manner similar to city-provided utility services.
Chicago Cable, the local subsidiary of TCI, is the incumbent provider of cable
services in Chicago's Area 1. Chicago Cable's legacy system is a traditional
street-grid, coaxial cable system, is one-way, non-interactive, limited to the
residential sector and does not currently accommodate enhanced communications
transmissions. In the Chicago metropolitan area, of which Area 1 is a part,
Chicago Cable and other subsidiaries of TCI have
52
approximately 515,000 subscribers for their basic cable services and their cable
networks pass approximately 1,340,000 homes.
OTHER VIDEO COMPETITION IN CHICAGO. There are small wireless cable providers
serving certain MDUs in Chicago. In its current analog format, wireless cable
has limited bandwidth and cannot accommodate a video channel offering comparable
to 21st Century's. Further, the Company believes that the wireless technology
required to provide bundled voice, video and high-speed data services with real
interactivity does not exist at the present time, and the current technology
that requires a phone-line return path should be at a competitive disadvantage
to 21st Century's online cable modem Internet and high-speed data offerings.
There are alternative methods of distributing the same or similar video
programming offered by cable television systems, although cable television
systems currently account for a substantial percentage of total subscribership
to multichannel video programming distributors ("MVPDs"). In addition to
broadcast television stations, the Company competes with other multichannel
programming service providers on a direct over-the-air basis. Multichannel
programming services are distributed by communications satellites directly to
satellite dishes serving residences, private businesses and various nonprofit
organizations.
The Company expects a more significant competitive impact from medium-power
and high-power communications DBS that transmit signals that can be received by
small dish antennas. Hughes Communications, Inc. ("Hughes") commonly known as
DirecTV, a subsidiary of General Motors Corporation, and United States Satellite
Broadcasting Company, a subsidiary of Hubbard Broadcasting, began offering
multichannel programming services in 1994 via high-power communications
satellites that require a dish antenna of only approximately 18 inches. Other
DBS providers include PrimeStar and EchoStar. Although DBS providers presently
serve a relatively small percentage of pay television subscribers, their share
has been growing steadily. Competition from both medium- and high-power DBS
services could become substantial as developments in technology continue to
increase satellite transmitter power and decrease the cost and size of equipment
needed to receive these transmissions. However, the Company believes that
equipment and programming costs presently are limiting DBS market share in
cabled areas. The Company also believes that Area 1 has lower potential for DBS
due to the difficulties of attaching dishes to high-rise structures.
DBS has advantages and disadvantages as an alternative means of distributing
video signals to the home. Among the advantages are that the capital investment
(although initially high) for the satellite and uplinking segment of a DBS
system is fixed and does not increase with the number of subscribers receiving
satellite transmissions, that DBS is not currently subject to local regulation
of service or required to pay franchise fees and that the capital costs for the
ground segment of a DBS system (the reception equipment) are directly related to
and limited by the number of service subscribers. The disadvantages of DBS
presently include a limited ability to tailor the programming package to the
interests of different geographic markets, such as providing local news, other
local origination services and local broadcast stations, signal reception being
subject to line of sight angles and intermittent interference from atmospheric
conditions and terrestrially-generated radio frequency noise. The long-term
effect of competition from these services cannot be predicted. Nonetheless, the
Company believes that such competition will be significant.
MMDS and LMDS systems represent another type of video distribution service.
Both systems deliver programming services over microwave channels received by
subscribers with a special antenna. LMDS, operating in the higher 28GHz
frequency band, employs frequency reuse within a distributed architecture and is
also capable of providing simultaneous delivery of two-way voice and data, as
well as video services. MMDS and LMDS systems are less capital-intensive, are
not required to obtain local franchises or pay franchise fees and are subject to
fewer regulatory requirements than cable television systems. Although there are
relatively few MMDS systems in the United States that are currently in operation
or under construction, many markets have been licensed or tentatively licensed
by the FCC. The FCC has taken a series of actions intended to facilitate the
development of these "wireless cable systems" as alternative means of
distributing video programming, including reallocating the use of certain
frequencies to these services and expanding the permissible use of certain
channels reserved for
53
educational purposes. The FCC's actions enable a single entity to develop a MMDS
system with a potential of up to 35 channels, and thus compete more effectively
with cable television. Developments in compression technology have significantly
increased the number of channels that can be available from other over-the-air
technologies. Subscribing to MMDS services is projected to continue to increase
over the next several years. There are currently no commercial operating
licensed LMDS systems in the United States. The FCC began auctioning commercial
LMDS licenses in February 1998. It is not expected that any commercial LMDS
systems will begin operating until late 1998.
21st Century believes that the density of high-rise buildings in the Chicago
market area is a limiting factor for wireless technologies, such as DBS, LMDS
and MMDS, all of which require a direct line of sight to the satellite or
headend tower, respectively. Satellite dish installations on metropolitan
Chicago MDUs have proven to be problematic and aesthetically undesirable.
Moreover, the Company believes that "ghosting" and other distortion created by
areas with substantial high-rise density, such as Area 1, may represent a
quality disadvantage for potential wireless competitors.
The Company also competes with master antenna television systems ("MATV")
and SMATV systems, which provide multichannel program services directly to
hotel, motel, apartment, condominium and similar multi-unit complexes within a
cable television system's franchise area. These systems are generally free of
any regulation by state and local government authorities. The 1996 Telecom Act
changed the definition of a "cable-system" to include only systems that cross
public rights-of-way. Therefore SMATV systems that serve buildings that are not
commonly owned or managed and which do not cross public rights-of-way are no
longer considered cable systems and no longer require a franchise to operate.
Prior to enactment of the 1996 Telecom Act, LECs were prohibited from offering
video programming directly to subscribers in their telephone service areas
(except in limited circumstances in rural areas). The 1996 Telecom Act
eliminated restrictions on LECs and the Company may face increased competition
from local telephone companies, which in most cases have greater financial
resources than the Company. Several major LECs, including Ameritech, have
announced plans to acquire cable television systems or provide video services to
the home through fiber optic technology.
The 1996 Telecom Act provides LECs with four options for providing video
programming directly to customers in their local exchange areas. Telephone
companies may provide video programming by radio-based systems, common carrier
systems, "open video" systems or "cable systems." LECs that elect to provide
service via "open video" systems must allow others to use up to two-thirds of
their activated channel capacity. They will be relieved of regulation as
"common carriers" and are not required to obtain local franchises, but will
still be subject to all rules governing cable systems, including franchising
requirements. It is unclear which model LECs will ultimately choose but the
video distribution service developed by local telephone companies is likely to
represent direct competition for the Company.
The ability of local telephone companies to compete with the Company by
acquiring an existing cable system is limited. The 1996 Telecom Act prohibits a
LEC and its affiliates from acquiring more than a 10% financial or management
interest in any cable company providing cable service in its telephone service
area. It further prohibits a cable operator and its affiliates from acquiring
more than a 10% financial or management interest in any LEC providing telephone
exchange service in its franchise area. A LEC and a cable operator that have a
telephone service and cable franchise in the same market may not enter into a
joint venture to provide telecommunications services or video programming. There
are exceptions to these limitations for rural locations, very small cable
systems and LECs in non-urban areas.
INTERNET AND HIGH-SPEED DATA SERVICES
54
Internet service, both Internet access and on-line content services, is
provided by ISPs, satellite-based companies, long-distance carriers and other
cable television companies.
A large number of companies provide businesses and individuals with direct
access to the Internet and a variety of supporting services. In addition, many
companies (such as America Online, Inc., MSN Computers, Prodigy Services Company
and WebTV Networks) offer "online" services consisting of access to closed,
proprietary information networks with services similar to those available on the
Internet, in addition to direct access to the Internet. Such companies generally
offer Internet services over telephone lines using standard computer modems. The
Company believes that this form of transmission works well for smaller amounts
of data, but standard telephone lines have limitations in handling large volumes
of information, multimedia applications or high-speed data transmissions,
resulting in lengthy delays. Also, ISPs have limited numbers of ports available
for customers to dial in to the Internet, and their customers may experience
difficulties in obtaining access to the Internet or be disconnected if activity
is too great. A few ISPs also offer high-speed ISDN connections to the Internet.
The Company believes that broadband transmission is the most efficient means of
transmitting large volumes of data and information on a high-speed basis to and
from the Internet.
A few satellite companies provide broadband access to the Internet from
desktop PCs using a small dish antenna and receiver kit comparable to that used
for satellite television reception. DirecPC, principally owned and operated by
Hughes, is a prominent provider of satellite-based Internet services in the
United States. These satellite-based Internet services generally require a local
wireline telephone (twisted copper pair) return path, which will have inherent
capacity limitations and costs.
Long-distance companies are aggressively entering the Internet access markets.
Long-distance carriers have substantial transmission capabilities, traditionally
carry data to large numbers of customers and have an established billing system
infrastructure that permits them to add new services. For example, AT&T began
providing Internet access in the United States through a new service called
WorldNet, offering its long-distance customers five free hours of Internet
access per month for a one-year period. MCI is offering MCI Internet in
competition with AT&T's WorldNet service. The Company expects competition for
the end-consumer from such companies to be vigorous due to such competitors'
greater resources, operating histories and name recognition. However, the long-
distance companies are still limited by the inherent speed constraints of
traditional copper twisted-pair telephone lines.
Other cable television companies can enter the Internet services market.
Traditional cable networks provide only one-way transmission and must be
upgraded (and often reconfigured) to permit two-way data transmission, which
requires significant investments on the part of service providers. Broadband
technology must be incorporated to enable digital data to be transmitted over a
separate channel. The Company is not aware of any cable television competitors
in its existing service area providing Internet access service using cable
modems. However, owners of newer or upgraded cable television networks have the
ability to provide Internet services using cable modems. The Company believes
that some existing cable television providers are beginning to provide such
services in certain of their major markets or clusters. @Home, a joint venture
among TCI and several other large cable companies, is offering high-speed
Internet service using cable modems in areas where its affiliates have HFC
networks. The Company believes that high-speed Internet services ultimately will
be offered by other cable providers and companies such as @Home in most of the
Company's present and future service areas. In addition, @Home announced in
December 1997 that it and Best Internet Communications would collaborate to
deliver web hosting to customers of @Home's @Work division.
Wireline and wireless telephony operators also provide high-speed data
services. The wireline carriers include Ameritech and two competitive access
providers ("CAPs"): WorldCom and TCG. While Ameritech provides telephony
service in all of Area 1, its existing copper lines are not well suited to
provide high-speed data services. Recent advances in DSL technology have made it
possible to enhance the data transport capabilities over copper lines and
Ameritech recently announced that it is providing high-speed Internet access
using ADSL technology and will be collaborating with Microsoft Corporation to
facilitate the installation of its ADSL service. Ameritech has announced plans
to provide high-speed Internet access initially in Ann Arbor, Michigan, and
expects to offer such
55
access in the Chicago area by mid-1998. However, the Company believes that the
installation and operation of ADSL technology (especially in residential areas)
will be costly to Ameritech. Neither of the CAPs offers ubiquitous telephony
service in Chicago's business district or has built a network infrastructure in
Chicago's residential areas. In addition, as in the case of Ameritech's network,
the CAPs' networks are currently designed primarily for the transport of voice
rather than data services and the Company believes the network upgrades
necessary for the CAPs to provide competitive high-speed data services will be
costly.
Wireless telephony providers offer high-speed data services via satellite
dishes. Data is transmitted to the subscriber from the satellite dish at
relatively fast rates, but the subscriber must use a telephone line to send
data. This restricts the ability of the subscriber to send information to the
speed of an analog modem (generally 56 Kbps) and necessitates the use and
expense of an additional telephone line. In addition, installation of a
satellite dish is generally difficult in an MDU environment and in Chicago's
business district.
VOICE SERVICES
Once the Company begins providing local and long-distance telephony services,
it will likely face competition in providing such services. The 1996 Telecom Act
is expected to have a substantial impact on the degree of competition because it
permits providers to enter markets that were previously closed to them.
Specifically, the 1996 Telecom Act preempts state policies that have
historically protected LECs from significant competition in local service
markets. In addition, the 1996 Telecom Act supersedes the antitrust consent
decree that prohibited the Regional Bell Operating Companies ("RBOCs") from
providing long-distance services, and establishes terms and conditions under
which RBOC entry into the long-distance market will be permitted. The overall
effect of these provisions is to blur the distinctions that previously existed
between local and long-distance services.
One major impact of the 1996 Telecom Act may be a trend toward the use and the
acceptance of bundled service packages, consisting of local and long-distance
telephony, combined with other elements such as cable television and wireless
telecommunications service. As a result, the Company will be competing with the
ILEC, Ameritech, with traditional providers of long-distance service, such as
AT&T, MCI, Sprint and WorldCom and with competitive local service providers, and
may face competition from other providers of cable television service, such as
TCI. The Company's ability to compete successfully in telephony will depend on
the attributes of the overall bundle of services the Company is able to offer,
including price, features and customer service.
Wireless telephone service (cellular and personal communication service
("PCS")) now is generally viewed by consumers as a supplement to, not a
replacement for, wireline telephone service. In particular, wireless is more
expensive than wireline local service and is generally priced on a usage basis.
However, it is possible that in the future the rate and quality differential
between wireless and wireline service will decrease, leading to more direct
competition between providers of these two types of services. In that event, the
Company's telephony operations may also face competition from wireless
operators.
OTHER TELEPHONY COMPETITORS. There are currently three principal competitive
telecommunications carriers in Chicago's Area 1: Ameritech, WorldCom and TCG.
Others have announced their entry into the local telephone business in Chicago,
but none is offering a commercially available product at this time. Of the "Big
Three" interexchange carriers, only MCI has attempted to enter the local market
to date. AT&T has publicly stated that it will be in the local Chicago market by
the end of 1998.
Ameritech is the regulated monopoly local carrier in Chicago's Area 1. It was
formed in 1983 as a result of the divestiture of AT&T. The local operating
company is known as Ameritech-Illinois, formerly Illinois Bell, and reported
operating revenues of $3.7 billion for 1996. Presently, its telephony services
are provided largely over restricted bandwidth, twisted-copper pair wire.
Ameritech offers local residential service on the basis of a per-line charge and
measured usage charges based on distance and time-of-day. Ameritech is the only
facilities-based provider presently available to the local residential market.
On the business side, Ameritech offers a wide range of
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switched and dedicated intraLATA local and toll services. Ameritech also offers
enhanced services such as custom calling and CLASS features to both residential
and business customers.
In late 1994, Ameritech received FCC approval to enter the cable television
business. Ameritech is initially targeting franchises in suburban Chicago and
Michigan. This new unregulated organization is called Ameritech New Media.
Ameritech is formally seeking the Area 5 franchise to compete with TCI in a
predominantly residential, single-family home market. Because Ameritech's video
division is not currently regulated, telephony services cannot currently be
bundled with cable services.
WorldCom is an integrated communications provider of local and long-distance
telecommunications services and certain Internet-related services to business
and government end-users nationally and internationally. It considers itself to
be the first CLEC and promotes its ability to offer an integrated set of
communications services. WorldCom says its strategy is to become the premier
provider of communications services to business and government end-users.
WorldCom has used a merger/acquisition strategy to achieve some of its goals.
In August 1996, MFS (now WorldCom) acquired Internet service provider UUNet
Technologies, Inc. and in August 1996, announced a merger with interexchange
carrier LDDS WorldCom. More recently, in October 1997, WorldCom announced the
purchase of Brooks Fiber Communications, which boosts its presence in the local
telecommunications arena. Finally, in November 1997, WorldCom announced a merger
with MCI, subject to regulatory approval. The combined WorldCom-MCI will offer a
broad range of services and will be one of the largest communications companies
in the world. The resulting integration of service offerings should strongly
position WorldCom against other interexchange carriers and local monopoly
carriers that do not yet provide the same range of services.
TCG is the nation's oldest competitive local telecommunications provider for
businesses and long-distance carriers. TCG's network currently encompasses more
than 6,200 route miles through 51 major markets. TCG markets its services
particularly to large businesses, interexchange carriers, ISPs, STS companies,
cable companies (dark and lit fiber transport) and other information-intensive
businesses. TCG provides dedicated and switched access, local-transport
services, central office switched services and fax and data services. TCG also
supplies point-to-point, broadcast-quality video channels between two or more
locations. TCG offers local access and is targeting interexchange carriers and
ISPs.
Switched services represented about 40% of TCG's revenue in 1996; special
access accounted for 60% during the same period. As of March 1997, four of the
nation's largest cable television companies (TCI, Cox Communications, Inc.,
Comcast Corporation and Media One) controlled approximately 88% of the voting
power of TCG. In January 1998, AT&T entered into an agreement to acquire all of
the outstanding common stock of TCG. In Chicago, TCG operates a 372-route mile
network, serving 144 commercial buildings in the downtown Loop. In September
1994, TCG was granted a CLEC license to operate in the Chicago area and has
focused its marketing efforts in Chicago's western suburbs.
TCI has formed a new division, TCI Telephony, Inc., to enable TCI to become a
participant in the competitive telephony market, and has indicated that it
intends to offer a full-range of both wired and wireless services to residential
and business customers. TCI has indicated that it plans to package its
telecommunications products with its cable services. It has been granted a
license to offer residential telephony service in Arlington Heights, Illinois (a
suburb of Chicago), but it has not stated any plan to enter the City of Chicago,
although it may choose to do so in the future.
CHICAGO FRANCHISE
21st Century was awarded a franchise effective June 1996 by the City of
Chicago for the construction of a fiber cable network in Chicago's Area 1,
representing one of the first second-provider franchise awards for a large urban
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area. Under this non-exclusive 15-year renewable franchise, the Company has been
granted unrestricted access to the public right-of-way to construct, operate and
maintain its DRS Network to all residential and commercial subscribers in the
franchise area. The franchise requires that the Company provide ubiquitous
service to all residential subscribers in the franchise area in accordance with
a specified time schedule, and allows the Company to selectively provide service
to the franchise area's business and financial districts.
Franchises typically contain many conditions, such as time limitations on
commencement and completion of system construction, customer service standards,
minimum number of channels and the provision of free service to schools and
certain other public institutions. The Company believes that the conditions in
its franchise in Chicago's Area 1 are fairly typical. The franchise obligates
the Company to meet a number of local regulatory requirements, including (i)
notices to subscribers of service and fee changes, (ii) system design,
construction, maintenance and technical criteria that, among other things,
require that the system be fully constructed within four years, (iii)
interconnection with other cable operators serving the City for purposes of
public, educational and governmental ("PEG") and leased access, (iv) various
payments to the Chicago Access Corp. ("CAC") for PEG local access obligations,
including (a) payments over ten years to CAC aggregating $1.1 million to fund
CAC's PEG local access capital costs and (b) an annual payment to CAC of one
percent of annual gross revenues, (v) preservation of 10 percent of channel
capacity for PEG local access, (vi) equal employment and affirmative action
requirements and (vii) development and fulfillment of standards for customer
service and consumer complaints. The Company may not transfer or assign the
franchise until June 1999, and then only with the prior consent of the City. The
Company is required to pay a quarterly fee for the franchise to the issuing
authority equal to 5% of gross revenues received from the operation of its cable
television system. The Company prepaid $3 million of its franchise fee, which
amount was credited toward future franchise fee payments, including a credit for
the time value of the prepayment.
EMPLOYEES
At March 31, 1998, the Company had 120 full-time employees, of which 48 were
technicians or others performing installation, maintenance, construction and
design repair on the DRS Network, 27 were involved principally in sales and
marketing, 15 were involved in matters relating to Internet and high-speed data
services and 30 had management or administrative responsibilities. The Company
considers its relations with its employees to be satisfactory. The Company
recruits from several major industries for employees with skills in voice, video
and data technologies.
PROPERTIES
The Company entered into a license agreement dated October 27, 1994 with the
CTA. The term of the agreement commenced on June 24, 1996 and is for 15 years.
The parties may elect to extend the agreement for additional 15-year terms.
Pursuant to this agreement, the CTA gave the Company a nonexclusive license to
install and maintain fiber optic cable on railway structures of the CTA's red,
brown and green transit lines.
The Company entered into a five-year pole attachment agreement dated April 3,
1996 with Commonwealth Edison. The Company has the option to renew this
agreement for one additional five-year term. Pursuant to this agreement,
Commonwealth Edison gave the Company nonexclusive licenses to attach fiber optic
strands and/or cable wire, strand hardware, hardware and power supplies to
utility poles that are owned by Commonwealth Edison so long as it does not
interfere with Commonwealth's use of such utility poles.
The Company entered into a pole attachment agreement dated November 14, 1996
with Ameritech. Either party may terminate the agreement upon six month's notice
to the other party. Pursuant to this agreement, Ameritech has given the Company
the nonexclusive right to place communications facilities on Ameritech's poles
and/or conduit systems.
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The Company entered into a 15-year lease dated January 31, 1997 for its
headquarters (which includes the NOC) (the "Apparel Lease") with LaSalle
National Bank. The Apparel Lease currently covers 32,422 square feet, and will
be increased on December 1, 1998 to cover 36,410 square feet and on December 1,
2000 to cover 40,397 square feet.
The Company's principal physical assets consist of fiber optic network and
equipment, located either at the equipment site or along the DRS Network. The
Company's distribution equipment along the DRS Network is generally attached to
utility poles under pole rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
The Company's franchise from the City of Chicago gives the Company rights of way
for its DRS Network. The physical components of the DRS Network require
maintenance and periodic upgrading to keep pace with technology advances. The
Company believes that its properties, taken as a whole, are in good operating
condition and are suitable for the Company's business operations.
INDUSTRY STRUCTURE AND TECHNOLOGY
GENERAL
Under the 1996 Telecom Act, cable companies may provide telephone service and
telephone companies may provide cable service, local telephone companies may
provide long-distance service and long-distance telephone companies may provide
local service, and all may provide numerous ancillary services (with certain
exceptions not material to the Company). Municipalities are required to grant
cable television franchises to qualified applicants. This change in the
regulatory environment, along with substantial growth in use of the Internet,
has led and is generally expected to continue to lead to a rush by
communications companies and other companies (such as utilities) to provide a
wider range of voice, video and data communications services to consumers.
COMMUNICATIONS TECHNOLOGIES AND SERVICES
Set forth below is a brief description of the current communications industry
systems, the technology generally used by each system (although numerous
variations exist, and some systems combine a variety of technologies), and the
hurdles each set of providers faces in offering new services.
CABLE TELEVISION. Cable television systems generally consist of coaxial
cable (which carries signals via radio frequency) and/or fiber optic cable
(which carries signal via light waves generated by a laser) that runs along
aerial or underground rights-of-way past the homes and businesses in a service
area, connecting to each home and business individually through a coaxial cable
connection tap located outside of the premises. Subscriber premises have
internal wiring running from the coaxial cable connection tap to one or more
outlets or "jacks" into which television sets or set-top terminals (which are
used for special services, descrambling, "pay-per-view" and other features)
may be connected. HFC cable networks rely on numerous amplifiers cascaded
throughout the network to increase the signal strength, which diminishes as it
travels through the network. The use of amplifiers produces distortion and noise
which causes the signal quality to degrade, and this degradation increases as
the number of amplifiers increases. Networks which are primarily fiber optic do
not use amplifiers in the fiber optic portion of the network. Optical networks
use lasers and fiber optic cable to distribute signals throughout the network.
The number of channels or features that a cable network can offer is limited by
the capacity of the HFC network and the electronic equipment which processes and
amplifies the signal.
Many traditional cable companies have sought to compete by increasing channel
capacity through the use of extensive electronics, often resulting in poor
signal quality. Most cable television systems use one-way (half-duplex, non-
interactive) networks and accordingly do not have the ability to provide
telephone services, which require full-duplex, two-way interactive cable.
Several cable companies, including large cable companies, are beginning to offer
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one-way data transmission (with telephony dial-back services). However, such
services generally cannot deliver high-speed performance unless the operator
substantially upgrades its cable system infrastructure.
WIRELESS CABLE. MMDS, LMDS and DBS technologies allow the transmission of
television programming, including high-speed computer data, high-definition
television and facsimile transmissions, via microwave frequencies from a single
location. Wireless cable was designed to serve primarily rural areas where
laying traditional coaxial cable is not economically feasible. The wireless
cable system's signal is sent from a centrally located facility equipped with
transmitters, antennas, satellite dishes and scrambling and descrambling
equipment, and is received by subscribers with rooftop antennas and the
necessary converters. Because wireless cable signals are sent via microwaves,
they require line-of-sight transmission from the central source to the
subscribers. Obstructions such as trees, uneven terrain or dense urban skylines
can interfere with reception, although repeaters that aid in reaching
subscribers in certain obstructed areas are being developed to alleviate these
shortcomings. As a result, the Company believes that at present this technology
is not well suited to providing broadband services in urban areas such as those
targeted by the Company.
DTH, DBS AND OTHER SATELLITE TECHNOLOGIES. Direct-to-home Satellite TV
("DTH") companies provide the satellite transmission of television products
and services. As part of the programming package, DTH companies generally
include hardware and software for the reception and decryption of satellite
television programming. The majority of DTH programming is transmitted on C-band
radio frequency, which typically requires dish sizes ranging from six to twelve
feet in diameter, depending upon the geographic location of the subscriber. In
1982, the FCC allocated spectrum within the Ku-band for DBS systems. The Ku-band
historically has allowed for higher power transmission than C-band, enabling
recipients to receive Ku-band signals using smaller satellite dishes (ranging in
size from 15 to 18 inches in diameter). DBS systems generally offer more
channels (often over 100 channels in all) than cable systems, although DBS
providers usually do not offer local programming. Unlike cable television, DBS
and DTH do not require ground construction to install or maintain or to upgrade
services, but do require a southern line-of-site, a separate dish for every
television and are not suitable for use in large MDUs. Rather, the programming
is transmitted from a ground station to the subscriber via a communications
satellite. These systems require the subscriber to purchase or lease a satellite
dish to receive signals and a receiver system to process and descramble signals
for television viewing.
Most of the small satellite dishes available at present are not two-way
interactive and therefore are not suitable for telephone or Internet services,
although businesses that can afford to do so purchase expensive dishes with two-
way interactivity and can receive each of the broadband services. Residential
systems have been designed using telephone lines to transmit to the Internet and
satellite transmission for reception from the Internet. This approach still is
subject to dial-up delays and has many of the same limitations as two-way
telephone communications as compared to service via an interactive broadband
network. Satellite transmissions are also ill-suited for voice transmissions
utilizing existing technologies due to the delay and echo inherent in the
transmission from ground to satellite and back.
WIRELINE TELEPHONY. Local wireline telephone systems consist of a network of
switches, transmission facilities between switches and the "local loop"
connections between customer premises and the nearest local exchange switch. A
call initiated by a customer can be routed by the local exchange switch either
directly to the called party, if that party is served by the same switch, to
another local or toll switch for delivery to the called party, or through one or
more switches to the POP of a long-distance carrier that transmits the call to a
more distant local switch for ultimate delivery to the called party. The
transmission facilities connecting switches are comprised primarily of very
high-capacity fiber optic cables. However, local loops generally consist of
twisted copper wire pairs that run along aerial or underground rights-of-way to
each of the premises served. These local loops generally carry analog
transmission and have relatively low transmission capacity, sufficient to carry
only one two-way voice conversation. Local loop capacity can be expanded
somewhat by using advanced technologies such as ISDN and DSL, which permits
voice and data transmission to occur simultaneously and can support some limited
level of video teleconferencing.
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Local loops (even with ISDN or DSL) do not have sufficient capacity for large-
scale provision of full-motion video services. Telephone service is the most
common way of communication with the Internet, but existing local loop telephone
lines do not have enough capacity for rapid downloading of large volumes of data
(such as graphics), leading many Internet users to experience delays and ISPs to
experience circuit overload.
WIRELESS TELEPHONY (CELLULAR, PCS AND ENHANCED SPECIALIZED MOBILE RADIO
("ESMR")). Wireless telephone technology is based upon the division of a
given market area into a number of smaller geographic areas or "cells." Each
cell has "base stations" or "cell sites," which are physical locations
equipped with transmitter-receivers and other equipment that communicate by
radio signal with cellular telephones located within range of the cell-site.
Cells generally have an operating range from 2 to 25 miles. Each cell site is
connected to a mobile telephone switching office ("MTSO"), which, in turn, is
connected to the local landline telephone network. When a subscriber in a
particular cell dials a number, the cellular telephone sends the call by radio
signal to the cell's transmitter-receiver, which then sends it to the MTSO. The
MTSO then completes the call by connecting it with the landline telephone
network or another cellular telephone unit. Incoming calls are received by the
MTSO, which instructs the appropriate cell to complete the communications link
by radio signal between the cell's transmitter-receiver and the cellular
telephone. Like wireline local loops, wireless telephone technologies do not
have sufficient capacity for large scale provision of video and data services.
INTERNET ACCESS. Most Internet access takes place over telephone lines using
computer modems. This form of transmission works well for text and small amounts
of data, but telephone lines generally are not capable of handling large volumes
of information, multimedia applications or high-speed data transmission,
resulting in lengthy delays. Also, ISPs have limited numbers of ports available
for customers to dial into the Internet, and their customers may experience
difficulties obtaining access to the Internet or be disconnected if the access
network is congested. A few satellite companies provide broadband access to the
Internet from desktop PCs using a small dish antenna and receiver kit comparable
to that used for satellite television reception, although such systems generally
provide only one-way satellite transmission, requiring communications in the
other direction to travel over telephone lines. High-speed cable modems used
over traditional non-interactive cable networks similarly permit high-speed
broadband reception from the Internet, but require communications from the user
to the Internet to travel over telephone lines and are therefore hampered by the
same delays and access difficulties associated with their telephone-only
counterparts.
LEGISLATION AND REGULATION
The cable television industry currently is regulated by the FCC, some state
governments and most local governments. Telecommunications services are
regulated by the FCC and state public utility commissions. Internet services are
generally unregulated at the Federal and state levels. In addition, legislative
and regulatory proposals under consideration by Congress and Federal agencies
may materially affect the cable television, telecommunications and Internet
industries. The following is a brief summary of Federal laws and regulations
affecting the growth and operation of the cable television, telecommunications
and Internet industries and a description of certain state and local laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), which
amended the Communications Act of 1934, as amended (the "Communications Act"),
established comprehensive national standards and guidelines for the regulation
of cable television systems and identified the boundaries of permissible
Federal, state and local government regulation. The FCC was charged with the
responsibility for adopting rules to implement the 1984 Cable Act. Among other
things, the 1984 Cable Act affirmed the right of franchising authorities (state
or local, depending on the practice in individual states) to award one or more
franchises within their jurisdictions. The 1984 Cable Act provided that in
granting or renewing franchises, franchising authorities may establish
requirements for
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cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
The 1992 Cable Act, which also amended the Communications Act, permitted a
greater degree of regulation of the cable industry with respect to, among other
things: (i) cable system rates for both basic and certain cable programming
services; (ii) programming access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
customer service requirements; (vii) television broadcast signal carriage and
retransmission consent; (viii) technical standards and (ix) cable equipment
compatibility. Additionally, the 1992 Cable Act allowed municipalities to own
and operate their own cable television systems without a franchise, prevented
franchising authorities from granting exclusive franchises or unreasonably
refusing to award additional franchises covering an existing cable system's
service area, and prohibited the common ownership of cable systems and co-
located MMDS or SMATV systems. The 1992 Cable Act also prevented video
programmers affiliated with cable television companies from favoring cable
operators over competitors and required such programmers to sell their
programming to other multichannel video distributors. The legislation required
the FCC to initiate a number of rulemaking proceedings to implement various
provisions of the statute, the majority of which have been completed.
On June 28, 1996, the Supreme Court upheld cable operators' ability to enforce
prospective written policies against carrying programming that depicts sexual or
excretory activities or organs in an offensive manner on commercial leased
access channels. The Court also ruled that cable operators may not be required
to segregate indecent commercial leased access programming and block it from
viewer access, finding that this statutory provision violated cable operators'
First Amendment rights. The Court also struck down on First Amendment grounds
the statutory provision that enabled cable operators to prohibit obscene
material, sexually explicit conduct or material soliciting unlawful acts on PEG
channels.
TELECOMMUNICATIONS ACT OF 1996
The 1996 Telecom Act significantly altered the regulatory structure of
telecommunications markets by mandating that states permit competition for local
exchange services. The 1996 Telecom Act also required ILECs to provide
competitors with interconnection on reasonable and non-discriminatory terms and
conditions, with access to ILEC facilities on an unbundled basis, and to provide
competitors, at wholesale rates, telecommunications services for resale. In
addition, the 1996 Telecom Act provided a statutory procedure for the RBOCs,
which offer local exchange service, to apply to the FCC for authority to provide
long-distance services.
The 1996 Telecom Act also included significant changes in the regulation of
cable operators. Specifically, the 1996 Telecom Act reversed over a three-year
period much of the cable rate regulation established by the 1992 Cable Act. The
rates for cable programming service ("CPS" or "expanded-basic") tiers
offered by small cable operators in small cable systems were deregulated
immediately. The FCC's authority to regulate the CPS tier rates of all other
cable operators will expire on March 31, 1999. The legislation also (i)
eliminated the uniform rate requirements of the 1992 Cable Act where effective
competition exists, (ii) repealed the anti-trafficking provisions of the 1992
Cable Act, which prohibited transfers of ownership of cable systems within three
years after initial construction or acquisition, (iii) limited the rights of
franchising authorities to require certain technology and prohibit or condition
the provision of telecommunications services by the cable operator, (iv)
required cable operators to fully block or scramble both the audio and video on
sexually-explicit or indecent programming on channels primarily dedicated to
sexually-oriented programming, (v) allowed cable operators to refuse to carry
leased access programs containing "obscenity, indecency or nudity," (vi)
adjusted the pole attachment laws and (vii) allowed cable operators to enter
telecommunications markets which historically have been closed to them, while
also allowing some telecommunications providers to begin providing competitive
cable service in their local service areas.
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FEDERAL REGULATION OF CABLE SERVICES
The FCC has promulgated regulations covering many aspects of cable television
operations, and is required to adopt additional regulations or repeal or modify
existing regulations to implement the 1996 Telecom Act. The FCC may enforce its
regulations through the imposition of fines, issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities often used in
connection with cable operations. A brief summary of certain Federal regulations
follows.
RATE REGULATIONS. Local franchising authorities may regulate rates for basic
cable services and equipment in communities where the cable operator is not
subject to "effective competition." The FCC resolves complaints about rates
for expanded-basic CPS and can reduce rates found to be unreasonable. Cable
services offered on a per channel or on a per program basis are not subject to
rate regulation by either local franchising authorities or the FCC. The 1996
Telecom Act deregulated the CPS rates of "small cable operators" immediately
and the CPS rates of all other cable operators after March 31, 1999.
A "small operator" is an operator that has fewer than 50,000 subscribers in
the franchise area, that with its affiliates serves less than 617,000
subscribers and that is not affiliated with entities with annual aggregate gross
revenues of more than $250 million.
Local franchise authorities must be certified by the FCC before regulating
basic cable rates. Upon certification, the local community obtains the right to
evaluate the reasonableness of basic rates under standards established by the
FCC. Certified franchising authorities are also empowered to regulate rates
charged for additional outlets and for the installation, lease and sale of
equipment used by subscribers to receive the basic service tier. Cable operators
may be required to refund overcharges with interest. The 1992 Cable Act permits
communities to certify at any time, so it is possible that the Company's
franchising authorities may choose in the future to certify to regulate the
Company's basic rates. FCC review of CPS rates is triggered by franchising
authority complaints filed within 180 days of a rate increase.
The FCC's rate regulations do not apply where a cable operator demonstrates
that it is subject to "effective competition" as defined under the 1992 Cable
Act. The Company believes that it is subject to effective competition in the
area that it currently serves.
The 1992 Cable Act also requires cable systems to permit subscribers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service, other
than the basic service tier, unless the system's lack of addressable converter
boxes or other technological limitations do not permit it to do so. Systems
facing "effective competition" are not subject to this tier buy-through
prohibition.
The 1996 Telecom Act allows cable operators to pass through franchise fees and
regulatory fees to subscribers without any prior notice. Notices of other rate
changes may be given by any reasonable written means, at the cable operator's
"sole discretion."
CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act established
signal carriage requirements for cable operators. These regulations allow
commercial television broadcast stations which are "local" to a cable system,
to elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether to require the cable system
to negotiate for "retransmission consent" to carry the station. Commercial
stations are generally considered "local" to a cable system where the system
is located in the station's 1992 ADI, as determined by Arbitron; the regulatory
method for determining whether a station is "local" to a cable system may
change at the time of the October 1999 election. Cable systems must obtain
retransmission consent for
63
the carriage of all "distant" commercial broadcast stations, except for certain
"superstations" (i.e., commercial satellite-delivered independent stations such
as WGN).
Local non-commercial educational television stations are also given mandatory
signal carriage rights. Subject to certain exceptions, a cable operator must
carry all such stations if the cable system is within the larger of (i) a 50-
mile radius of the station's city of license or (ii) the station's Grade B
contour (a measure of signal strength). Non-commercial stations are not given
the option to negotiate for retransmission consent.
DELETION OF NETWORK AND SYNDICATED PROGRAMMING. Cable television systems
that have 1,000 or more subscribers must, upon the appropriate request of a
local television station, delete or "black out" the network and/or syndicated
non-network programming of a distant station when the local station has
contracted for such programming on an exclusive basis.
REGISTRATION PROCEDURES AND TECHNICAL REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals that it will
carry and certain other information. The Company has filed its registration
statement with the FCC. Additionally, cable operators periodically are required
to file various informational reports with the FCC. Cable operators that operate
in certain frequency bands used in the aeronautical service for airport air-to-
ground communications (108-137 MHz and 225-400 MHz bands) must notify the FCC
before commencing operations and, on an annual basis, file the results of
periodic cumulative leakage testing measurements to insure that they do not
interfere with aeronautical stations. Operators that fail to make these filings
or who exceed the FCC's allowable cumulative leakage index risk being prohibited
from operating in those frequency bands in addition to other sanctions. The
Company has filed its initial aeronautical notice with the FCC. The FCC has also
imposed technical standards applicable to the cable channels on which broadcast
stations are carried, and has prohibited franchising authorities from adopting
standards which conflict with or are more restrictive than those established by
the FCC. The FCC has applied its standards to all classes which carry downstream
National Television System Committee ("NTSC") video programming. The 1992
Cable Act requires the FCC to update periodically its technical standards to
reflect improvements in technology.
FRANCHISE AUTHORITY. The 1984 Cable Act affirmed the right of franchising
authorities (the cities, counties or political subdivisions in which a cable
operator provides cable service) to award franchises within their jurisdictions
and prohibited non-grandfathered cable systems from operating without a
franchise in such jurisdictions. The Company holds a cable franchise in the
franchise area in which it currently provides service.
In addition to the franchise matters discussed in greater detail below, local
franchise authorities typically exercise regulatory jurisdiction over cable
system design and construction, safe use of public rights-of-way, consumer
protection and customer service. The Company's franchise contains such
requirements.
The 1996 Telecom Act exempts from franchise requirements those
telecommunications services provided by a cable operator or its affiliate.
Franchise authorities may not require a cable operator to provide
telecommunications service or facilities, other than institutional networks, as
a condition of franchise grant, renewal or transfer. Similarly, franchise
authorities may not impose any conditions on the provision of such service.
Local officials may, however, regulate cable-provided telecommunications
services' use of public rights-of-way, provided that it is done outside the
cable franchising process and in a competitively neutral, non-discriminatory
way.
FRANCHISE FEES. Although franchising authorities may impose franchise fees
under the 1984 Cable Act, as modified by the 1996 Telecom Act, such payments
cannot exceed 5% of the cable system's annual gross revenues derived from the
operation of the cable system to provide cable services. Franchise fees apply
only to revenues from cable services. Franchising authorities are permitted to
charge a fee for any telecommunications provider's use of public rights-of-way
"on a competitively neutral and nondiscriminatory basis."
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FRANCHISE RENEWAL. Federal statutory law provides renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal. These formal procedures are mandatory only if timely invoked by either
the cable operator or the franchising authority. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain free
to negotiate a renewal outside the formal process. Although the procedures
provide substantial protection to incumbent franchisees, renewal is by no means
assured, as the franchisee must meet a number of statutory standards and filing
deadlines. Even if a franchise is renewed, a franchising authority may impose
new and more onerous requirements such as upgrading facilities and equipment,
although the municipality must take into account the cost of meeting such
requirements.
CHANNEL SET-ASIDES. Federal law permits local franchising authorities to
require cable operators to set aside certain channels for PEG access
programming. In addition, cable television systems with 36 or more activated
channels are required to designate a portion of their channel capacity for
commercial leased access by unaffiliated third parties. Leased access rates are
to be set according to an FCC-prescribed formula.
OWNERSHIP. The 1996 Telecom Act prohibits a LEC or its affiliate from
acquiring more than a 10% financial or management interest in any cable operator
providing cable service in its telephone service area. It also prohibits a cable
operator or its affiliate from acquiring more than a 10% financial or management
interest in any LEC providing telephone exchange service in its franchise area.
A LEC and cable operator whose telephone service area and cable franchise area
are in the same market may not enter into a joint venture to provide
telecommunications service or video programming. There are exceptions to these
limitations for rural facilities, very small cable systems and small LECs in
non-urban areas.
The 1984 Cable Act prohibited the common ownership, operation, control or
interest in a cable system and a local television broadcast station whose
predicted Grade B contour covers any portion of the community served by the
cable system, and FCC rules continue to prohibit such cross-ownership. The 1996
Telecom Act repeals this statutory restriction on broadcast-cable cross-
ownership, but does not require the FCC to repeal its cross-ownership rule.
Nevertheless, the FCC intends to review this rule. The 1996 Telecom Act also
eliminates the FCC's restriction against the ownership or control of both a
broadcast network and a cable system, but it authorizes the FCC to adopt
regulations which will ensure carriage, channel positioning and
nondiscriminatory treatment of non-affiliated broadcast stations by cable
systems which are owned by a broadcast network.
The 1992 Cable Act prohibits the common ownership, affiliation, control or
interest in cable television systems and MMDS facilities or SMATV systems with
overlapping service areas. However, a cable system may acquire a co-located
SMATV system if it provides cable service to the SMATV system in accordance with
the terms of its cable television franchise. The 1996 Telecom Act provides that
these rules shall not apply where the cable operator is subject to effective
competition.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems a single cable operator may own. In general, no cable operator may
hold an attributable interest in cable systems which pass more than 30% of all
homes nationwide. This statutory provision was found to be unconstitutional by a
Federal district court in 1993, and the FCC has stayed the effectiveness of its
applicable rules pending disposition of further administrative reconsideration
and judicial appeal. Attributable interests for these purposes include voting
interests of 5% or more (unless there is another single holder of more than 50%
of the voting stock), officerships, directorships and general partnership
interests. An FCC proceeding in which ownership attribution standards currently
are under review may lead to changes in FCC policies affecting cable ownership.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner
in which cable system operators can collect and disclose data about individual
system subscribers. The statute also requires that the system operator
periodically provide all subscribers with written information about its policies
regarding the collection and handling of data about subscribers, their privacy
rights under Federal law and their enforcement rights. Under the 1992 Cable Act,
the privacy requirements are strengthened to require that cable operators take
such actions as are necessary to prevent unauthorized access to personally
identifiable information.
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ANTI-TRAFFICKING. Under the 1996 Telecom Act, a local franchise may require
prior approval of a transfer or sale of a cable system. The 1992 Cable Act
requires franchising authorities to act on a franchise transfer request within
120 days after receipt of all information required by FCC regulations and the
franchising authority. Approval is deemed granted if the franchising authority
fails to act within such period.
ACCESS TO PROGRAMMING AND EXCLUSIVITY. As required by the 1992 Cable Act,
the FCC adopted regulations designed to increase access to video programming for
all multichannel video programming distributors by prohibiting unfair or
discriminatory practices in the sale of satellite cable programming distributed
by cable-affiliated programmers. The rules also limit exclusive programming
contracts that may be entered into between cable operators and cable-affiliated
programmers.
COPYRIGHT. Cable television systems are subject to Federal compulsory
copyright licensing covering carriage of broadcast signals. In exchange for
making semi-annual payments to a Federal copyright royalty pool and meeting
certain other obligations, cable operators obtain a statutory license to
retransmit broadcast signals. The amount of the royalty payment varies,
depending on the amount of system revenues from certain sources, the number of
distant signals carried and the location of the cable system with respect to
over-the-air television stations. Cable operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Copyright music performed in programming supplied to cable television systems
by pay cable networks (such as HBO) and cable programming networks (such as USA
Network) has generally been licensed by the networks through private "through
to the viewer" license agreements with the American Society of Composers and
Publishers and BMI, Inc., although music used in local origination programming
is not yet covered by a license.
TELECOMMUNICATIONS AND CABLE INSIDE WIRING. The FCC recently issued new
rules of particular importance to providers of cable television and
telecommunications services to MDUs. These rules, which govern such inside
wiring matters as procedures for an incumbent provider to sell, remove or
abandon its wiring upon termination of service and shared use of space by
competing providers, may affect the competitive position of providers of cable
and telephone service to the MDU market. The FCC is continuing to review issues
such as exclusive service contracts and application of cable home wiring rules
to non-cable video distributors.
POLE ATTACHMENTS. The Communications Act permits the FCC, in the absence of
state regulation, to regulate rates, terms and conditions for pole attachments
and use of utility conduits, ducts or other rights-of-way by cable operators.
Rates for pole attachments and use of conduits and other facilities for
providers of telecommunications services are subject to different FCC
regulations.
REGULATORY FEES AND OTHER MATTERS. The FCC requires payment of annual
"regulatory fees" by the various industries it regulates, including the cable
television industry. The current fee is $0.54 per subscriber. Fees are also
assessed for other FCC licenses, including licenses for business radio, cable
television relay system and earth stations. Fees are reassessed by the FCC
annually.
In December 1994, the FCC adopted new cable television and broadcast technical
standards to support a new Emergency Alert System. The FCC has not established a
date by which cable operators must install and activate equipment necessary to
implement the new Emergency Alert System.
FCC regulations also address the carriage of local sports programming,
restrictions on origination and cablecasting by cable system operators,
application of the rules governing political broadcasts, customer service
standards, closed captioning of programming for the hearing impaired,
limitations on advertising contained in nonbroadcast children's programming and
equal employment opportunity requirements for cable system employees.
66
FEDERAL REGULATION OF TELECOMMUNICATIONS SERVICES
Telecommunications services are subject to varying degrees of Federal, state
and local regulation. The FCC exercises jurisdiction over all facilities of and
services offered by telecommunications carriers to the extent those facilities
are used to provide, originate or terminate interstate or international
communications.
The 1996 Telecom Act substantially revised communications regulation in the
United States. The legislation is intended to allow providers to enter
communications markets that have historically been closed to them as a result of
legal restrictions and due to practical and economic considerations. At the same
time, implementation of the 1996 Telecom Act and regulatory actions at the state
level may result in increased competition in the local exchange business, which,
in turn, will give incumbent providers greater flexibility to compete
aggressively. The Company is unable to predict the ultimate outcome of Federal
and state proceedings to implement the legislation.
INTERCONNECTION. The 1996 Telecom Act establishes local exchange competition
as a national policy by preempting laws that prohibit competition in the local
exchange. The 1996 Telecom Act also requires ILECs to enter into mutual
compensation arrangements with new local telephone companies for transport and
termination of local calls on each others' networks. The Act's interconnection,
unbundling and resale standards have been developed in the first instance by the
FCC and will be implemented by the states in numerous proceedings and through a
process of negotiation and arbitration. In August 1996, the FCC adopted a wide-
ranging decision regarding the statutory interconnection obligations of the
LECs. Among other things, the order established pricing principles to be used by
the states in determining rates for unbundled local network elements and
established a method for calculating discounts to reflect costs saved by the
LECs in offering their retail services to other carriers on a wholesale basis.
In July 1997, the United States Court of Appeals for the Eighth Circuit struck
down the pricing rules established by the FCC, ruling that the FCC lacked
jurisdiction under the 1996 Telecom Act to establish pricing rules to be applied
by the states. Consequently, the pricing of interconnection, unbundled network
elements and wholesale ILEC services is a matter primarily within the
jurisdiction of state commissions at the present time. The court generally
upheld the FCC's non-pricing requirements for unbundling of network elements and
offering of wholesale services. The FCC has appealed such decision to the United
States Supreme Court.
NUMBER PORTABILITY. Another new statutory provision requires all providers
of local exchange services to give users the ability (without the impairment of
quality, reliability or convenience) to retain their existing telephone numbers
if they switch local exchange service providers ("number portability"). The
FCC has adopted an order requiring the implementation of interim portability and
mandating that permanent number portability be available in the 100 largest
metropolitan areas by December 31, 1998. However, an appeal challenging that
decision is pending.
UNIVERSAL SERVICE AND ACCESS CHARGE REFORM. The FCC has adopted rules
implementing the universal service requirements of the 1996 Telecom Act.
Pursuant to those rules, all telecommunications providers must contribute to a
newly established Universal Service Fund. Carriers providing service to
customers in high-cost and rural areas, as well as to low-income customers, will
be eligible to collect subsidies from the fund. The fund also will subsidize
service provided to schools, libraries and rural health care providers. The FCC
also completed a proceeding in which it revised the rules governing access
charges imposed by ILECs on interexchange carriers for use of the local network
to complete long-distance calls. The policies adopted in that proceeding are
intended to move the ILECs' charges for access services closer to cost. Appeals
of the FCC's access charge reform and universal service orders are currently
pending.
RBOC ENTRY INTO LONG DISTANCE. The 1996 Telecom Act opens the way for RBOCs
and their affiliates to provide long-distance telecommunications services
between a local access and transport area ("LATA") and points outside that
area. Prior to the 1996 Telecom Act, RBOCs were generally prohibited from
offering such "interLATA" services. Under the 1996 Telecom Act such services
may be offered by a RBOC outside of its local exchange service states
immediately. RBOCs may offer interLATA services from within such states (in-
region) only after receiving FCC approval, and in accordance with regulatory
requirements. On December 31, 1997, a Federal district court judge in Texas
declared portions of the 1996 Telecom Act unconstitutional. If this ruling is
upheld on appeal,
67
RBOCs could enter the interLATA market in the very near future. If the Company
decides itself to provide interLATA service, it will likely face vigorous
competition from RBOC entrants, as well as from existing long-distance carriers.
TARIFFS. Pursuant to its forbearance authority, the FCC recently determined
that it will no longer require nondominant interexchange carriers to file
tariffs listing their rates, terms and conditions. This decision has been stayed
by the United States Court of Appeals for the District of Columbia Circuit.
Nondominant providers of exchange access services provided to interexchange
carriers no longer are required to file tariffs at the FCC. Authorization from
the FCC must be obtained, and a carrier must file a tariff at the FCC detailing
the rates, terms and conditions of service, prior to offering international
service.
ADDITIONAL REQUIREMENTS. Federal law imposes a number of additional
obligations on all telecommunications carriers, including the obligations to:
(i) interconnect with other carriers and not to install equipment that cannot be
connected with the facilities of other carriers; (ii) ensure that their services
are accessible and usable by persons with disabilities; (iii) provide
Telecommunications Relay Service ("TRS"), either directly or through
arrangements with other carriers or service providers (TRS enables hearing
impaired individuals to communicate by telephone with hearing individuals
through an operator at a relay center); (iv) comply with verification procedures
in connection with changing the prescribed interexchange carrier of a customer
so as to prevent "slamming," a practice by which a customer's chosen long-
distance carrier is switched without the customer's knowledge; (v) protect the
confidentiality of proprietary information obtained from other carriers,
manufacturers and customers; (vi) pay annual regulatory fees to the FCC; (vii)
contribute to the Telecommunications Relay Services Fund; and (viii) cooperate
with Federal, state and local law enforcement officials in lawful
investigations, while protecting the confidentiality of subscribers'
communications. In addition, the Company will be subject to requirements
potentially affording competitors access to its facilities and rights-of-way and
enabling others to resell the Company's services.
ADDITIONAL REQUIREMENTS IMPOSED ON LECS. Federal law imposes a number of
additional obligations that will apply to the Company to the extent it provides
local exchange and exchange access services, including the duty (i) not to
prohibit or impose unreasonable or discriminatory conditions or limitations on
the resale of its telecommunications services, (ii) to provide, to the extent
technically feasible, number portability in accordance with FCC requirements, to
provide dialing parity to competing providers of telephone exchange service and
telephone toll service and the duty to permit all such providers to have
nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listing, with no unreasonable dialing delays, (iii) to
afford access to its poles, ducts, conduits and rights-of-way to competing
providers of telecommunications services on rates, terms and conditions that are
consistent with section 224 of the Communications Act and (iv) to establish
reciprocal compensation arrangements for the transport and termination of
telecommunications.
STATE AND LOCAL REGULATION
CABLE TELEVISION REGULATIONS
In June of 1996, the Company and the City of Chicago entered into a franchise
agreement to provide cable services to Area 1 of the City. The franchise remains
in effect for 15 years, until June 2011. Under the franchise, the Company is
obligated to pay to the City a franchise fee of 5 percent of its annual gross
revenues received from operation of its cable television system. The franchise
obligates the Company to meet a number of local regulatory requirements,
including: (i) notices to subscribers of service and fee changes; (ii) system
design, construction, maintenance and technical criteria that, among other
things, require that the system be fully constructed within four years; (iii)
interconnection with other cable operators serving the City for purposes of City
PEG and leased access; (iv) various payments to the CAC for PEG local access
obligations, including (a) payments over ten years aggregating $1,125,000 to
fund CAC's PEG local access capital costs and (b) an annual payment of one
percent of annual gross revenues; (v) preservation of 10 percent of channel
capacity for PEG local access; (vi) equal employment and affirmative action
requirements; and (vii) development and fulfillment of standards for customer
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service and consumer complaints. The Company may not transfer or assign the
franchise until June 1999, and then only with the prior consent of the City.
TELECOMMUNICATIONS REGULATIONS
The 1996 Telecommunications Act contains provisions that prohibit states and
localities from adopting or imposing any legal requirement that may prohibit, or
have the effect of prohibiting, market entry by new providers of intrastate or
interstate telecommunications services. The FCC is required to preempt any state
or local requirements to the extent necessary to enforce the open market entry
requirements. States and localities may continue to regulate the provision of
intrastate telecommunications services and require carriers to obtain
certificates or licenses before providing service. These regulatory agencies are
governed by respective Federal or state legislation and, therefore, any change
or modification to such regulation or legislation can result in positive or
negative effects upon the Company. Moreover, any significant changes in
regulations by Federal or state governmental agencies could significantly
increase the Company's costs or otherwise have an adverse effect on the
Company's activities.
STATE CERTIFICATION PROCEDURES. CLECs desiring to provide service within the
State of Illinois must obtain certificates of exchange and interexchange
telecommunications service authority. On October 27, 1997, the Company applied
to the Illinois Commerce Commission ("ICC") for such certificates. Those
applications are currently pending. To be awarded a certificate, an applicant
must show that it has the requisite technical, financial and managerial
expertise to offer the underlying services. In addition, an application for a
certificate to provide local exchange service must prove that grant of the
certificate would not adversely affect the prices, network design or the
financial viability of the principal provider of local exchange
telecommunications service. In addition to obtaining the requisite certificates,
carriers are required to file tariffs describing the nature of the service,
applicable rates and other charges, terms and conditions of service and the
exchange, exchanges or other geographical area or areas in which the service
shall be offered or provided.
STATE RESALE REQUIREMENTS. Once the Company receives its certification from
the ICC, it will be required to offer for resale all noncompetitive services. A
carrier offering noncompetitive services to any customer must provide that
service pursuant to tariff to all persons, including all telecommunications
carriers and competitors. A service is competitive if it is reasonably available
(or its functional equivalent or substitute is reasonably available) for some
identifiable class or group of customers. A carrier may petition the ICC to
request a ruling that a service be declared competitive, and thus, not subject
to the resale requirements. In addition, noncompetitive services are subject to
additional tariffing requirements and other regulation.
STATE INTERCONNECTION REQUIREMENTS. Illinois statutory law does not
explicitly regulate the terms of interconnection between telecommunications
carriers. The ICC, however, has adopted detailed regulations to implement
interconnection under Section 252 of the Communications Act. Specifically, the
ICC is required to arbitrate interconnection agreements between competitive
local exchange providers, such as the Company, and incumbent local exchange
providers.
STATE UNIVERSAL SERVICE REQUIREMENTS. Similar to the universal service fund
mandated by the FCC, the ICC established a Universal Service Telephone Service
Assistance Program whereby providers of local exchange services pay into a fund
designed to subsidize local service for low-income residents of the state. Such
funds are available to providers that service such customers.
LOCAL FEES AND TAXES. All providers operating in the City of Chicago are
required to remit a fee of 2 percent of all gross charges paid to the provider
for telecommunications received or originated within the City. The fee is for
the use of the public ways within the City. Providers, such as the Company, are
required to pass the fee on to customers, and are permitted to retain up to 2
percent of the total amounts collected to reimburse themselves for expenses
incurred in submitting this fee to the City. In addition, a tax of 5 percent of
all gross charges for all
69
telecommunications originated within the City of Chicago must be remitted to the
City. Providers may charge customers directly for this tax, and may keep up to
1.75 percent of the amounts collected to reimburse themselves for the expenses
of collecting such taxes.
LOCAL EMERGENCY SYSTEM REQUIREMENTS. The City of Chicago imposes upon every
network connection within the City's corporate limits a monthly rate of $1.25
per network connection to support the City's Emergency Telephone System. Each
carrier, such as the Company, is required to collect this amount from each
subscriber as a separate billed amount on a monthly basis. Carriers, such as the
Company, can deduct three percent of the gross amount collected to reimburse
themselves for the expenses of collecting and accounting for these charges.
Carriers must remit the amount collected to the Chicago Emergency Telephone
System Board monthly.
To the best of the Company's knowledge, there exist no local or city
regulations which materially affect the Company's planned offerings of
telecommunications services.
FEDERAL AND STATE REGULATION OF INTERNET SERVICES
Internet services, including Internet access, have traditionally been deemed
an "enhanced" or "information" service and, as such, neither Federal nor
state telecommunications regulations apply. As a matter of Federal policy, the
FCC does not regulate the provision of "information" and "enhanced"
services, and preempts certain state regulation of such services that would
frustrate the Federal deregulatory policy. However, it is likely that, in the
next year, the FCC will investigate the status of Internet services to discern,
among other things, whether some or all Internet services should be classified
as "telecommunications" and not as "information" or "enhanced" services.
At this time, the Company cannot estimate whether the FCC's future proceeding
will lead to a change of regulatory treatment of Internet services, or what
impact such a change would have on the Company's business plans for providing
Internet services.
The Communications Decency Act ("CD Act") would make it unlawful to: (i)
knowingly send to a minor or display in a manner available to a minor
"obscene", "indecent" or "patently offensive" communications using a
telecommunications device or on-line service; (ii) send such a communication to
anyone with the intent to annoy, threaten or harass; or (iii) allow a
telecommunications facility under one's control to be used for such purpose. A
preliminary injunction against enforcement of the CD Act with respect to
indecent or patently offensive communications has been affirmed by the United
States Supreme Court, which found the CD Act's provisions to violate the First
Amendment. Although it is unlikely that the enjoined provisions of the CD Act
will ever become effective, there can be no assurance that information content
made available on or through the Company's offerings, by the Company or by users
of those offerings would not violate the CD Act, if it were to become effective,
or similar legislation that Congress might enact in the future, or that attempts
to implement defenses to such legislation would not adversely affect the
Company's business or operations. Federal laws dealing with obscenity and child
pornography as well as various state laws similar to those laws or to the CD Act
may also apply to information content available on or through the Company's
offerings. There is no assurance that those laws will not be applied in a manner
that will adversely affect the Company's business or operations.
Proposals for additional or revised statutory or regulatory requirements are
considered by Congress, the FCC and state and local governments from time to
time, and a number of such proposals are under consideration at this time. It is
possible that certain of the provisions and requirements described herein are
now, and in the future may be, the subject of federal or state legislation,
agency proceedings or court litigation. It is not possible to predict what
legislative, regulatory or judicial changes, if any, may occur or their impact
on the Company's business or operations.
70
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are listed below.
Directors of the Company are elected at the annual meeting of shareholders and
officers of the Company are appointed at the first meeting of the Board of
Directors after each annual meeting of shareholders. Directors and executive
officers of the Company are elected to serve until they resign or are removed,
are otherwise disqualified to serve or until their successors are elected and
qualified. The ages of the persons set forth below are as of December 31, 1997.
NAME AGE POSITION(S) WITH COMPANY
- ----------------------------- --- -------------------------------------------
Glenn W. Milligan........... 50 Chairman of the Board and Chief Executive
Officer
Robert J. Currey............ 52 President, Chief Operating Officer and
Director
Ronald D. Webster........... 48 Chief Financial Officer
Jay E. Carlson.............. 36 Chief Technical Officer
Richard Wiegand-Moss........ 50 Senior Vice President of Customer
Operations
Stephen Lee................. 41 Senior Vice President of Internet and Data
Services
Susan R. Quandt............. 43 Senior Vice President of Corporate
Marketing
John Brouse................. 49 Vice President of Network Operations
Eric D. Kurtz............... 33 Vice President of Corporate Development
and Regulatory Affairs
Roxanne Jackson............. 33 Vice President of Human Resources
Donna Clayburn.............. 40 Vice President of Marketing
Edward T. Joyce............. 55 Director
Dr. Charles E. Kaegi........ 47 Director
James H. Lowry.............. 58 Director
David Kronfeld.............. 50 Director
Thomas Neustaetter.......... 45 Director
GLENN W. MILLIGAN, the Company's founder, has been Chairman of the Board and
Chief Executive Officer of the Company since its inception in October 1992.
Prior to founding the Company, Mr. Milligan was President and Chief Executive
Officer of 21st Century Technology Group, Inc. from April 1986 to October 1992.
From July 1985 until March 1986, Mr. Milligan served as Regional Director for
the Walt Disney Company, where he was responsible for sales and marketing in
eight midwestern states. From March 1984 to March 1985, Mr. Milligan served as
Area Manager of the Midwest offices of Showtime Networks, Inc. and Regional
Sales Director of their North Central offices from March 1985 to June 1985. From
July 1979 to November 1983, Mr. Milligan was the Chief Executive Officer of
DAEOC, Inc., a diversified government contractor.
ROBERT J. CURREY has served as a Director of the Company since February 1997
and was named President and Chief Operating Officer on March 1, 1998. Mr. Currey
served as Group President of Telecommunications Services for McLeod USA, a
wholly owned subsidiary of McLeod, Inc., from September 1997 through February
1998. Mr. Currey continues to serve on the board of directors of McLeod USA.
From March 1990 until September 1997, he served as President and Chief Executive
Officer of Consolidated Communications. From 1988 to 1990, Mr. Currey served as
Senior Vice President of Operations and Engineering at Citizens Utilities
Company in Stanford, CT. From 1987 to 1988, Mr. Currey served as Executive Vice
President at US Sprint in Kansas City, MO.
RONALD D. WEBSTER joined the Company as Chief Financial Officer in September
1997. He was previously Vice President and Treasurer at Telephone Data Systems,
Inc., where he served from April 1988 until August 1997. Prior thereto, he held
executive positions with Ideal School Supply Corp. and Trans Union Corporation.
JAY E. CARLSON has served as the Company's Chief Technical Officer since March
1997. From October 1989 to March 1997, Mr. Carlson was the Fund Engineering
Director for Jones Intercable, Inc. where he was responsible for
71
engineering operations in the Western region. He was also instrumental in the
design and construction of Jones Intercable's Alexandria, Virginia HFC broadband
network, which was one of the first platforms to simultaneously carry
residential and commercial telephony, video and data.
RICHARD WIEGAND-MOSS joined the Company in May 1996 and serves as Senior Vice
President of Customer Operations. Prior to joining the Company, from May 1994 to
April 1996, Mr. Wiegand-Moss was Vice President of Customer Operations for Time
Warner Entertainment Co. L.P. From October 1993 to April 1994, he was Senior
Consultant/Project Manager for International Profit Associates, a management
consulting firm providing turnaround services for companies in financial trouble
and from January 1991 to September 1993, Mr. Wiegand-Moss was General Manager
and Chief Operating Officer of TCI Chicago. From August 1982 until December
1990, Mr. Wiegand-Moss was Vice President and District Manager for Continental
Cablevision.
STEPHEN LEE joined the Company in January 1997 as Senior Vice President of
Internet and Data Services. Mr. Lee was the Director of the Central Region Sales
for MFS Datanet, Inc. from October 1993 to April 1996. From April 1996 to
January 1997, Mr. Lee served as a technical consultant to the Company. From
October 1983 until October 1993, Mr. Lee held various managerial positions at
Graphnet, Inc. From January 1979 to October 1983, Mr. Lee was the Major Account
Manager/Systems Sales Engineer for ITT World Communications, Inc.
SUSAN R. QUANDT has served as the Company's Senior Vice President of Corporate
Marketing since December 1997. From December 1994 to December 1997, Ms. Quandt
served as Executive Vice President of Taylor-Winfield, an information technology
market consulting and executive recruiting firm. From January 1992 to September
1994, Ms. Quandt served as Vice President of Marketing and Product Development
of Call-Net Enterprises Inc., a national long-distance telephone company owned
by Sprint Canada. From January 1989 to December 1991, Ms. Quandt served as Vice
President of Marketing for Schneider Communications, Inc., a regional long-
distance telephone company.
JOHN BROUSE has served as the Company's Vice President of Network Operations
since April 1997. Prior to that time, Mr. Brouse was Operations Engineering
Director for Jones Intercable, Inc. from June 1988 to April 1997. Mr. Brouse
received the cable industry's prestigious Polaris Award in 1996.
ERIC D. KURTZ has served as the Company's Vice President of Corporate
Development and Regulatory Affairs since March 1997. From April 1989 until July
1996, Mr. Kurtz was a General Manager with Time Warner's Milwaukee & Chicago
Divisions. During this time span he also served as a board member of the
Wisconsin Cable Communications Association and as its President from September
1994 to September 1996.
ROXANNE JACKSON has served as the Company's Vice President of Human Resources
since May 1996. Prior to that time, from January 1994 to May 1996, Ms. Jackson
was the Human Resources Director for Metz Baking Group. From August 1992 until
January 1994, Ms. Jackson served as the Director of Human Resources for Fox
Television Stations, Inc.
DONNA CLAYBURN has served as the Company's Vice President of Marketing since
March 1997. Prior to joining the Company, from November 1994 until September
1996, Ms. Clayburn was a Senior Vice President, Affiliate Sales & Marketing and
later a Marketing Consultant for Scholastic, Inc., a book and magazine
publishing company. From March 1993 to November 1994, Ms. Clayburn was the Vice
President, Affiliate Sales & Marketing with World African Network. From April
1989 until February 1993, she was the National Accounts Director for ESPN. From
October 1986 to April 1989, Ms. Clayburn was Account Executive for Turner
Broadcasting. Ms. Clayburn served as HBO Manager, BET Marketing with Time Warner
from December 1982 to October 1986.
EDWARD T. JOYCE has served as a Director of the Company since the Company's
inception in October 1992. Mr. Joyce founded his own firm in 1971, now known as
Edward T. Joyce and Associates, P.C., a law firm dealing with commercial
litigation.
72
DR. CHARLES E. KAEGI has served as a Director of the Company since the
Company's inception in October 1992. Dr. Kaegi has been in private practice of
medicine since July 1979. From November 1979 to present, Dr. Kaegi has held the
following positions at Ravenswood Hospital Medical Center: Attending Physician
(November 1979 to present); Medical Director, Alcohol & Drug Abuse Program (July
1994 to present); Medical Director, Community Mental Health Center (November
1994 to present); Medical Education (January 1980 to present); Secretary of the
Department of Psychiatry (January 1993-present); and Consultant to Community
Mental Health Center (March 1980 to August 1985). Dr. Kaegi is the cousin of Mr.
Glenn Milligan.
JAMES H. LOWRY has served as a Director of the Company since February 1997.
Mr. Lowry serves as President and Chief Executive Officer of James H. Lowry &
Associates ("JHLA"), a consulting company established in 1975. Prior to
establishing JHLA, Mr. Lowry served as the Director of Public Service Practice
for McKinsey & Company from 1967 to 1975.
DAVID KRONFELD has served as a Director of the Company since February 1997.
Mr. Kronfield founded JK&B Capital in January 1996 and has been its general
partner since that time. Before founding JK&B Capital, Mr. Kronfield was a
General Partner at Boston Capital Ventures from August 1989 to October 1995,
where he specialized in the telecommunications and software industries. From
October 1984 to August 1989, Mr. Kronfield served as Vice President of
Acquisitions and Venture Investments at Ameritech.
THOMAS NEUSTAETTER has served as a Director of the Company since February
1997. Mr. Neustaetter has been an officer of the Chatterjee Management Group, a
division of Chatterjee Management Company, since January 1996. From January 1995
to January 1996, Mr. Neustaetter was the Managing Director for Bancroft Capital
Corporation in New York City, a company he founded. From August 1986 to December
1994, Mr. Neustaetter was employed at Chemical Banking Corporation in New York
City.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the Executive Committee and the
Compensation Committee. The Executive Committee makes recommendations to the
Board of Directors regarding issues such as finance, strategic planning and
long-range goals for the Company. The current members of the Executive Committee
are Glenn Milligan, Edward Joyce and David Kronfeld.
The Compensation Committee reviews and recommends the compensation and bonus
arrangements for executive level management of the Company and administers the
Company's stock option plans. The current members of the Compensation Committee
are Glenn Milligan, Edward Joyce and Thomas Neustaetter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As stated above, the current members of the Compensation Committee are Messrs.
Milligan, Joyce and Neustaetter. Mr. Milligan is also the Chief Executive
Officer of the Company.
TRANSACTION WITH 21ST CENTURY TECHNOLOGY GROUP, INC. Messrs. Milligan, Joyce
and Kaegi served as executive officers and directors of 21st Century Technology
Group, Inc. As of March 26, 1996 the Company entered into an Asset Purchase
Agreement with 21st Century Technology Group, Inc. pursuant to which the Company
acquired (i) the contract rights to service 1,734 cable television subscribers,
(ii) contracts pertaining to subscriber lists and (iii) certain electronic
equipment in exchange for the purchase price of $3,381,300. On March 26, 1996
Messrs. Milligan, Joyce and Kaegi beneficially owned approximately 15%, 27% and
24%, respectively, of the common stock of 21st Century Technology Group, Inc.
73
PAYMENT OF LEGAL FEES TO EDWARD JOYCE. In January 1997, the Company paid
approximately $459,000 of accrued legal fees to Edward Joyce, either
individually or to entities controlled by him, for legal services rendered by
Mr. Joyce to the Company in connection with the Company's cable service offering
and its obtaining the Chicago franchise. Mr. Joyce continues from time to time
to perform legal services for the Company.
SALE OF CAPITAL STOCK. In June 1996, the Company entered into a loan
agreement with LaSalle Northwest National Bank (the "Bank") pursuant to which
the Bank agreed to make certain loans available to the Company on a revolving
credit basis in the maximum principal amount of $5.0 million. In order to induce
the Bank to enter into this agreement, the Bank required that the loan be
unconditionally guaranteed by certain directors of the Company. Messrs.
Milligan, Kaegi and Joyce agreed to be guarantors in exchange for the right and
option to acquire up to an aggregate of 1,250,000 shares of Common Stock of the
Company at $4 per share for a period of 10 years.
In January 1997, pursuant to the Stock Purchase Agreement dated January 30,
1997, the Company issued an aggregate of 1,380.3 shares of Class A Convertible
8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants
to purchase up to 1,161,307.6 shares of Common Stock at a price of $.000001 per
share, of which 19.2 shares of Class A Convertible 8% Cumulative Preferred Stock
and warrants to purchase up to 16,141.1 shares of Common Stock were issued to
Mr. Joyce.
In January 1998, the Company agreed to issue to Messrs. Milligan, Kaegi and
Joyce 4.7, 6.3 and 31.7 shares of Class A Convertible 8% Cumulative Preferred
Stock, respectively, at a price of $15,793.84 per share, and warrants to
purchase up to 3,995.3, 5,327.1 and 26,635.5 shares of Common Stock,
respectively, at a price of $.000001 per share.
See also "Executive Compensation--Employment Agreements" for a description
of employment agreements between the Company and Messrs. Milligan, Wiegand-Moss
and Day.
See also "Certain Transactions--Sale of Capital Stock" for a description of
the issuance of Common Stock and non-voting Common Stock in January 1998 to
Messrs. Neustaetter, Joyce, Kronfeld, Currey, Milligan and Kaegi.
DIRECTOR COMPENSATION
Directors of the Company receive no directors' fees. Directors are reimbursed
for their reasonable out-of-pocket travel expenditures incurred in connection
with their service as directors.
COMPENSATION PLAN
1997 STOCK OPTION PLAN. The Company's Stock Option Plan (the "Stock Option
Plan") provides for the grant of options that are not intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to key employees. The Compensation Committee of
the Board of Directors administers the Stock Option Plan and grants options to
purchase Common Stock thereunder.
The aggregate number of shares of Common Stock that may be issued under
options under the Stock Option Plan may not exceed 728,667.7 shares. Reserved
shares may be either authorized but unissued shares or treasury shares, and will
be distributed at the discretion of the Board of Directors.
The Compensation Committee has the exclusive authority to establish, amend and
rescind appropriate rules and regulations relating to the Stock Option Plan.
Each participant's option will expire as of the earliest of : (i) the date on
which it is forfeited under the provisions of the Stock Option Plan; (ii) ten
years from the option date; and (iii) the date on which it expires pursuant to
the relevant option agreement. The option price may be greater than, less
74
than or equal to the fair market value on the option date as determined in the
sole discretion of the Compensation Committee.
An option participant may not exercise an option or any portion thereof until
such option or such portion thereof has become fully vested. Pursuant to the
Stock Option Plan, options generally vest 1/48th each month and are fully
vested after four years. All options become 100% vested and immediately
exercisable prior to a Change in Control (as such term is defined in the Stock
Option Plan).
On October 14, 1997, the Compensation Committee granted Messrs. Milligan and
Wiegand-Moss options to acquire 131,160.3 and 109,300.0 shares of Common Stock,
respectively. Each of such options vests 1/48th per month from the optionee's
date of employment with the Company, even if such employment precedes the date
of grant. During October and December 1997, the Compensation Committee granted
options to acquire an aggregate of 488,207.4 shares of Common Stock to other
current executive officers of the Company.
As of December 31, 1997, options to acquire 728,667.7 shares of Common Stock
were outstanding pursuant to the Stock Option Plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the Company's fiscal year ended
March 31, 1997 concerning compensation of (i) all individuals serving as the
Company's Chief Executive Officer during the fiscal year ended March 31, 1997
and (ii) each other executive officer of the Company whose total annual salary
and bonus equaled or exceeded $100,000 in the fiscal year ended March 31, 1997
(collectively, the "Named Executive Officers"):
ANNUAL COMPENSATION
- ------------------------------------ ------------------------------
SALARY BONUS OTHER(1)
- ------------------------------------ -------- ------ ----------
Glenn W. Milligan(2)............... $170,833 $6,875 $ 4,000
Chairman of the Board, President
and Chief Executive Officer (as of
March 31, 1997)
Richard Wiegand-Moss(3)............ 117,709 5,729 13,750(4)
Chief Operating Officer (as of
March 31, 1997)
Daniel O. Day(5)................... 116,041 5,208 2,500
Chief Financial Officer (as of
March 31, 1997)
- --------------
(1) These amounts represent automobile allowances paid to the Named Executive
Officers in the fiscal year ended March 31, 1997.
(2) Mr. Milligan currently serves as the Company's Chairman of the Board and
Chief Executive Officer.
(3) Mr. Wiegand-Moss currently serves as the Company's Senior Vice President of
Customer Operations.
(4) This amount represents automobile allowances and relocation expenses paid in
fiscal year ended March 31, 1997.
(5) Mr. Day's employment with the Company was terminated in February 1998.
EMPLOYMENT AGREEMENTS
GLENN W. MILLIGAN. Mr. Milligan entered into an employment agreement with
the Company as of August 1996 for a five-year term, which will be automatically
renewed for consecutive five-year terms unless either party elects not to renew
the agreement. Pursuant to the employment agreement, Mr. Milligan is entitled to
an initial annual base salary of $165,000 which was increased to $200,000 on
February 1, 1997 upon the consummation of the Company's initial private
preferred stock offering and will increase by ten percent annually. In addition,
if the Company obtains a new franchise and finances its construction, Mr.
Milligan's annual base salary will be increased
75
in an amount equal to $.20 times the number of new homes passed by the Company
in the new franchise area. Mr. Milligan is entitled to an annual bonus, based
upon a bonus plan to be developed by management and approved by the Board of
Directors, in a minimum amount of 1/24th of his annual base salary. Mr.
Milligan is also entitled annually to receive shares of the Company's common
stock in an amount equal to 5,000 shares or such other number of shares as is
necessary to provide him with .261% of the outstanding shares of common stock
and to receive stock options covering such number of shares pursuant to a
separate agreement. The agreement provides that Mr. Milligan is entitled to
various fringe benefits, including a monthly automobile allowance in an amount
equal to 1% of his annual base salary. Mr. Milligan has agreed not to disclose
confidential information relating to the Company and has agreed not to compete
with, or solicit employees or customers of, the Company during specified periods
following discontinuance of his employment for any reason. Upon a termination of
the employment agreement, Mr. Milligan is generally entitled to severance
benefits, including continuation of health benefits for Mr. Milligan and his
family for three years, outplacement services, such vested stock and stock
options to which Mr. Milligan would have been entitled during the remaining
contract term had the employment agreement not been terminated and a lump-sum
payment, the amount of which is dependent upon the reason for termination. In
addition, upon a termination of the employment agreement for any reason, Mr.
Milligan has the right to require the Company to repurchase all shares of the
Company's capital stock then beneficially owned by him for their fair market
value.
RICHARD WIEGAND-MOSS. Mr. Wiegand-Moss entered into an employment agreement
with the Company as of August 1996 for a five-year term, which will be
automatically renewed for consecutive four-year terms unless either party elects
not to renew the agreement. Pursuant to the employment agreement, Mr. Wiegand-
Moss is entitled to an initial annual base salary of $137,500 which will
increase by ten percent annually. In addition, if the Company obtains a new
franchise and finances its construction, Mr. Wiegand-Moss's annual base salary
will be increased in an amount equal to $.165 times the number of new homes
passed by the Company in the new franchise area. Mr. Wiegand-Moss is entitled to
an annual bonus, based upon a bonus plan to be developed by management and
approved by the Board of Directors, in a minimum amount of 1/24th of his annual
base salary. Mr. Wiegand-Moss is also entitled annually to receive shares of the
Company's common stock in an amount equal to 4,000 shares or such other number
of shares as is necessary to provide him with .2088% of the outstanding shares
of common stock and to receive stock options covering such number of shares
pursuant to a separate agreement. The agreement provides that Mr. Wiegand-Moss
is entitled to various fringe benefits, including a monthly automobile allowance
in an amount equal to 1% of his annual base salary. Mr. Wiegand-Moss has agreed
not to disclose confidential information relating to the Company and has agreed
not to compete with, or solicit employees or customers of, the Company during
specified periods following discontinuance of his employment for any reason.
Upon a termination of the employment agreement, Mr. Wiegand-Moss is generally
entitled to severance benefits, including continuation of health benefits for
Mr. Wiegand-Moss and his family for three years, outplacement services and a
lump-sum payment, the amount of which is dependent upon the reason for
termination. In addition, upon a termination of the employment agreement for any
reason, Mr. Wiegand-Moss has the right to require the Company to repurchase all
shares of the Company's capital stock then beneficially owned by him for their
fair market value.
DANIEL O. DAY. Mr. Day's employment with the Company was terminated in
February 1998. Mr. Day entered into an employment agreement with the Company as
of August 1996 for a four-year term. Mr. Day has agreed not to disclose
confidential information relating to the Company and has agreed not to compete
with, or solicit employees or customers of, the Company during specified periods
following discontinuance of his employment for any reason. Upon a termination of
the employment agreement, Mr. Day is generally entitled to severance benefits,
including continuation of health benefits for Mr. Day and his family for three
years, outplacement services and a lump-sum payment, the amount of which is
dependent upon the reason for termination. In addition, upon a termination of
the employment agreement for any reason, Mr. Day has the right to require the
Company to repurchase all shares of the Company's capital stock then
beneficially owned by him for their fair market value.
76
CERTAIN TRANSACTIONS
TRANSACTION WITH JAMES LOWRY & ASSOCIATES
On December 9, 1997 the Board of Directors of the Company authorized the
Company to enter into a contract whereby James Lowry & Associates would assist
the Company in the development of a plan to meet Chicago's Minority Business
Enterprise/Women Business Enterprise certification requirements. The contract
calls for payment for services rendered on an hourly basis, but not to exceed
$200,000 per annum. Mr. Lowry, who became a Director of the Company in February
1997, is the President and Chief Executive Officer and the sole beneficial owner
of James Lowry & Associates.
SALE OF CAPITAL STOCK
In September 1997, pursuant to a Purchase, Joinder and Waiver Agreement (the
"Purchase Agreement"), the Company issued 63.3 shares of Class A Convertible
8% Cumulative Preferred Stock at a price of $15,793.84 per share, and warrants
to purchase up to 53,271 shares of Common Stock at a price of $.000001 per share
to Consolidated Communications, whose President and Chief Executive Officer at
such time was Mr. Currey, a Director of the Company at that time and currently
the Company's President and Chief Operating Officer.
In November 1997, pursuant to a Purchase, Joinder and Waiver Agreement, the
Company issued 9.5 shares of Class A Convertible 8% Cumulative Preferred Stock
at a price of $15,793.84 per share, and warrants to purchase up to 7,990.6
shares of Common Stock at a price of $.000001 per share to Mr. Webster, the
Company's Chief Financial Officer.
In January 1998, the Company agreed to issue an aggregate of 550,362.2 shares
of Common Stock and an equal number of shares of non-voting Common Stock, for a
total of 1,100,724.3 shares. These shares were issued in exchange for the
initial and debt warrants which arose from the purchase of Class A Convertible
8% Cumulative Preferred Stock and were assigned a value of $2,343,746. The
beneficial owners of such shares included Purnendu Chattenjee, JK&B Capital,
William Farley, Boston Capital Ventures III, L.P., Thomas Neustaetter, Edward T.
Joyce, David Kronfeld, Robert Currey, Glenn W. Milligan and Charles E. Kaegi,
MD. The number of shares issued to each of these beneficial owners is set forth
in the principal shareholders table. In April 1998, pursuant to a Purchase,
Joinder & Waiver Agreement, the Company issued 6.3316 shares of Class A
Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share and
a warrant to purchase 5327.1 shares of Common Stock at a price of $.000001 per
share to Wendy Dietze, Managing Director of Credit Suisse First Boston
Corporation.
TRANSACTION WITH 21ST CENTURY TECHNOLOGY GROUP, INC.
Glenn Milligan, Edward Joyce and charles Kaegi served as executive officers
and directors of 21st Century Technology Group, Inc. ("Technology"), a related
party through both common ownership and common management. As of March 26, 1996
the Company entered into an Asset Purchase Agreement with technology pursuant
to which the Company acquired (i) the contract rights to service 1,734 cable
television subscribers, (ii) contracts pertaining to subscriber lists and (iii)
certain electronic equipment in exchange for the purchase price of $3,381,300.
On March 26, 1996 Messrs. Milligan, Joyce and Kaegi beneficially owned
approximately 15%, 27% and 24%, respectively, of the common stock of
Technology.
From inception to March 31, 1996, operating expenses, except interest and
amortization, had been allocated from Technology based on estimates of time
spent by management and employees of Technology on Company activities. The
Company's Board of Directors approved these allocations. Technology's Board of
Directors did not formally approve these allocations. However, at the time the
allocations were made, the Company's and Technology's Boards contained
substantially the same individuals. For the years ended March 31, 1995 and 1996,
the Company also recognized 100% of expenses paid by Technology on behalf of the
Company, as well as 100% of expenses incurred by the Company. Effective April 1,
1996, the Company began recognizing and paying substantially all of its own
expenses. Therefore, for the year ended March 31, 1997, there were no
significant allocations from Technology or payments made by Technology on the
Company's behalf.
The Company believes that all transactions set forth above were made on terms
no less favorable to the Company than would have been obtained from unaffiliated
third parties. The Company has adopted a policy whereby all future transactions
between the Company and its officers, directors and affiliates will be on terms
no less favorable to the Company than could be obtained from unrelated third
parties and will be approved by a majority of the disinterested members of the
Board of Directors.
See also "Management--Compensation Committee Interlocks and Insider
Participation" for a description of certain other transactions with officers
and directors of the Company.
77
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information at January 15, 1998,
regarding beneficial ownership of the capital stock of the Company by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
capital stock of the Company, (ii) each director of the Company, (iii) each
Named Executive Officer of the Company and (iv) all directors and executive
officers as a group.
NUMBER OF SHARES OF
---------------------
CLASS A CONVERTIBLE
---------------------
NUMBER OF SHARES OF 8% CUMULATIVE
--------------------- ---------------------
COMMON STOCK PREFERRED STOCK PERCENT OF AGGREGATE
--------------------- --------------------- -----------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2) VOTING RIGHTS(3)
- ---------------------------------------- --------------------- --------------------- -----------------------
Purnendu Chatterjee(4).................. 757,744.7 633.2 31.1%
JK&B Capital(5)......................... 378,872.4 316.6 16.5
William Farley(6)....................... 303,097.7 249.3 13.3
Myron M. Cherry(7)...................... 274,066.6 12.7 7.1
Boston Capital Ventures III, L.P.(8).... 151,549.0 126.6 6.9
Elske Bolitho(9)........................ 305,000.0 -- 7.7
Thomas Neustaetter(4)(10)............... 757,744.7 633.2 31.1
Charles E. Kaegi, M.D.(11)(18).......... 934,700.7 6.3 14.3
Edward T. Joyce(12)(18)................. 768,714.4 50.8 19.1
David Kronfeld(13)...................... 530,421.4 443.2 22.6
Glenn W. Milligan(14)(18)............... 661,925.1 4.7 15.4
James H. Lowry(18)...................... 19,000.0 -- *
Robert J. Currey(15).................... 75,774.5 63.3 3.5
Richard Wiegand-Moss(16)(18)............ 52,813.6 -- 1.2
Daniel O. Day(17)(18)................... 16,673.6 -- *
All executive officers and directors as
a group (17 persons)(19)............... 3,493,703.7 1,211.1 73.5
- --------------
* Less than 1%.
(1) The persons named in this table have sole voting power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable and except as indicated in the
other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options and warrants held by that person
that are currently exercisable or exercisable within 60 days after January
15, 1998, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Each share of Class A Convertible 8% Cumulative Preferred Stock converts
into one thousand shares of Common Stock at the option of the shareholder.
(3) Percent of Aggregate Voting Rights, for each beneficial owner, was
determined based upon a fraction. The numerator of such fraction is the sum
of (a) the number of outstanding shares of Common Stock beneficially owned
by such owner, plus (b) the number of shares of Common Stock into which the
number of shares of Class A Convertible 8% Cumulative Preferred Stock
beneficially owned by such owner are convertible, plus (c) the number of
shares of Common Stock issuable upon exercise of options and warrants
beneficially owned by such owner and which are exercisable within 60 days of
January 15, 1998. The denominator of such fraction is the sum of (a) the
aggregate number of shares of Common Stock outstanding on January 15, 1998,
78
plus (b) the number of shares of Common Stock into which the aggregate
number of shares of Class A Convertible 8% Cumulative Preferred Stock
outstanding on January 15, 1998 are convertible, plus (c) the aggregate
number of shares of Common Stock issuable upon exercise of options and
warrants beneficially owned by such owner and which are exercisable within
60 days of January 15, 1998.
(4) Represents 112,517.4 shares of Common Stock, 266,354.9 shares of Common
Stock issuable upon exercise of warrants and 316.6 shares of Class A
Convertible 8% Cumulative Preferred Stock held by Quantum Industrial
Partners LDC ("QIP"). The address of QIP is c/o Curacao Corporation Company,
Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. Also includes
65,260.1 shares of Common Stock, 154,485.9 shares of Common Stock issuable
upon exercise of warrants and 183.6 shares of Class A Convertible 8%
Cumulative Preferred Stock held by S-C Phoenix Holdings, L.L.C. ("S-C
Phoenix"). The address of S-C Phoenix is c/o Chatterjee Management Company,
888 Seventh Avenue, New York, New York 10106. This total also includes 45.2
shares of Class A Convertible 8% Cumulative Preferred Stock, 16,067.5 shares
of Common Stock and 38,035.5 shares of Common Stock issuable upon exercise
of warrants held by Winston Partners II, LLC and 87.8 shares of Class A
Convertible 8% Cumulative Preferred Stock, 31,189.8 shares of Common Stock
and 73,833.6 shares of Common Stock issuable upon exercise of warrants held
by Winston Partners II, LDC (Winston Partners II, LLC and Winston Partners
II, LDC, collectively "Winston Partners"). The address of Winston Partners
II, LLC is c/o Chatterjee Management Company, 888 Seventh Avenue, New York,
New York 10106. The address of Winston Partners II, LDC is c/o Curacao
Corporation Company, Kaya Flamboyan 9, Willemstad, Curacao, Netherlands
Antilles. QIP, S-C Phoenix and Winston Partners are associated with
Chatterjee Management Company. Chatterjee Management Company is managed and
controlled by Purnendu Chatterjee. Dr. Chatterjee may be deemed to have the
power to direct the voting and disposition of the shares owned by QIP, S-C
Phoenix and Winston Partners. Dr. Chatterjee and Mr. George Soros may each
be deemed to have the power to direct the voting and disposition of the
shares owned by S-C Phoenix. In addition, Mr. Soros, Mr. Stanley F.
Druckenmiller and Soros Fund Management LLC may be deemed to have the power
to direct the voting and disposition of the shares owned by QIP. The Percent
of Aggregate Voting Rights excludes 225,034.8 shares of non-voting Common
Stock beneficially owned by Purnendu Chatterjee which the Company has agreed
to issue.
(5) Represents 221.6 shares of Class A Convertible 8% Cumulative Preferred
Stock, 78,762.2 shares of Common Stock and 186,448.5 shares of Common Stock
issuable upon exercise of warrants held by JK&B Capital, L.P. and 95.0
shares of Class A Convertible 8% Cumulative Preferred Stock, 33,755.2 shares
of Common Stock and 79,906.5 shares of Common Stock issuable upon exercise
of warrants held by JK&B Capital II, L.P. (JK&B Capital, L.P. and JK&B
Capital II, L.P., collectively "JK&B Capital"). The address of JK&B Capital
is 205 North Michigan, Suite 800, Chicago, IL 60601. The Percent of
Aggregate Voting Rights excludes 112,517.4 shares of non-voting Common Stock
beneficially owned by JK&B Capital which the Company has agreed to issue.
(6) Represents the following securities held by the following entities, all of
which are beneficially owned by Mr. Farley: 73.9 shares of Class A
Convertible 8% Cumulative Preferred Stock, 26,254.0 shares of Common Stock
and 62,149.4 shares of Common Stock issuable upon exercise of warrants held
by Farley, Inc. of which Mr. Farley is the sole owner, and 105.5 shares of
Class A Convertible 8% Cumulative Preferred Stock, 37,505.8 shares of Common
Stock and 88,785.0 shares of Common Stock issuable upon exercise of warrants
held by The Retirement Program of Farley, Inc. of which Mr. Farley is the
sole member of the Pension Investment Committee of the Retirement Program of
Farley, Inc. Also includes 42.2 shares of Class A Convertible 8% Cumulative
Preferred Stock, 15,002.3 shares of Common Stock and 35,514 shares of Common
Stock issuable upon exercise of warrants held by FTL Investments Inc. of
which Mr. Farley is Chairman and Chief Executive Officer, and 31.7 shares of
Class A Convertible 8% Cumulative Preferred Stock, 11,251.7 shares of Common
Stock and 26,635.5 shares of Common Stock issuable upon exercise of warrants
held by Union Underwear Pension Plan of which Mr. Farley is the sole member
of the Pension Investment Committee of the Fruit of the Loom Board of
Directors. The address of Mr. Farley is 233 South
79
Wacker Drive, Chicago, Illinois, 60606. The Percent of Aggregate Voting
Rights excludes 90,013.8 shares of non-voting Common Stock beneficially
owned by Mr. Farley which the Company has agreed to issue.
(7) Includes 72,223.3 shares of Common Stock issuable upon exercise of options.
The address of Mr. Cherry is 30 North LaSalle, #2300, Chicago, Illinois
60602. The Percent of Aggregate Voting Rights excludes 4,500.7 shares of
non-voting Common Stock beneficially owned by Mr. Cherry which the Company
has agreed to issue.
(8) Includes 106,542.0 shares of Common Stock issuable upon exercise of
warrants. The address of Boston Capital Ventures III, L.P. is Old City
Hall, 45 School Street, Boston, MA 02108. The Percent of Aggregate Voting
Rights excludes 45,007.0 shares of non-voting Common Stock beneficially
owned by Boston Capital Ventures III, L.P. which the Company has agreed to
issue.
(9) Represents 153,000 shares of Common Stock held by Elske Bolitho, Trustee of
Robert W. Bolitho Trust, and 152,000 shares of Common Stock held by Elske
Bolitho, Trustee of Elske Bolitho Trust. The address of Ms. Bolitho is
13376 185th Place N, Jupiter, Florida 33478.
(10) All of such shares are beneficially owned by Purnendu Chatterjee. Mr.
Neustaetter is an officer of the Chatterjee Management Group, a division of
Chatterjee Management Company. Mr. Neustaetter is an officer of Chatterjee
Management Company. Mr. Neustaetter disclaims beneficial ownership of these
shares, over which he does not have dispositive or voting control. The
business address of Mr. Neustaetter is c/o Chatterjee Management Company,
888 Seventh Avenue, New York, NY 10106.
(11) Includes 172,202.2 shares of Common Stock and 376,721.8 shares of Common
Stock issuable upon exercise of options held by Charles E. Kaegi, M.D.,
S.C., Defined Contribution Pension Plan and Trust, 26,990.0 shares of
Common Stock held by Charles E. Kaegi, M.D., S.C., Defined Benefit Pension
Plan and Trust, 1,700.0 shares of Common Stock held by Charles E. Kaegi,
M.D., S.C. Profit Sharing Pension Plan and Trust, 321,240.0 shares of
Common Stock held jointly with Mr. Kaegi's wife, and 17,470.0 shares of
non-voting Common Stock owned by Mr. Kaegi's wife. The Percent of Aggregate
Voting Rights excludes 2,250.4 shares of non-voting Common Stock held by
Mr. Kaegi which the Company has agreed to issue.
(12) Includes 269,516.5 shares of Common Stock issuable upon exercise of options
held by Mr. Joyce, 96,620.0 shares of Common Stock and 52,291.5 shares of
Common Stock issuable upon exercise of options held by Mr. Joyce's wife,
1.864.5 shares of Common Stock issuable upon exercise of warrants held by
Mr. Joyce, 12.9 shares of Class A Convertible 8% Cumulative Preferred Stock
and 10,867.3 shares of Common Stock issuable upon exercise of warrants held
by Edward T. Joyce, as Trustee of the Edward T. Joyce Ltd. Employees'
Profit Sharing Plan, and 4.1 shares of Convertible Class A Preferred Stock
and 3,409.3 shares of Common Stock issuable upon exercise of warrants held
by Edward T. Joyce, as Trustee of the Individual Retirement Account for
Edward T. Joyce. The Percent of Aggregate Voting Rights excludes 18,070.2
shares of non-voting Common Stock beneficially owned by Mr. Joyce which the
Company has agreed to issue.
(13) All such shares are held of record by JK&B Capital and Boston Capital
Ventures III, L.P. Mr. Kronfeld is a Manager of JK&B Management, L.L.C. and
General Partner of JK&B Capital, L.P. and JK&B Capital II, L.P. The
business address of Mr. Kronfeld is c/o JK&B Capital, 205 North Michigan,
Suite 800, Chicago, IL 60601.
(14) Includes 316,060.3 shares of Common Stock issuable upon exercise of options
held by Mr. Milligan, and 93,750.0 shares of Common Stock and 61,225.5
shares of Common Stock issuable upon exercise of options held by Mr.
Milligan's wife. The Percent of Aggregate Voting Rights excludes 1,687.8
shares of non-voting Common Stock beneficially owned by Mr. Milligan which
the Company has agreed to issue.
80
(15) All of such Shares are held of record by Consolidated Communications. Mr.
Currey, a Director of the Company and its current President and Chief
Operating Officer, was formerly Group President of Telecommunications
Services for McLeod USA. Consolidated Communication and McLeod USA are both
wholly owned subsidiaries of McLeod, Inc. The Percent of Aggregate Voting
Rights excludes 22,503.5 shares of non-voting Common Stock beneficially
owned by Consolidated Communications which the Company has agreed to issue.
(16) Includes 47,818.7 shares of Common Stock issuable upon exercise of options.
(17) Includes 3,527.2 shares of Common Stock issuable upon exercise of options.
(18) The address of each such person is c/o the Company, 350 N. Orleans Street,
Suite 600, Chicago, IL 60654.
(19) Includes the aggregate of 1,216,271.6 shares of Common Stock issuable upon
exercise of options and 1,018,967.5 shares of Common Stock issuable upon
exercise of warrants. See notes 10, 11, 12, 13, 14, 15, 16 and 17 above.
The Percent of Aggregate Voting Rights excludes 428,758.8 shares of non-
voting Common Stock which the Company has agreed to issue.
DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT FACILITY
The Company has received a commitment letter (the "Commitment Letter") from
BankBoston, N.A. and Bank of America National Trust and Savings Association
(collectively, the "Senior Lenders") pursuant to which the Senior Lenders have
agreed, subject to the terms and conditions set forth in the Commitment Letter
(including the negotiation of definitive loan documents and satisfactory
completion by the Senior Lenders of their due diligence review), to provide a
senior secured revolving credit facility (the "Bank Credit Facility") of up to
$50.0 million to a subsidiary of the Company that will own the assets used in
Chicago's Area 1 (the "Borrower"), which will be guaranteed by the Company, to
be used for working capital and other general corporate purposes, except that
prior to the time that the Borrower has at least 30,000 total subscribers and
has expended at least $75 million of proceeds from the Company to expand network
operations, all borrowings under the Bank Credit Facility will be required to be
fully cash collateralized in accounts maintained by the Senior Lenders. The
Borrower will be permitted to make available to the Company a portion of the
Bank Credit Facility to finance the Company's expansion of its operations to
markets outside of Chicago's Area 1. There are currently no outstanding amounts
under the Bank Credit Facility.
The following summary of the material provisions of the Commitment Letter does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Commitment Letter, a copy of which is available from the
Company upon request. Defined terms that are used but not defined in this
section have the meanings given to such terms in the Commitment Letter. Because
the terms, conditions and covenants of the Bank Credit Facility are subject to
the negotiation, execution and delivery of the definitive loan documents,
certain of the actual terms, conditions and covenants thereof may differ from
those described below.
The Bank Credit Facility will mature in 2003. Borrowings under the Bank Credit
Facility will be subject to a borrowing base determined on the basis of 7.5
times the prior three months' collected revenues. Amounts drawn under the Bank
Credit Facility will bear interest, at the Borrower's option, at either (i) a
base rate equal to the higher of (x) BankBoston, N.A.'s prime rate and (y) .50%
plus the Federal funds rate or (ii) the LIBOR rate, plus, in each case, an
Applicable Margin. The Applicable Margin will be an annual rate which will
fluctuate based on the Borrower's Total Leverage Ratio (as defined below) and
which will be between .50% and 2.00% for base rate borrowings and between 2.00%
and 3.50% for LIBOR rate borrowings.
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The Bank Credit Facility will begin amortizing by equal quarterly installments
of $3,125,000 beginning on the last day of the first quarter after the second
anniversary of its closing plus a final payment of $12,500,000. The Commitment
Letter contemplates that the Borrower will be required to repay indebtedness
outstanding under the Bank Credit Facility with (i) the net cash proceeds in
excess of $1 million from sales of assets, (ii) the net cash proceeds from
certain issuances of debt (iii) the net cash proceeds from certain issuances of
equity, (iv) the net cash proceeds in excess of $1 million from insurance
recoveries and (v) 50% of annual Excess Cash Flow (as defined below) beginning
on the third anniversary of the closing of the Bank Credit Facility if the
leverage is greater than 4.5 to 1.0.
The Commitment Letter contemplates that, subject to customary exceptions, the
Borrowers' obligations under the Bank Credit Facility will be secured by a first
priority security interest in all tangible and intangible assets of the Borrower
and any of its subsidiaries, including the Area 1 franchise, the CTA attachment
agreement and the pole attachment agreements with Commonwealth Edison and
Ameritech and that the Company's obligations under its guarantee will be secured
by a pledge of the stock of the Borrower.
The Commitment Letter contemplates that the Bank Credit Facility will contain
a number of negative covenants, including, among others, covenants limiting the
ability of the Borrower, subject to customary exceptions, to incur debt, create
liens, pay dividends, make distributions, make guarantees, sell assets and
engage in mergers. In addition, the Commitment Letter contemplates that the Bank
Credit Facility will contain usual and customary affirmative covenants,
including the delivery of financial and other information.
The Commitment Letter contemplates that the Borrower will be required to
comply with certain financial tests and to maintain certain financial ratios on
a consolidated basis. The Borrower must maintain (i) a Total Leverage Ratio, as
of the end of any fiscal quarter beginning with the fiscal quarter ending
December 31, 2000, no greater than 10.0 to 1.0 initially, with subsequent step-
downs, (ii) a Senior Leverage Ratio, as of the end of any fiscal quarter
beginning with the fiscal quarter ending December 31, 2000, no greater than 4.25
to 1.0 initially, with subsequent step-downs, (iii) a Fixed Charge Coverage
Ratio, as of the end of each fiscal quarter beginning with the fiscal quarter
ending December 31, 2001, no less than 1.0 to 1.0, (iv) an Interest Coverage
Ratio, as of the end of any fiscal quarter beginning with the fiscal quarter
ending December 21, 2000, no less than 2.0 to 1.0 and (v) a minimum number of
subscribers to be agreed upon and a maximum level of EBITDA losses to be agreed
upon, as of the end of each fiscal quarter beginning after the closing.
Total Leverage Ratio means the ratio of total funded debt consisting of senior
funded debt (including amounts outstanding under the Bank Credit Facility,
capitalized leases and the Notes to Annualized EBITDA. Annualized EBITDA means
EBITDA for the two most recent fiscal quarters multiplied by two. EBITDA means
consolidated net income, plus depreciation, amortization, any non-cash charges,
interest expense and tax expense deducted in calculating net income. Senior
Leverage Ratio means the ratio of total funded debt consisting of senior funded
debt (including amounts outstanding under the Bank Credit Facility and
capitalized leases to Annualized EBITDA. Fixed Charge Coverage Ratio means the
ratio of EBITDA to the sum of interest expense which is paid or payable in cash,
distributions made to the Company for payment of cash interest on the Notes,
income taxes paid or payable in cash, capital expenditures, required principal
payments and required capital lease payments. Excess Cash Flow means EBITDA
minus the sum of cash taxes, capital expenditures, required principal
repayments, interest expense paid or payable in cash, distributions made to the
Company for payment of cash interest on the Notes and the increase in working
capital calculated quarterly (net of cash or cash equivalents). Interest
Coverage Ratio means the ratio of EBITDA to the sum of interest expense on total
debt and dividends which is paid or payable in cash for the succeeding four
fiscal quarters.
The Commitment Letter contemplates that the Bank Credit Facility will include
usual and customary events of default.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes have been, and the New Notes will be, issued under an Indenture,
dated as of February 15, 1998 (the "Indenture"), between the Company and State
Street Bank and Trust Company, as Trustee (the "Trustee"). The following is a
summary of certain provisions of the Indenture and the New Notes, a copy of
which Indenture and the form of New Notes is available upon request to the
Company at the address set forth under "Available Information". The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of 1939, as
amended. For the definition of certain capitalized terms used in the following
summary, see "--Certain Definitions."
The New Notes will be issued only in fully registered form, without coupons,
in denominations of principal amount at maturity of $1,000 and any integral
multiple of $1,000. No service charge shall be made for any registration of
transfer or exchange of New Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
TERMS OF THE NEW NOTES
The New Notes will be unsecured senior obligations of the Company, initially
limited to $363,135,000 aggregate principal amount at maturity, and will mature
on February 15, 2008. Except as described under "Exchange Offer--Acceptance of
Old Securities for Exchange; Delivery of New Securities", no cash interest will
accrue on the Notes prior to February 15, 2003, although for U.S. Federal income
tax purposes a significant amount of OID will be recognized by a Holder as such
discount accrues. See "Certain United States Federal Income Tax Consequences"
for a discussion regarding the taxation of such OID. Cash interest will accrue
on the Notes at the rate per annum shown on the front cover of this Prospectus
from February 15, 2003, or from the most recent date to which interest has been
paid or provided for, payable semiannually on February 15 and August 15 of each
year, commencing August 15, 2003 to holders of record at the close of business
on the February 1 or August 1 immediately preceding the interest payment date.
The Company will pay interest on overdue principal at 1% per annum in excess of
such rate, and it will pay interest on overdue installments of interest at such
higher rate applicable to overdue principal to the extent lawful. Interest will
be computed on the basis of a 360-day year of twelve 30-day months.
The interest rate on the New Notes is subject to increase in certain
circumstances if the Company does not file a registration statement relating to
the Exchange Offer or if the registration statement is not declared effective on
a timely basis or if certain other conditions are not satisfied, all as further
described under "Exchange Offer."
Subject to the covenants described below under "--Certain Covenants" and
applicable law, the Company may issue additional Notes under the Indenture in an
unlimited principal amount at maturity. The Old Notes, the New Notes offered
pursuant to the Exchange Offer and any additional Notes subsequently issued
would be treated as a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph the New Notes will not be
redeemable at the option of the Company prior to February 15, 2003. Thereafter,
the New Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, upon not less than 30 nor more than 60 days'
prior notice mailed by first-class mail to each Holder's registered address, at
the following redemption prices (expressed in percentages of Accreted Value),
plus accrued interest to the redemption date (subject to the right of Holders of
record on the
83
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on February 15 of the
years set forth below:
REDEMPTION
-----------
PERIOD PRICE
- ------------ -----------
2003.................... 106.1250%
2004.................... 104.0833
2005.................... 102.0417
2006 and thereafter..... 100.0000
In addition, at any time and from time to time prior to February 15, 2001, the
Company may redeem in the aggregate up to 35% of the original principal amount
at maturity of the New Notes with the proceeds (to the extent received by the
Company) of one or more Equity Offerings following which there is a Public
Market at a redemption price (expressed as a percentage of Accreted Value) of
112 1/4% plus accrued interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $236.0 million
aggregate principal amount at maturity of the Notes must remain outstanding
after each such redemption.
In the case of any partial redemption, selection of the New Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no New Note of $1,000 in principal amount at maturity or
less shall be redeemed in part. If any New Note is to be redeemed in part only,
the notice of redemption relating to such New Note shall state the portion of
the principal amount thereof to be redeemed. A different New Note in principal
amount at maturity equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original New Note.
RANKING
The indebtedness evidenced by the New Notes will be senior unsecured
obligations of the Company, will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company and will be senior in
right of payment to all future subordinated indebtedness of the Company. As of
December 31, 1997, after giving effect to the Private Placement and the
application of the proceeds therefrom, the Company's total indebtedness
outstanding would have been approximately $200.2 million.
Substantially all the operations of the Company are or will be conducted
through one or more of its subsidiaries. The Company currently has three wholly-
owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century
Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc.
Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned
subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century
Telecom of Michigan, Inc. The Company intends to transfer substantially all its
assets to newly formed Restricted Subsidiaries, and thereafter the Company will
be a holding company with no assets other than the capital stock of its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the New Notes. The New Notes, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of the Company. Although the Indenture
limits the incurrence of Indebtedness and preferred stock of certain of the
Company's subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness or Preferred Stock under the Indenture. See "--Certain Covenants--
Limitation on Indebtedness."
CHANGE OF CONTROL
84
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's New Notes at a purchase price in cash equal to 101% of
the Accreted Value thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(i) Prior to the earlier to occur of (A) the first public offering of
common stock of Parent or (B) the first public offering of common stock of the
Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of the
Voting Stock of the Company, whether as a result of issuance of securities of
the Parent or the Company, any merger, consolidation, liquidation or
dissolution of the Parent or the Company, any direct or indirect transfer of
securities by Parent or otherwise (for purposes of this clause (i) and clause
(ii) below, the Permitted Holders shall be deemed to beneficially own any
Voting Stock of a corporation (the "specified corporation") held by any
other corporation (the "parent corporation") so long as the Permitted
Holders beneficially own (as so defined), directly or indirectly, in the
aggregate a majority of the voting power of the Voting Stock of the parent
corporation);
(ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in clause (i) above, except that for purposes of
this clause (ii) such person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly
or indirectly, of more than 35% of the total voting power of the Voting Stock
of the Company; provided, however, that the Permitted Holders beneficially own
(as defined in clause (i) above), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors (for the purposes of this clause (ii), such other person
shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other person is the
beneficial owner (as defined in this clause (ii)), directly or indirectly, of
more than 35% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders beneficially own (as defined in clause
(i) above), directly or indirectly, in the aggregate a lesser percentage of
the voting power of the Voting Stock of such parent corporation and do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
corporation);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with any
new directors whose election or appointment by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved
by a vote of 66 2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iv) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale of all
or substantially all the assets of the Company to another Person (other than a
Person that is controlled by the Permitted Holders), and, in the case of any
such merger or consolidation, the securities of the Company that are
outstanding immediately prior to such transaction and which represent 100% of
the aggregate voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition to
any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
85
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's New Notes at a purchase price in cash equal to 101% of
the Accreted Value thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest on the relevant interest
payment date); (2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income, cash
flow and capitalization after giving effect to such Change of Control); (3) the
purchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its New Notes purchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of New Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between the
Company and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "--Certain Covenants--Limitation on Indebtedness,"
"--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions."
Such restrictions can only be waived with the consent of the holders of a
majority in principal amount at maturity of the Notes (including both Old Notes
and New Notes) then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford holders of the New Notes protection in the event of a highly
leveraged transaction.
Future indebtedness of the Company may contain prohibitions on the occurrence
of certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require the Company to repurchase the New Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders of New Notes following
the occurrence of a Change of Control may be limited by the Company's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required repurchases. The
provisions under the Indenture relative to the Company's obligation to make an
offer to repurchase the New Notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount at maturity of the outstanding Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall not
permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any
Indebtedness, except that the Company may Incur Indebtedness if, on the date of
such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December
31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter.
86
(b) Notwithstanding the foregoing paragraph (a), the Company and (except as
specified below) any Restricted Subsidiary may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement; provided,
however, that the aggregate amount of such Indebtedness, when taken together
with all other Indebtedness Incurred pursuant to this clause (1) and then
outstanding, does not exceed the remainder of (x) $50 million minus (y) the
sum of all principal payments with respect to the permanent retirement of such
Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock;"
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or
clauses (7), (8) or (11) below; provided, however, that to the extent such
Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a
Restricted Subsidiary described in clause (11), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary;
(6) Hedging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company or any
Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof;
(7) Indebtedness, including Indebtedness of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Subsidiary was
acquired by the Company, Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network
assets (including real estate) (including acquisitions by way of capital lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory
or networks assets so acquired) by the Company or a Restricted Subsidiary
after the Issue Date for use in a Related Business;
(8) Indebtedness of the Company in an amount which, when taken together
with the amount of Indebtedness Incurred pursuant to this clause (8) and then
outstanding, does not exceed two times the Net Cash Proceeds received by the
Company after the Issue Date as a capital contribution from, or from the
issuance and sale of its Capital Stock (other than Disqualified Stock) to, a
Person that is not a Subsidiary of the Company, to the extent such Net Cash
Proceeds have not been used pursuant to paragraph (a)(3)(B) or paragraph
(b)(i) of the covenant described under "--Limitation on Restricted Payments"
to make a Restricted Payment; provided, however, that such Indebtedness does
not mature prior to the Stated Maturity of the Notes and has an Average Life
longer than the Average Life of the Notes;
(9) Indebtedness in respect of performance, surety or appeal bonds or
similar obligations, in each case Incurred in the ordinary course of business
of the Company and its Restricted Subsidiaries and Indebtedness due and owing
to governmental entities in connection with any licenses and franchises issued
by a governmental entity and necessary or desirable to conduct a Related
Business;
(10) Guarantees of the Notes issued by any Restricted Subsidiary;
87
(11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company (other
than Indebtedness Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company); provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of additional Indebtedness pursuant to
paragraph (a) hereof; and
(12) Indebtedness Incurred in an aggregate amount which, when taken
together with the aggregate amount of all other Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (11) above or
paragraph (a)) does not exceed the greater of (a) $10 million and (b) an
amount equal to 5% of the Company's Consolidated Net Tangible Assets as of
such date.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
(e) For the purposes of determining the amount of Indebtedness outstanding at
any time, Guarantees with respect to Indebtedness otherwise included in the
determination of such amount shall not be included.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness;" or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments (the amount of any Restricted Payment,
if other than in cash, to be determined in good faith by the Board of Directors
and to be evidenced by a resolution of such Board set forth in an Officer's
Certificate delivered to the Trustee) since the Issue Date would exceed the sum
of, without duplication:
(A) the remainder of (x) cumulative EBITDA during the period (taken as a
single accounting period) beginning on the first day of the fiscal quarter of
the Company beginning after the Issue Date and ending on the last day of the
most recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to the date
of such determination minus (y) the product of 1.5 times cumulative
Consolidated Interest Expense during such period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a Subsidiary
of the Company and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of
88
the Company (less the amount of any cash, or the fair value of any other
property, distributed by the Company upon such conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from payments of interest, dividends,
repayments of loans or advances or other transfers of assets, in each case to
the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any acquisition of any Capital Stock of the Company or any Restricted
Subsidiary or any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made out of
the proceeds of the substantially concurrent sale of, or made by exchange for,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however, that (A)
such acquisition of Capital Stock or of Subordinated Obligations shall be
excluded in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above and (B) the Net Cash Proceeds from such sale
shall be excluded from the calculation of amounts under clause (3)(B) of
paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations in whole or in part
(including premium, if any, and accrued and unpaid interest) made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness;" provided, however,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend, no
other Default shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above;
(iv) the purchase, redemption, retirement, repurchase or other acquisition
of shares of, or options to purchase shares of, Capital Stock (other than
Disqualified Stock) of the Company or Capital Stock (other than Preferred
Stock) of any of its Subsidiaries from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former directors
including their estates or beneficiaries under their estates), (a) upon their
death, disability, retirement or termination of employment or (b) otherwise
pursuant to the terms of agreements (including employment agreements) or plans
(or amendments thereto) approved by the Board of Directors under which such
individuals received such Capital Stock; provided, however, that the aggregate
amount of consideration paid for such purchases, redemptions, retirements,
repurchases and other acquisitions made pursuant to this clause (iv) shall not
exceed $500,000 in any calendar year; provided further, however, that such
purchases, redemptions, retirements, repurchases and other acquisitions
pursuant to this clause shall be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
89
(v) any purchase or redemption of Subordinated Obligations in whole or in
part (including premium, if any, and accrued and unpaid interest) from Net
Available Cash to the extent permitted by the covenant described under "--
Limitation on Sales of Assets and Subsidiary Stock;" provided, however, that
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(vi) the purchase, redemption, acquisition, cancelation or other retirement
for value of shares of Capital Stock of the Company or any of its Restricted
Subsidiaries to the extent necessary, as determined in good faith by a
majority of the disinterested members of the Board of Directors, to prevent
the loss or to secure the renewal or reinstatement of any license or franchise
held by the Company or any Restricted Subsidiary from any governmental entity;
provided, however, that such purchase or redemption shall be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above;
(vii) any purchase or redemption of Subordinated Obligations or Preferred
Stock following a Change of Control pursuant to an obligation in the
instruments governing such Subordinated Obligations or Preferred Stock to
purchase or redeem such Subordinated Obligations or Preferred Stock as a
result of such Change of Control; provided, however, that no such purchase or
redemption shall be permitted until the Company has completely discharged its
obligations described under "--Change of Control" (including the purchase of
all Notes tendered for purchase by holders) arising as a result of such Change
of Control; provided further, however, that such purchase or redemption shall
be included in the calculation of the amount of Restricted Payments pursuant
to clause (3) of paragraph (a) above; or
(viii) cash dividends paid after February 15, 2003 in respect of the
Exchangeable Preferred Stock in an aggregate amount in any twelve month period
not to exceed 13 3/4% of the aggregate liquidation preference outstanding at
the beginning of such twelve month period; provided, however, that at the time
of payment of any such dividends, no Default shall have occurred and be
continuing; provided further, however, that all such dividends shall be
included in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary, (b) pay any Indebtedness owed to the
Company, (c) make any loans or advances to the Company or (d) transfer any of
its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to the Indenture, the
Exchangeable Preferred Stock or any other agreement in effect at or entered
into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement or instrument
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement or instrument referred to in clause
(i) or (ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less favorable
to the
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Noteholders than encumbrances and restrictions with respect to such Restricted
Subsidiary contained in such predecessor agreements;
(iv) any such encumbrance or restriction consisting of customary non-
assignment or anti-alienation provisions in (a) leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder or subletting and (b) licenses or franchises to
the extent such provisions restrict the transfer of the license or franchise;
(v) in the case of clause (d) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such restrictions restrict the transfer of the property subject to
such security agreements or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(vii) any encumbrance or restriction contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was Incurred
if the Board of Directors determines in good faith that any such encumbrance
or restriction will not materially affect the Company's ability to pay
principal or interest on the Notes when due and such encumbrance or
restriction by its terms expressly permits such Restricted Subsidiary, (A) in
the absence of a payment default in respect of such Indebtedness or other
agreement, to make cash payments to the Company (in any form) sufficient to
pay when due all amounts of principal and interest on the Notes and (B)
following the occurrence and during the continuance of a payment default in
respect of such Indebtedness or other agreement, to resume making cash
payments to the Company (in any form) sufficient to pay when due all amounts
of principal and interest on the Notes upon the earlier of the cure of such
payment default and the lapse of 179 consecutive days following the date when
such encumbrance or restriction became operative to prohibit or limit such
Restricted Subsidiary from making such payments to the Company; provided,
however, that no Restricted Subsidiary shall be affected by the operation of
any such encumbrances or restrictions following the occurrence of a payment
default on more than one occasion in any consecutive 360-day period.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be):
(A) first, to the extent the Company elects in its sole discretion (or is
required by the terms of any Indebtedness), to prepay, repay, redeem or
purchase Senior Indebtedness or Indebtedness (other than any Disqualified
Stock) of a Restricted Subsidiary (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) within one year from the later
of the date of such Asset Disposition or the receipt of such Net Available
Cash;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company elects in
its sole discretion, to acquire Additional Assets within one year after the
receipt of such Net Available Cash;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Notes (and to holders of other Senior Indebtedness
91
designated by the Company) to purchase Notes (and such other Senior
Indebtedness) pursuant to and subject to the conditions contained in the
Indenture; and
(D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for the general
corporate and working capital purposes of the Company and its Restricted
Subsidiaries;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) or (C) above, the Company or such
Restricted Subsidiary shall permanently retire such Indebtedness and shall cause
the related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased. Notwithstanding
the foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions occurring after the Issue Date which are not applied
in accordance with this paragraph exceeds $5 million. Pending application of Net
Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or cash
equivalents: (x) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition, (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash; and (z) Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes (and other Senior Indebtedness) pursuant to clause (a) (ii) (C) above, the
Company will be required to purchase Notes tendered pursuant to an offer by the
Company for the Notes (and other Senior Indebtedness) at a purchase price of
100% of their Accreted Value (in the case of Notes) or 100% of their principal
amount (in the case of other Senior Indebtedness) plus accrued but unpaid
interest, if any, to the date of purchase (or, in respect of such other Senior
Indebtedness, such lesser price, if any, as may be provided for by the terms of
such Senior Indebtedness) in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of Notes (and any other Senior Indebtedness) tendered pursuant to
such offer is less than the Net Available Cash allotted to the purchase thereof,
the Company will be required to apply the remaining Net Available Cash in
accordance with clause (a) (ii) (D) above. The Company shall not be required to
make such an offer to purchase Notes (and other Senior Indebtedness) pursuant to
this covenant if the Net Available Cash available therefor is less than $5.0
million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, license, lease or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") unless the
terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set
forth in writing and (ii) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction and
(3) if such Affiliate Transaction involves an amount in excess of $5.0 million,
have been determined by a nationally recognized investment banking firm or other
qualified
92
appraiser under the relevant circumstances to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Permitted Investment or any Restricted Payment permitted to be paid pursuant to
the covenant described under "--Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $500,000 in the aggregate outstanding at any one time, (v) the
payment of reasonable fees to directors of the Company and its Restricted
Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries; provided, however,
that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange
Act) of 5% or more of the Capital Stock of the Company holds, directly or
indirectly, any Investments in any such Restricted Subsidiary (other than
indirectly through the Company), (vii) the issuance or sale of any Capital Stock
(other than Disqualified Stock) of the Company and (viii) any transaction
pursuant to an agreement or arrangement in effect on the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Certain Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock (other than Qualified Preferred Stock) of an Existing Restricted
Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
(other than Qualified Preferred Stock), except (i) to the Company or a Wholly
Owned Subsidiary, (ii) if, immediately after giving effect to such issuance,
sale or other disposition, neither the Company nor any of its Subsidiaries own
any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, such Existing
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect thereto would have been
permitted to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale or other
disposition, (iv) to directors of directors' qualifying shares of common stock
of any Restricted Subsidiary, to the extent mandated by applicable law, or (v)
the issuance or sale of Capital Stock of a Restricted Subsidiary that has a
class of equity security registered under Section 12 of the Exchange Act
pursuant to an employee stock option plan approved by the Board of Directors.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or, if the obligation or
liability to be secured by such Lien is subordinated in respect of payment to
the Notes, prior to) the obligations so secured for so long as such obligations
are so secured; provided, however, that the Company and its Restricted
Subsidiaries may Incur other Liens to secure Indebtedness as long as the amount
of outstanding Indebtedness secured by Liens Incurred pursuant to this proviso
at any time does not exceed $5.0 million.
Limitation on Sale/Leaseback Transactions. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under "--Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under "--
Limitation on Liens," (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under "--Limitation on Sale of Assets
and Subsidiary Stock."
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Limitation on Market Swaps. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any Market Swaps, unless:
(i) at the time of entering into the agreement to swap markets and
immediately after giving effect to the proposed Market Swap, no Default shall
have occurred and be continuing;
(ii) the respective fair market values of the markets and other assets (to
be determined in good faith by the Board of Directors and to be evidenced by a
resolution of such Board set forth in an Officer's Certificate delivered to
the Trustee) being purchased and sold by the Company or any of its Restricted
Subsidiaries are substantially the same at the time of entering into the
agreement to swap markets; and
(iii) the cash payments, if any, received by the Company or such Restricted
Subsidiary in connection with such Market Swap are treated as Net Available
Cash received from an Asset Disposition.
Limitation on Lines of Business. The Company shall not, and shall not permit
any Restricted Subsidiary to, engage in any trade or business other than a
Related Business.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing,
(iii) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "--Limitation on
Indebtedness;"
(iv) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less than
the Consolidated Net Worth of the Company immediately prior to such
transaction;
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture; and
(vi) the Company shall have delivered to the Trustee an Opinion of Counsel
to the effect that the holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction and will
be subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.
The Successor Company shall be the successor to the Company and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under the Indenture, but the predecessor Company in the
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case of a conveyance, transfer or lease shall not be released from the
obligation to pay the principal of and interest on the Notes.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the SEC and provide the Trustee and Noteholders with such annual
reports and such information, documents and other reports as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation
subject to such Sections, such information, documents and other reports to be so
filed and provided at the times specified for the filing of such information,
documents and reports under such Sections if it were subject thereto (unless the
Commission will not accept such a filing, in which case the Company shall
provide such documents to the Trustee). In addition, for so long as any of the
Notes are outstanding, the Company will make available to any prospective
purchaser of the Notes or beneficial owner thereof (upon written request to the
Company) in connection with any sales thereof the information required by Rule
144A(d) (4) under the Securities Act.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under "--
Certain Covenants--Merger and Consolidation" above, (iv) the failure by the
Company to comply for 30 days after the notice described below with any of its
obligations in the covenants described above under "--Change of Control"
(other than a failure to purchase Notes) or under "--Certain Covenants" under
"--Limitation on Indebtedness," "--Limitation on Restricted Payments," "--
Limitation on Restrictions on Distributions from Restricted Subsidiaries," "--
Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to
purchase Notes), "--Limitation on Affiliate Transactions," "--Limitation on
the Sale or Issuance of Capital Stock of Certain Restricted Subsidiaries," "--
Limitation on Liens," "--Limitation on Sale/Leaseback Transactions,"
"Limitation on Market Swaps," "Limitation on Lines of Business" or "--SEC
Reports," (v) the failure by the Company to comply for 60 days after the notice
described below with its other agreements contained in the Indenture, (vi)
Indebtedness of the Company or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million and such non-payment continues, or such
acceleration is not rescinded, within 10 days after notice (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions") or (viii) any judgment or decree (not covered by insurance or
indemnification by a Person other than the Company or a Restricted Subsidiary,
which indemnity party is solvent and has acknowledged responsibility) for the
payment of money in excess of $10 million is entered against the Company or a
Significant Subsidiary, remains outstanding for a period of 60 days following
such judgment and is not discharged, waived, bonded over or stayed within 10
days after notice (the "judgment default provision") . However, a default
under clauses (iv), (v), (vi) and (viii) will not constitute an Event of Default
until the Trustee or the holders of 25% in principal amount at maturity of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified herein after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount at maturity of the outstanding Notes may
declare the Accreted Value of and accrued but unpaid interest on all the Notes
to be due and payable (collectively, the "Default Amount"). Upon such a
declaration, the Default Amount shall be due and payable immediately. If an
Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs and is continuing, the Default Amount on
all the Notes will ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holders of the
Notes. Under certain circumstances, the holders of a majority in principal
amount at maturity of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences. Subject to the provisions of the
Indenture relating to the duties of the Trustee, in case an Event of Default
occurs and is continuing,
95
the Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right to
receive payment of principal, premium (if any) or interest when due, no holder
of a Note may pursue any remedy with respect to the Indenture or the Notes
unless (i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount at
maturity of the outstanding Notes have requested the Trustee to pursue the
remedy, (iii) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee has not
complied with such request within 60 days after the receipt thereof and the
offer of security or indemnity and (v) the holders of a majority in principal
amount at maturity of the outstanding Notes have not given the Trustee a
direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the holders of a majority in principal amount at maturity
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is known
to the Trustee, the Trustee must mail to each holder of the Notes notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of or interest on any Note, the Trustee may withhold notice
if and so long as a committee of its trust officers determines that withholding
notice is not opposed to the interest of the holders of the Notes. In addition,
the Company is required to deliver to the Trustee, within 120 days after the end
of each fiscal year, a certificate indicating whether the signers thereof know
of any Default that occurred during the previous year. The Company also is
required to deliver to the Trustee, within 30 days after the Company becomes
aware of the occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the Company is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount at maturity of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount at maturity of the Notes then outstanding. However, without the consent
of each holder of an outstanding Note affected thereby, no amendment may, among
other things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the amount payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "--Optional
Redemption," (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes or (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions.
Without the consent of any holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder of the Notes or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the Trust Indenture Act.
96
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the New Notes in accordance with the
Exchange Offer and the Indenture. The Company, the Registrar and the Trustee
may require a holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a holder to pay any taxes and
fees required by law or permitted by the Indenture.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes. The
Company at any time may terminate its obligations under "--Change of Control"
and under the covenants described under "--Certain Covenants" (other than the
covenant described under "--Merger and Consolidation"), the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under "--
Defaults" above and the limitations contained in clauses (iii) and (iv) under
"--Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If the Company exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "--Certain
Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay principal and interest on the Notes when due (whether at
scheduled maturity or upon redemption as to which irrevocable instructions have
been given to the Trustee) in accordance with the terms of the Indenture and the
Notes (the value of such money or U.S. Government Obligations may not be
sufficient to pay the Default Amount at any particular point in time) and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
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State Street Bank and Trust Company is the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
The Holders of a majority in principal amount at maturity of the outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions, including furnishing the Trustee with indemnity satisfactory
to it. The Indenture provides that if an Event of Default occurs (and is not
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each, a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL
- -------------------------
ACCRUAL DATE ACCRETED VALUE
- ------------------------- --------------
Issue Date............. $ 550.76
August 15, 1998........ 585.69
February 15, 1999...... 621.56
August 15, 1999........ 659.63
February 15, 2000...... 700.03
August 15, 2000........ 742.91
February 15, 2001...... 788.41
August 15, 2001........ 836.70
February 15, 2002...... 887.95
August 15, 2002........ 942.34
February 15, 2003...... 1,000.00
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the Semi-
Annual Accrual Date immediately preceding such Specified Date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the immediately preceding Semi-
Annual Accrual Date to the Specified Date, using a 360-day year of 12 30-day
months, and the denominator of which is 180 (or, if the Semi-Annual Accrual
Date immediately preceding the Specified Date is the Issue Date, the
denominator of which is 186); or
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(iii) if the Specified Date occurs after the last Semi-Annual Accrual Date,
the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is or becomes a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
For purposes of the provisions described under "--Certain Covenants--Limitation
on Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Annualized EBITDA" as of any date of determination means EBITDA for the
most recent two consecutive fiscal quarters for which financial statements have
been made publicly available but in no event ending more than 135 days prior to
the date of such determination multiplied by two.
"Area 1 Franchise" means the Company's cable television franchise pursuant
to a Franchise Agreement between the Company and the City of Chicago in effect
on the Issue Date.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) (that is not for
security purposes) by the Company or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of (i) any
shares of Capital Stock (other than Qualified Preferred Stock) of a Restricted
Subsidiary (other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Restricted
Subsidiary), (ii) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary or (iii) any other assets
(other than Capital Stock or other Investments in an Unrestricted Subsidiary) of
the Company or any Restricted Subsidiary outside of the ordinary course of
business of the Company or such Restricted Subsidiary (other than, in the case
of (i), (ii) and (iii) above, (a) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to another Restricted
Subsidiary, (b) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition that (x) constitutes a Permitted Investment or a Restricted Payment
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments," (y) complies with the covenant described under "--Certain
Covenants--Merger and Consolidation" or (z) constitutes a Market Swap permitted
by the covenant described under "--Certain Covenants--Limitation on Market
Swaps" and (c) a disposition of assets with a fair market value of less than
$250,000).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
99
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years (calculated to the nearest one-twelfth) from
the date of determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means any day other than a Saturday, Sunday or day on which
banking institutions are not required to be open in the States of New York,
Illinois and Massachusetts.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated, whether voting or nonvoting) equity of such Person,
including any common stock and Preferred Stock, whether outstanding on the Issue
Date or issued after the Issue Date, but excluding any debt securities
convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"consolidated" means the consolidation of accounts of the Company and its
Subsidiaries in accordance with GAAP.
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of the Company and its Restricted Subsidiaries
which may properly be classified as current liabilities (including taxes accrued
as estimated), on a consolidated basis, after eliminating (i) all intercompany
items between the Company and any Restricted Subsidiary and (ii) all current
maturities of long-term Indebtedness, all as determined in accordance with GAAP
consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred in such period by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) net costs associated with Hedging Obligations
(including amortization of fees), (vii) Preferred Stock dividends in respect of
all Preferred Stock held by Persons other than the Company or a Restricted
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations, (ix) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by (or secured by the
assets of) the Company or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust; excluding, however, (y) a proportional amount of any of
the foregoing items or other interest expense incurred by a Restricted
Subsidiary in such period to the extent the net income of such Restricted
Subsidiary is excluded in the calculation of Consolidated Net Income pursuant to
clause (iii) of the definition thereof and (z) any fees or debt issuance costs
(and any amortization thereof) payable in connection with the sale of the Notes
and Units on the Issue Date.
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"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries calculated on a consolidated basis as of the end of the
most recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to the date
of such determination to (ii) Annualized EBITDA as of such date of
determination; provided, however, that
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the amount of
Indebtedness outstanding at the end of such fiscal quarter shall be calculated
after giving effect on a pro forma basis to the Incurrence of such
Indebtedness as if such Indebtedness had been outstanding as of the end of
such fiscal quarter and to the discharge of any other Indebtedness to the
extent it was outstanding as of the end of such fiscal quarter and is to be
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such Indebtedness had been discharged as of the
end of such fiscal quarter,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness that was outstanding as of
the end of such fiscal quarter or if any Indebtedness that was outstanding as
of the end of such fiscal quarter is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise to the need to
calculate the Consolidated Leverage Ratio, the aggregate amount of
Indebtedness outstanding as of the end of such fiscal quarter shall be
calculated on a pro forma basis as if such discharge had occurred as of the
end of such fiscal quarter and EBITDA shall be calculated as if the Company or
such Restricted Subsidiary had not earned the interest income, if any,
actually earned during the period of the most recent two consecutive fiscal
quarters for which financial statements have been made publicly available but
in no event ending more than 135 days prior to the date of such determination
(the "Reference Period") in respect of cash or Temporary Cash Investments
used to repay, repurchase, defease or otherwise discharge such Indebtedness,
(3) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for
the Reference Period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for the Reference Period, or increased by an amount equal to
the EBITDA (if negative), directly attributable thereto for the Reference
Period,
(4) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment
in any Restricted Subsidiary (or any person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction requiring a calculation to be made
hereunder, which constitutes all or substantially all an operating unit of a
business, EBITDA for the Reference Period shall be calculated after giving pro
forma effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of the Reference Period,
(5) if since the beginning of the Reference Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such Reference
Period) shall have made any Asset Disposition, any Investment or acquisition
of assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during the Reference
Period, EBITDA for the Reference Period shall be calculated after giving pro
forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of the Reference Period; and
(6) the aggregate amount of Indebtedness outstanding at the end of such
most recent fiscal quarter will be deemed to include the total principal
amount of funds outstanding or available to be borrowed on the date of
determination under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
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For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets or the amount of income or earnings relating thereto, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company.
"Consolidated Net Income" means, for any period, the aggregate net income of
the Company and its consolidated Subsidiaries for such period; provided,
however, that the following shall not be included in such Consolidated Net
Income:
(i) any net income (or loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that subject to the exclusion
contained in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
a Restricted Subsidiary, to the limitations contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period shall
be included in determining such Consolidated Net Income;
(iv) the after-tax gain or loss realized upon the sale or other disposition
of any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business and the
after-tax gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants--Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any payments of interest, dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
interest, dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a balance sheet of the Company
and its Restricted Subsidiaries, determined on a consolidated basis in
accordance with GAAP, and after giving effect to purchase accounting and after
deducting therefrom Consolidated Current Liabilities and, to the extent
otherwise included, the amounts of: (i) minority interests in consolidated
Subsidiaries held by Persons other than the Company or a Restricted Subsidiary;
(ii) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors; (iii) any revaluation or
other write-up in book value of assets subsequent to the Issue Date as a result
of a change in the method of valuation in accordance with GAAP consistently
applied; (iv) unamortized debt discount
102
and expenses and other unamortized deferred charges, goodwill, patents,
trademarks, service marks, trade names, copyrights, licenses, organization or
developmental expenses and other intangible items; (v) treasury stock; (vi) cash
set apart and held in a sinking or other analogous fund established for the
purpose of redemption or other retirement of Capital Stock to the extent such
obligation is not reflected in Consolidated Current Liabilities; and (vii)
Investments in and assets of Unrestricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, the total of
the amounts shown on the balance sheet of the Company and its consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Company for which financial
statements have been made publicly available but in no event ending more than
135 days prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Agreement" means one or more term loans or revolving credit or
working capital facilities (including any letter of credit subfacility) with one
or more banks or other institutional lenders in favor of the Company or any
Restricted Subsidiary.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable or must be purchased, upon the occurrence of certain events
or otherwise, by such Person at the option of the holder thereof, in whole or in
part, in each case on or prior to the first anniversary of the Stated Maturity
of the Notes; provided, however, that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to purchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to
the first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if (x) the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of such
Capital Stock than the terms applicable to the Notes and described under "--
Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" and "--
Change of Control" and (y) any such requirement only becomes operative after
compliance with such terms applicable to the Notes, including the purchase of
any Notes tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(a) Consolidated Interest Expense, (b) all income tax expense of the Company and
its consolidated Restricted Subsidiaries, (c) depreciation expense of the
Company and its consolidated Restricted Subsidiaries, (d) amortization expense
of the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (e) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that
103
has not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"Equity Offering" means either (a) an underwritten primary public offering
of common stock of Parent or the Company pursuant to an effective registration
statement under the Securities Act or (b) a primary offering of Capital Stock
(other than Disqualified Stock) of the Company to one or more Persons primarily
engaged in a Related Business.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Restricted Subsidiary" means any Restricted Subsidiary in
existence on the Issue Date and any Restricted Subsidiary formed after the Issue
Date which thereafter conducts all or any portion of the Company's business
pertaining to its Area 1 Franchise in Chicago, as in effect on the Issue Date.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning. The term "Guarantor"
shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when
used as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable, including, in each case, any premium on such indebtedness to the
extent such premium has become due and payable;
104
(ii) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i) through (iii) above) entered into in
the ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on the
letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of such Person (including any Restricted
Subsidiary), the liquidation preference with respect to, any Preferred Stock
(but excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through (v) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i) through (vi)
of other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the fair value of such property or
assets or the amount of the obligation so secured, in each case as of the date
of determination; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap, floor, collar or forward interest rate
agreement or other financial agreement or arrangement designed to protect such
Person against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary
105
shall be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Old Notes were issued under the
Indenture.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Market Assets" means assets used or useful in the ownership or operation of
a Related Business, including any and all licenses, franchises and assets
related thereto.
"Market Swap" means the execution of a definitive agreement, subject only to
governmental approval and other customary closing conditions, that the Company
in good faith believes will be satisfied, for a substantially concurrent
purchase and sale, or exchange, of Market Assets between the Company or any of
its Restricted Subsidiaries and another Person or group of Persons; provided
that any amendment to or waiver of any closing condition which individually or
in the aggregate is material to the Market Swap will be deemed to be a new
Market Swap; provided, however, that the Market Assets to be sold by the Company
or its Restricted Subsidiaries in connection with a Market Swap do not include
assets used in or necessary for the ownership or operation of the Company's
business pertaining to its Area 1 franchise in Chicago; provided further,
however, that the cash and other assets to be received by the Company or its
Restricted Subsidiaries which do not constitute Market Assets do not constitute
more than 15% of the total consideration to be received by the Company or its
Restricted Subsidiaries in such Market Swap.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law, be repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Restricted Subsidiaries as a result of such Asset Disposition and
(iv) the deduction of appropriate amounts provided by the seller as a reserve,
in accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the proceeds of such issuance or sale in the form of cash or cash
equivalents including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in such form of cash or cash equivalents and the conversion of
other property received when converted to such form of cash or cash equivalents,
net of any and all issuance costs, including attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Parent" means any Person that owns directly or indirectly all the Voting
Stock of the Company.
"Permitted Holders" means Purnendu Chatterjee, JK&B Capital, William Farley,
Boston Capital Ventures II, L.P., Glenn W. Milligan, Edward T. Joyce and each of
their affiliates.
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"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) commissions, payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments; (viii) any Person to the
extent such Investment represents either the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" or the consideration not constituting Market Assets
received in a Market Swap as permitted pursuant to the covenant described under
"--Certain Covenants--Limitation on Market Swaps;" and (ix) any Person
principally engaged in a Related Business if (a) the Company or a Restricted
Subsidiary, after giving effect to such Investment, will own at least 20% of the
Voting Stock of such Person and (b) the amount of such Investment, when taken
together with the aggregate amount of all Investments made pursuant to this
clause (ix) and then outstanding, does not exceed $10.0 million.
"Permitted Liens" means, with respect to any Person,
(a) pledges or deposits by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation and other types of social
security, or good faith deposits in connection with bids, tenders, contracts
(other than for the payment of Indebtedness) or leases to which such Person is
a party, or deposits to secure public or statutory or regulatory obligations
of such Person or deposits of cash, cash equivalents or United States
government bonds to secure surety or appeal bonds to which such Person is a
party, or deposits as security for contested taxes or import duties or for the
payment of rent, in each case Incurred in the ordinary course of business;
(b) Liens imposed by law, such as carriers', landlords', warehousemen's and
mechanics', suppliers', repairmen's or other similar Liens, in each case for
sums not yet due or being contested in good faith by appropriate proceedings
or other Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or other
proceedings for review and Liens in favor of customs and revenue authorities
to secure payment of customs duties;
(c) Liens for taxes, assessments, governmental charges or claims subject to
penalties for non-payment or which are being contested in good faith and by
appropriate proceedings;
(d) Liens in favor of issuers of surety or payment and performance bonds or
letters of credit and bankers' acceptances issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit and bankers' acceptances do not
constitute Indebtedness;
(e) survey exceptions, encumbrances, easements or reservations of, or
rights of others for, licenses, rights-of-way, pole attachment, use of
conduit, use of trenches, or similar rights, sewers, electric lines, telegraph
and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties or other
municipal and zoning ordinances, title defects or other irregularities which
were not Incurred in connection with
107
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of
the business of such Person;
(f) Liens securing Indebtedness Incurred after the Issue Date pursuant to
clause (b) (7) of the covenant described under "--Limitation on
Indebtedness" or otherwise Incurred to finance the construction, purchase or
lease of, or repairs, improvements or additions to, property of such Person;
provided, however, that the Liens securing such Indebtedness may not extend to
any property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred other than the property financed with the proceeds of such
Indebtedness and the proceeds thereof, and the Indebtedness (other than any
interest thereon) secured by the Lien may not be Incurred more than 180 days
after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property
subject to the Lien;
(g) Liens to secure Indebtedness permitted under the provisions described
in clause (b)(1) under "--Certain Covenants--Limitation on Indebtedness;"
(h) Liens existing on the Issue Date;
(i) Liens on property or shares of Capital Stock of another Person at the
time such other Person becomes a Subsidiary of such Person; provided, however,
that such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries;
(j) Liens on property at the time such Person or any of its Subsidiaries
acquires the property, including any acquisition by means of a merger or
consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries;
(k) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a Subsidiary of such Person;
(l) Liens securing Hedging Obligations so long as such Hedging Obligations
relate to Indebtedness that is, and is permitted to be under the Indenture,
secured by a Lien on the same property securing such Hedging Obligations; and
(m) Liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(n) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company or any
of its Restricted Subsidiaries in the ordinary course of business; and
(o) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (f), (h), (i) and (j); provided, however, that (I) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (II) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (h), (i) or
(j) at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any accrued and unpaid interest, fees and expenses, including
premiums, related to such refinancing, refunding, extension, renewal or
replacement.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (f), (i) or (j) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
108
pursuant to the covenant described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock." For purposes of this definition, the
term "Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated, whether voting or
nonvoting) which is preferred as to the payment of dividends or distributions,
or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of Capital Stock of any
other class of such Person.
"principal" of a Note means the Accreted Value of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"principal amount at maturity" of a Note means the amount specified as such
on the face of such Note.
"Public Market" means any time after (x) a Public Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Parent or the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Public Offering" means an underwritten primary public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
"Qualified Preferred Stock" of a Restricted Subsidiary means a series of
Preferred Stock of such Restricted Subsidiary which (i) has a fixed liquidation
preference that is no greater in the aggregate than the sum of (x) the fair
market value (as determined in good faith by the Board of Directors at the time
of the issuance of such series of Preferred Stock) of the consideration received
by such Restricted Subsidiary for the issuance of such series of Preferred Stock
and (y) accrued and unpaid dividends to the date of liquidation, (ii) has a
fixed annual dividend and has no right to share in any dividend or other
distributions based on the financial or other similar performance of such
Restricted Subsidiary and (iii) does not entitle the holders thereof to vote in
the election of directors, managers or trustees of such Restricted Subsidiary
unless such Restricted Subsidiary has failed to pay dividends on such series of
Preferred Stock for a period of at least 12 consecutive calendar months.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus accrued and unpaid interest, fees and expenses,
including any premium and defeasance costs) under the Indebtedness being
Refinanced; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
109
"Related Business" means the businesses of the Company and the Restricted
Subsidiaries on the Issue Date and any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Restricted Payment" with respect to any Person means
(i) the declaration or payment of any dividends or any other distributions
of any sort (including any payment in connection with any merger or
consolidation involving such Person) in respect of its Capital Stock held by
Persons other than the Company or any Restricted Subsidiary or similar payment
to the direct or indirect holders (other than the Company or a Restricted
Subsidiary) of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), and other
than pro rata dividends or other distributions made by a Subsidiary that is
not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)),
(ii) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person or of any Capital Stock
of a Restricted Subsidiary held by any Affiliate of the Company (other than a
Restricted Subsidiary), including the exercise of any option to exchange any
Capital Stock (other than into Capital Stock of the Company that is not
Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase, redemption or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of
the date of such purchase, repurchase, redemption or acquisition) or
(iv) the making of any Investment (other than a Permitted Investment) in
any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means Indebtedness (including interest on such
Indebtedness) of the Company, whether outstanding on the Issue Date or
thereafter Incurred, unless in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such obligations
are subordinate in right of payment to the Notes; provided, however, that Senior
Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities), (4) any Indebtedness of the
Company (and any accrued and unpaid interest in respect thereof) which is
subordinate or junior in any respect to any other Indebtedness or other
obligation of the Company or (5) that portion of any Indebtedness which at the
time of Incurrence is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory
110
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is expressly
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Voting Stock is at the time owned or controlled, directly or
indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of
such Person or (iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of America
or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered into
with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 270 days after
the date of acquisition, issued by a corporation (other than an Affiliate of
the Company) organized and in existence under the laws of the United States of
America or any foreign country recognized by the United States of America with
a rating at the time as of which any investment therein is made of "P-1" (or
higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard and Poor's Ratings Group,
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political subdivision
or taxing authority thereof, and rated at least "A" by Standard & Poor's
Ratings Group or "A" by Moody's Investors Service, Inc., and
(vi) investments in money-market funds (other than single-state funds) that
make investments in instruments of the type described in clause (i)-(v) above
in accordance with the regulations of the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under
111
"--Certain Covenants--Limitation on Restricted Payments." The Board of Directors
may designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided, however, that immediately after giving effect to such designation (x)
the Company could Incur $1.00 of additional Indebtedness under paragraph (a) of
the covenant described under "--Certain Covenants--Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the resolution of the Board of Directors giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
DESCRIPTION OF THE NEW EXCHANGEABLE PREFERRED STOCK
The following is a summary of certain provisions of the New Exchangeable
Preferred Stock and the Amendment to the Articles of Incorporation (the
"Amended Articles") setting forth the rights and privileges of the New
Exchangeable Preferred Stock. A copy of the Amended Articles and the form of New
Exchangeable Preferred Stock is available upon request to the Company at the
address set forth under "Available Information." The following summary of
certain provisions of the Amended Articles does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Amended Articles. The definitions of certain capitalized terms
used but not defined in the following summary are set forth under "Description
of the Exchange Debentures--Certain Definitions." Other capitalized terms used
but not defined herein and not otherwise defined under "Description of the
Exchange Debentures--Certain Definitions" are defined in the Amended Articles.
GENERAL
At the consummation of the Exchange Offer, the Company will issue up to
51,833.33 shares of its registered 13 3/4% Senior Cumulative Exchangeable
Preferred Stock Due 2010, $0.01 par value per share, designated as "13 3/4%
Senior Cumulative Exchangeable Preferred Stock Due 2010," in exchange for an
equal number shares of its outstanding 13 3/4% Senior Cumulative Exchangeable
Preferred Stock Due 2010, $0.01 par value per share. Subject to certain
conditions, the New Exchangeable Preferred Stock will be exchangeable for the
Exchange Debentures at the option of the Company on any scheduled dividend
payment date on or after the date of issuance of the New Exchangeable Preferred
Stock. When issued, the New Exchangeable Preferred Stock will be validly issued,
fully paid and nonassessable. The holders of the New Exchangeable Preferred
Stock will have no preemptive or preferential right to purchase or subscribe for
stock, obligations, warrants, or other securities of the Company of any
class.
RANKING
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The Exchangeable Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding-up and dissolution, rank (i) senior to all
classes of common stock and to each other class of Capital Stock or series of
Preferred Stock outstanding on the Issue Date (including the Class A Preferred
Stock and the Class B Preferred Stock) and each other class or series
established hereafter by the Board of Directors the terms of which do not
expressly provide that it ranks senior to, or on a parity with, the Exchangeable
Preferred Stock as to dividend rights and rights on liquidation, winding-up and
dissolution of the Company (collectively referred to, together with all classes
of common stock of the Company, as "Junior Stock"); (ii) subject to certain
conditions, on a parity with each class of Capital Stock or series of Preferred
Stock established hereafter by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Exchangeable Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively referred to as "Parity Stock"); and
(iii) subject to certain conditions, junior to each class of Capital Stock or
series of Preferred Stock established hereafter by the Board of Directors, the
terms of which expressly provide that such class or series will rank senior to
the Exchangeable Preferred Stock as to dividend rights and rights upon
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Senior Stock").
While any shares of Exchangeable Preferred Stock are outstanding, the Company
may not authorize, create or increase the authorized amount of any class or
series of stock that ranks senior to or on parity with the Exchangeable
Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up without the consent of the holders of a
majority of the outstanding shares of Exchangeable Preferred Stock. However,
without the consent of any holder of Exchangeable Preferred Stock, the Company
may create additional classes of stock, increase the authorized number of shares
of preferred stock or issue series of a stock that ranks junior to the
Exchangeable Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution and winding up. See "--
Voting Rights."
Substantially all the operations of the Company are or will be conducted
through one or more of its subsidiaries. The Company currently has three wholly-
owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century
Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc.
Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned
subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century
Telecom of Michigan, Inc. The Company intends to transfer substantially all its
assets to newly formed Restricted Subsidiaries, and thereafter the Company will
be a holding company with no assets other than the capital stock of its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Exchangeable Preferred Stock. The Exchangeable
Preferred Stock, therefore, will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders (if any) of subsidiaries
of the Company. Although the Amended Articles limit the incurrence of
Indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Amended Articles does not impose any limitation on the incurrence by such
subsidiaries of liabilities that are not considered Indebtedness or Preferred
Stock under the Amended Articles. See "--Certain Covenants--Limitation on
Indebtedness."
DIVIDENDS
The holders of shares of New Exchangeable Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Company legally available therefor, cumulative preferential
dividends from the Issue Date accruing at the rate per share of 13 3/4% per
annum, payable quarterly in arrears on each of February 15, May 15, August 15
and November 15 or, if any such date is not a Business Day, on the next
succeeding Business Day, to the holders of record as of the next preceding
February 1, May 1, August 1 and November 1. Dividends will be payable in cash,
except that on each dividend payment date occurring on or prior to the fifth
anniversary of the Issue Date, dividends may be paid, at the Company's option,
by the issuance of additional shares of New Exchangeable Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such dividends. The issuance of such additional shares of New
Exchangeable Preferred Stock will constitute "payment" of the related dividend
for all purposes of the Amended Articles. The first dividend payment of New
Exchangeable Preferred Stock will be payable on May 15, 1998.
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Dividends payable on the New Exchangeable Preferred Stock will be computed on a
basis of the 360-day year consisting of twelve 30-day months and will be deemed
to accrue on a daily basis. For a discussion of certain Federal income tax
considerations relevant to the payment of dividends on the New Exchangeable
Preferred Stock, see "Certain United States Federal Income Tax Consequences."
Dividends on the New Exchangeable Preferred Stock will accrue whether or not
the Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Amended Articles
will provide that the Company will take all actions required or permitted under
the Illinois Business Corporation Act (the "IBCA") to permit the payment of
dividends on the Exchangeable Preferred Stock, including through the revaluation
of its assets in accordance with the IBCA.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the New Exchangeable
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart (or, on or prior to February 15, 2003, shares of New
Exchangeable Preferred Stock for which have been issued and are held for holders
by the Transfer Agent) for the payment of such dividend, upon all outstanding
shares of New Exchangeable Preferred Stock.
Except as provided in the next sentence, no dividend will be declared or paid
on any Parity Stock unless full cumulative dividends have been paid on the New
Exchangeable Preferred Stock for all prior dividend periods. If accrued
dividends on the New Exchangeable Preferred Stock for all prior dividend periods
have not been paid in full then any dividend declared on the New Exchangeable
Preferred Stock for any dividend period and on any Parity Stock will be declared
ratably in proportion to accrued and unpaid dividends on the New Exchangeable
Preferred Stock and such Parity Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock or (ii)
redeem, purchase or otherwise acquire for consideration any Junior Stock through
a sinking fund or otherwise, unless (A) all accrued and unpaid dividends with
respect to the New Exchangeable Preferred Stock and any Parity Stock at the time
such dividends are payable have been paid or funds have been set apart (or, on
or prior to February 15, 2003, shares of New Exchangeable Preferred Stock for
which have been issued and are held for holders by the Transfer Agent) for
payment of such dividends and (B) sufficient funds have been paid or set apart
(or, on or prior to February 15, 2003, shares of New Exchangeable Preferred
Stock for which have been issued and are held for holders by the Transfer Agent)
for the payment of the dividend for the current dividend period with respect to
the New Exchangeable Preferred Stock and any Parity Stock.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchangeable Preferred
Stock will not be redeemable at the option of the Company prior to February 15,
2003. Thereafter, the Exchangeable Preferred Stock will be redeemable, at the
Company's option, in whole or in part, at any time or from time to time, upon
not less than 30 nor more than 60 days' prior notice mailed by first-class mail
to each Holder's registered address, at the following redemption prices
(expressed in percentages of the liquidation preference thereof), plus
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period) (subject to the rights of
holders of record on the relevant record date to receive dividends due on the
relevant dividend payment date), if redeemed during the 12-month period
commencing on February 15 of the years set forth below:
REDEMPTION
----------
PERIOD PRICE
- ---------- -----
2003..................... 106.8750%
2004..................... 104.5833
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2005..................... 102.2917
2006 and thereafter...... 100.0000
In the case of any partial redemption, selection of the Exchangeable Preferred
Stock for redemption will be made on a pro rata basis.
In addition, at any time prior to February 15, 2001, the Company may redeem
the Exchangeable Preferred Stock, in whole, but not in part, with the proceeds
(to the extent received by the Company) of an Equity Offering, at a redemption
price of 113 3/4% of the liquidation preference thereof, plus accumulated and
unpaid dividends (including an amount in cash equal to a prorated dividend for
any partial dividend period) (subject to the rights of holders of record on the
relevant record date to receive dividends due on the relevant dividend payment
date).
MANDATORY REDEMPTION
On February 15, 2010, the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Exchangeable
Preferred Stock at a price in cash equal to the liquidation preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption (subject to the rights of holders of record on the relevant record
date to receive dividends on the relevant dividend payment date). The Company
will not be required to make sinking fund payments with respect to the
Exchangeable Preferred Stock. The Amended Articles will provide that the Company
will take all actions required or permitted under the IBCA to permit such
redemption.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled dividend payment date, exchange the Exchangeable Preferred Stock, in
whole, but not in part, for the Exchange Debentures; provided, however, that (i)
on the date of such exchange there are no accumulated and unpaid dividends on
the Exchangeable Preferred Stock (including the dividend payable on such date)
or other contractual impediments to such exchange; (ii) there shall be funds
legally available sufficient therefor; (iii) immediately after giving effect to
such exchange, no Default (as defined in the Exchange Indenture) shall have
occurred and be continuing; and (iv) the Company shall have delivered to the
Trustee under the Exchange Indenture an opinion of counsel with respect to the
due authorization and issuance of the Exchange Debentures.
Upon any exchange pursuant to the preceding paragraph, holders of outstanding
shares of Exchangeable Preferred Stock will be entitled to receive, subject to
the second succeeding sentence, $1.00 principal amount of Exchange Debentures
for each $1.00 liquidation preference of Exchangeable Preferred Stock held by
them. The Exchange Debentures will be issued in registered form, without
coupons. Exchange Debentures issued in exchange for Exchangeable Preferred Stock
will be issued in principal amounts of $1,000 and integral multiples thereof to
the extent possible, and will also be issued in principal amounts less than
$1,000 so that each holder of Exchangeable Preferred Stock will receive
certificates representing the entire amount of Exchange Debentures to which such
holder's shares of Exchangeable Preferred Stock entitle such holder; provided,
however, that the Company may pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. The Company will send a written notice
of exchange by mail to each holder of record of shares of Exchangeable Preferred
Stock not fewer than 30 days nor more than 60 days before the date fixed for
such exchange. On and after the Exchange Date, dividends will cease to accrue on
the outstanding shares of Exchangeable Preferred Stock, and all rights of the
holders of Exchangeable Preferred Stock (except the right to receive the
Exchange Debentures, an amount in cash (or, prior to February 15, 2003, at the
option of the Company, in Exchange Debentures), in each case, to the extent
applicable, equal to the accumulated and unpaid dividends to the exchange date
and, if the Company so elects, cash in lieu of any Exchange Debenture that is in
a principal amount that is not an integral multiple of $1,000) will
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terminate. The person entitled to receive the Exchange Debentures issuable upon
such exchange will be treated for all purposes as the registered holder of such
Exchange Debentures. See "Description of the Exchange Debentures."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, an amount equal to the liquidation preference per share of
Exchangeable Preferred Stock held by such holder, plus accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
before any distribution is made on any Junior Stock, including the Class A
Preferred Stock, the Class B Preferred Stock and the common stock of the
Company. If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the amounts payable with respect to the Exchangeable
Preferred Stock and all other Parity Stock are not paid in full, the holders of
the Exchangeable Preferred Stock and the Parity Stock will share equally and
ratably in any distribution of assets of the Company in proportion to the full
liquidation preference and accumulated and unpaid dividends to which each is
entitled. After payment of the full amount of the liquidation preference and
accumulated and unpaid dividends to which they are entitled, the holders of
shares of Exchangeable Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company. However, neither the
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all the property or assets of the
Company nor the consolidation or merger of the Company with one or more entities
shall be deemed to be a liquidation, dissolution or winding-up of the Company.
The Amended Articles will not contain any provision requiring funds to be set
aside to protect the liquidation preference of the Exchangeable Preferred Stock,
although such liquidation preference will be substantially in excess of the par
value of such shares of Exchangeable Preferred Stock.
VOTING RIGHTS
The holders of Exchangeable Preferred Stock, except as otherwise required
under Illinois law or as provided in the Amended Articles, shall not be entitled
or permitted to vote on any matter required or permitted to be voted upon by the
stockholders of the Company.
The Amended Articles will provide that if (i) dividends on the Exchangeable
Preferred Stock are in arrears and unpaid for six or more dividend periods
(whether or not consecutive); (ii) the Company fails to redeem the Exchangeable
Preferred Stock on February 15, 2010, or fails to otherwise discharge any
redemption obligation with respect to the Exchangeable Preferred Stock; (iii) a
breach or violation of any of the provisions described under the captions "--
Change of Control" or "--Certain Covenants" occurs and the breach or
violation continues for a period of 30 days or more after the Company receives
notice thereof specifying the default from the holders of at least 25% of the
shares of Exchangeable Preferred Stock then outstanding; or (iv) the Company
fails to pay at final maturity (giving effect to any applicable grace period)
the principal amount of any Indebtedness of the Company or any Significant
Subsidiary or the final maturity of any such Indebtedness is accelerated because
of a default and the total amount of such Indebtedness unpaid or accelerated
exceeds $10 million and such nonpayment continues, or such acceleration is not
rescinded, within 10 days, then the holders of the outstanding shares of
Exchangeable Preferred Stock, voting together as a single class, will be
entitled to elect to serve on the Board of Directors the lesser of (x) two
additional members to the Board of Directors or (y) that number of directors
constituting 25% of the members of the Board of Directors, and the number of
members of the Board of Directors will be immediately and automatically
increased by such number. Such voting rights of the Exchangeable Preferred Stock
will continue until such time as, in the case of a dividend default, all
dividends in arrears on the Exchangeable Preferred Stock are paid in full in
cash (or, if prior to February 15, 2003, in shares of Exchangeable Preferred
Stock) and, in all other cases, any failure, breach or default giving rise to
such voting rights is remedied or waived by the holders of a majority of the
shares of Exchangeable Preferred Stock then outstanding, at which time the term
of any directors elected
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pursuant to the provisions of this paragraph (subject to the rights of holders
of any other preferred stock to elect such directors) shall terminate. Each such
event described in clauses (i) through (iv) above is referred to herein as a
"Voting Rights Triggering Event."
The Amended Articles will also provide that the Company will not authorize,
create or increase the authorized amount of any class of Senior Stock or Parity
Stock without the affirmative vote or consent of holders of a majority of the
shares of Exchangeable Preferred Stock then outstanding, voting or consenting,
as the case may be, as one class. In addition, the Amended Articles will provide
that the Company may not authorize the issuance of any additional shares of
Exchangeable Preferred Stock without the affirmative vote or consent of the
holders of a majority of the then outstanding shares of Exchangeable Preferred
Stock, voting or consenting, as the case may be, as one class. The Amended
Articles will also provide that, except as set forth above, (a) the creation,
authorization or issuance of any shares of Junior Stock, or (b) the increase or
decrease in the amount of authorized Capital Stock of any class, including any
preferred stock, shall not require the consent of the holders of Exchangeable
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Exchangeable Preferred
Stock.
CHANGE OF CONTROL
The Amended Articles will provide that upon the occurrence of a Change of
Control, the Company shall offer to repurchase the Exchangeable Preferred Stock
at a purchase price in cash equal to 101% of the liquidation preference thereof
plus accumulated and unpaid dividends, if any, to the date of purchase (subject
to the rights of holders of record on the relevant record date to receive
dividends due on the relevant dividend payment date), as described below.
A Change of Control will be deemed to have occurred upon the occurrence of any
of the following events (each a "Change of Control"):
(i) Prior to the earlier to occur of (A) the first public offering of
common stock of Parent or (B) the first public offering of common stock of the
Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of the
Voting Stock of the Company, whether as a result of issuance of securities of
the Parent or the Company, any merger, consolidation, liquidation or
dissolution of the Parent or the Company, any direct or indirect transfer of
securities by Parent or otherwise (for purposes of this clause (i) and clause
(ii) below, the Permitted Holders shall be deemed to beneficially own any
Voting Stock of a corporation (the "specified corporation") held by any
other corporation (the "parent corporation") so long as the Permitted
Holders beneficially own (as so defined), directly or indirectly, in the
aggregate a majority of the voting power of the Voting Stock of the parent
corporation);
(ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in clause (i) above, except that for purposes of
this clause (ii) such person shall be deemed to have "beneficial ownership"
of all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly
or indirectly, of more than 35% of the total voting power of the Voting Stock
of the Company; provided, however, that the Permitted Holders beneficially own
(as defined in clause (i) above), directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors (for the purposes of this clause (ii), such other person
shall be deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other person is the
beneficial owner (as defined in this clause (ii)), directly or indirectly, of
more than 35% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders beneficially own (as defined in clause
(i) above), directly or indirectly, in the aggregate a lesser percentage of
117
the voting power of the Voting Stock of such parent corporation and do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
corporation);
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with any
new directors whose election or appointment by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved
by a vote of 66 2/3% of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(iv) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale of all
or substantially all the assets of the Company to another Person (other than a
Person that is controlled by the Permitted Holders), and, in the case of any
such merger or consolidation, the securities of the Company that are
outstanding immediately prior to such transaction and which represent 100% of
the aggregate voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition to
any other consideration, securities of the surviving corporation that
represent immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving Person.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder stating: (1) that a Change of Control has occurred and
that such Holder has the right to require the Company to purchase such Holder's
Exchangeable Preferred Stock at a purchase price in cash equal to 101% of the
aggregate liquidation preference thereof plus accumulated and unpaid dividends,
if any, thereon to the date of purchase; (2) the circumstances and relevant
facts regarding such Change of Control (including information with respect to
pro forma historical income, cash flow and capitalization after giving effect to
such Change of Control); (3) the purchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with the covenant described
hereunder, that a Holder must follow in order to have its Exchangeable Preferred
Stock purchased.
In the event the Company is prohibited by applicable law or by the terms of
Indebtedness of the Company from making the offer described above or from
purchasing Exchangeable Preferred Stock pursuant to such offer then, within 60
days of the occurrence of the Change of Control, holders of a majority of the
Exchangeable Preferred Stock may designate an Independent Financial Advisor to
determine, within 20 days of such designation, in the opinion of such firm, the
appropriate dividend rate (the "reset rate") that the Exchangeable Preferred
Stock should bear so that, after the dividend rate on the shares of Exchangeable
Preferred Stock is reset to such reset rate, the Exchangeable Preferred Stock
would have a market value of 101% of the liquidation preference; provided,
however, that no such reset shall be required to be made if such Independent
Financial Advisor determines that the Exchangeable Preferred Stock, after giving
effect to the Change of Control, has a market value of 101% of the liquidation
preference thereof or greater. Upon the determination of the reset rate, the
Exchangeable Preferred Stock shall accrue and accumulate dividends at the reset
rate as of the date of occurrence of the Change of Control; provided, however,
that the reset rate shall in no event be less than 13 3/4% per annum (the
initial dividend rate on the Exchangeable Preferred Stock) or greater than 15%
per annum. The reasonable fees and expenses, including reasonable fees and
expenses of legal counsel, if any, and customary indemnification, of the above-
referenced Independent Financial Advisor shall be borne by the Company.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Exchangeable Preferred Stock pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable
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securities laws and regulations and shall not be deemed to have breached its
obligations under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between the
Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control, but that could increase the
amount of indebtedness outstanding at such time or otherwise affect the
Company's capital structure or credit ratings. Restrictions on the ability of
the Company and its Restricted Subsidiaries to incur additional indebtedness are
contained in the covenant described under "--Certain Covenants--Limitation on
Indebtedness." Such restrictions can only be waived with the consent of the
holders of a majority of the outstanding shares of the Exchangeable Preferred
Stock. Except for the limitations contained in such covenants, however, the
Amended Articles of Designation will not contain any covenants or provisions
that may afford holders of the Exchangeable Preferred Stock protection in the
event of a highly leveraged transaction.
Future indebtedness of the Company may contain, prohibitions on the occurrence
of certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the Company's
ability to pay cash to the holders of Exchangeable Preferred Stock following the
occurrence of a Change of Control may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any repurchases. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing
Exchangeable Preferred Stock, the Company could seek the consent of its lenders
to make such purchase, or could attempt to refinance the borrowings that contain
such prohibitions. If the Company does not obtain such consent or repay such
borrowings, the Company would be required to utilize the reset provision
described herein.
CERTAIN COVENANTS
The Amended Articles contains covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall not
permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any
Indebtedness, except that the Company may Incur Indebtedness if, on the date of
such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December
31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and (except as
specified below) any Restricted Subsidiary may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement; provided,
however, that the aggregate amount of such Indebtedness, when taken together
with all other Indebtedness Incurred pursuant to this clause (1) and then
outstanding, does not exceed the remainder of (x) $50 million minus (y) the
sum of all principal payments with respect to the permanent retirement of such
Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described under
"--Limitation on Sales of Assets and Subsidiary Stock;"
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
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(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or
clauses (7), (8) or (11) below; provided, however, that to the extent such
Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a
Restricted Subsidiary described in clause (11), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary;
(6) Hedging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company or any
Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof;
(7) Indebtedness, including Indebtedness of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Subsidiary was
acquired by the Company, Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network
assets (including real estate) (including acquisitions by way of capital lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory
or networks assets so acquired) by the Company or a Restricted Subsidiary
after the Issue Date for use in a Related Business;
(8) Indebtedness of the Company in an amount which, when taken together
with the amount of Indebtedness Incurred pursuant to this clause (8) and then
outstanding, does not exceed two times the Net Cash Proceeds received by the
Company after the Issue Date as a capital contribution from, or from the
issuance and sale of its Capital Stock (other than Disqualified Stock) to, a
Person that is not a Subsidiary of the Company, to the extent such Net Cash
Proceeds have not been used pursuant to paragraph (a) (3) (B) or paragraph (b)
(i) of the covenant described under "--Limitation on Restricted Payments" to
make a Restricted Payment; provided, however, that such Indebtedness does not
mature prior to the Stated Maturity of the Exchangeable Preferred Stock and
has an Average Life longer than the Average Life of the Exchangeable Preferred
Stock;
(9) Indebtedness in respect of performance, surety or appeal bonds or
similar obligations, in each case Incurred in the ordinary course of business
of the Company and its Restricted Subsidiaries and Indebtedness due and owing
to governmental entities in connection with any licenses and franchises issued
by a governmental entity and necessary or desirable to conduct a Related
Business;
(10) Guarantees of the Notes issued by any Restricted Subsidiary;
(11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company (other
than Indebtedness Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company); provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of additional Indebtedness pursuant to
paragraph (a) hereof; and
(12) Indebtedness Incurred in an aggregate amount which, when taken
together with the aggregate amount of all other Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (11) above or
paragraph (a)) does not exceed the greater of (a) $10 million and (b) an
amount equal to 5% of the Company's Consolidated Net Tangible Assets as of
such date.
(c) For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its
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sole discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
(d) For the purposes of determining the amount of Indebtedness outstanding at
any time, Guarantees with respect to Indebtedness otherwise included in the
determination of such amount shall not be included.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution (including any payment in connection with
any merger or consolidation involving the Company) on or in respect of, in the
case of the Company, any Junior Stock or, in the case of any Restricted
Subsidiary, any Capital Stock, in each case held by Persons other than the
Company or any Restricted Subsidiary or similar payment to the direct or
indirect holders (other than the Company or a Restricted Subsidiary) of any such
Stock (other than dividends or distributions payable solely in Junior Stock
(other than Disqualified Stock) and other than pro rata dividends or other
distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to
minority stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation)), (ii) purchase, redeem
or otherwise acquire or retire for value any Junior Stock of the Company or any
Capital Stock of any direct or indirect parent of the Company, or (iii) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, other acquisition, retirement or investment
being herein referred to as a "Restricted Payment") if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment: (1) any accrued and
payable dividends (including dividends for the then current dividend period)
with respect to the Exchangeable Preferred Stock or any Parity Stock have not
been paid in full and funds for such payment have not been set apart (or, if on
or prior to February 15, 2003, shares of Exchangeable Preferred Stock have not
been issued in payment of such dividends and are not held by the Transfer
Agent); (2) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "--Limitation on
Indebtedness;" or (3) the aggregate amount of such Restricted Payment and all
other Restricted Payments (the amount of any Restricted Payments, if other than
in cash, to be determined in good faith by the Board of Directors and to be
evidenced by a resolution of such Board set forth in an Officer's Certificate
delivered to the Transfer Agent) since the Issue Date would exceed the sum of,
without duplication:
(A) the remainder of (x) cumulative EBITDA during the period (taken as a
single accounting period) beginning on the first day of the fiscal quarter of
the Company beginning after the Issue Date and ending on the last day of the
most recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to the date
of such determination minus (y) the product of 1.5 times cumulative
Consolidated Interest Expense during such period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Junior Stock (in each case other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of
the Company convertible or exchangeable for Junior Stock (in each case other
than Disqualified Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company upon such
conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from payments of interest, dividends,
repayments of loans or advances or other transfers of assets, in each case to
the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary;
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provided, however, that the foregoing sum shall not exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any acquisition of Junior Stock made out of the proceeds of the
substantially concurrent sale of, or any acquisition of any Junior Stock of
the Company made by exchange for, other Junior Stock of the Company (in each
case other than Disqualified Stock and other than Junior Stock issued or sold
to a Subsidiary of the Company or an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for the benefit of
their employees); provided, however, that (A) such acquisition of Junior Stock
shall be excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above;
(ii) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend, all
accumulated dividends on the Exchangeable Preferred Stock have been paid in
full and no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments;
(iii) the purchase, redemption, retirement, repurchase or other acquisition
of shares of, or options to purchase shares of, Junior Stock (other than
Disqualified Stock) of the Company or Capital Stock (other than Preferred
Stock) of any of its Subsidiaries from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former directors
including their estates or beneficiaries under their estates), (a) upon their
death, disability, retirement or termination of employment or (b) otherwise
pursuant to the terms of agreements (including employment agreements) or plans
(or amendments thereto) approved by the Board of Directors under which such
individuals received such Capital Stock; provided, however, that the aggregate
amount of consideration paid for such purchases, redemptions, retirements,
repurchases and other acquisitions made pursuant to this clause (iv) shall not
exceed $500,000 in any calendar year; provided further, however, that such
purchases, redemptions, retirements, repurchases and other acquisitions
pursuant to this clause shall be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iv) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Junior Stock of the Company or Capital Stock
of any of its Restricted Subsidiaries to the extent necessary, as determined
in good faith by a majority of the disinterested members of the Board of
Directors, to prevent the loss or to secure the renewal or reinstatement of
any license or franchise held by the Company or any Restricted Subsidiary from
any governmental entity; provided, however, that such purchase or redemption
shall be included in the calculation of the amount of Restricted Payments
pursuant to clause (3) of paragraph (a) above; or
(v) any purchase or redemption of Junior Stock following a Change of
Control pursuant to an obligation in the instruments governing such Junior
Stock to purchase or redeem such Junior Stock as a result of such Change of
Control; provided, however, that no such purchase or redemption shall be
permitted until the Company has completely discharged its obligations
described under "--Change of Control" (including the purchase of all
Exchangeable Preferred Stock tendered for purchase by holders) arising as a
result of such Change of Control; provided further, however, that such
purchase or redemption shall be included in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any
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other distributions on its Capital Stock to the Company or a Restricted
Subsidiary, (b) pay any Indebtedness owed to the Company, (c) make any loans or
advances to the Company or (d) transfer any of its property or assets to the
Company, except:
(i) any encumbrance or restriction pursuant to the Indenture, the Amended
Articles or any other agreement in effect at or entered into on the Issue
Date;
(ii) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement or instrument
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement or instrument referred to in clause
(i) or (ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less favorable
to the holders of the Exchangeable Preferred Stock than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
predecessor agreements;
(iv) any such encumbrance or restriction consisting of customary non-
assignment or anti-alienation provisions in (a) leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder or subletting and (b) licenses or franchises to
the extent such provisions restrict the transfer of the license or franchise;
(v) in the case of clause (d) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such restrictions restrict the transfer of the property subject to
such security agreements or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(vii) any encumbrance or restriction contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was Incurred
if the Board of Directors determines in good faith that any such encumbrance
or restriction will not materially affect the Company's ability to pay the
mandatory redemption price and dividends on the Exchangeable Preferred Stock
when due and such encumbrance or restriction by its terms expressly permits
such Restricted Subsidiary, (A) in the absence of a payment default in respect
of such Indebtedness or other agreement, to make cash payments to the Company
(in any form) sufficient to pay when due all amounts of the mandatory
redemption price and dividends on the Exchangeable Preferred Stock and (B)
following the occurrence and during the continuance of a payment default in
respect of such Indebtedness or other agreement, to resume making cash
payments to the Company (in any form) sufficient to pay when due all amounts
of the mandatory redemption price and dividends on the Exchangeable Preferred
Stock upon the earlier of the cure of such payment default and the lapse of
179 consecutive days following the date when such encumbrance or restriction
became operative to prohibit or limit such Restricted Subsidiary from making
such payments to the Company; provided, however, that no Restricted Subsidiary
shall be affected by the operation of such encumbrances or restrictions
following the occurrence of a payment default on more than one occasion in any
consecutive 360-day period.
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Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be)
(A) first, to the extent the Company elects in its sole discretion (or is
required by the terms of any Indebtedness), to prepay, repay, redeem or
purchase Indebtedness (other than any Disqualified Stock) of the Company or a
Restricted Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within one year from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company elects in
its sole discretion, to acquire Additional Assets within one year after the
receipt of such Net Available Cash;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Exchangeable Preferred Stock (and to holders of Parity Stock
designated by the Company) to purchase Exchangeable Preferred Stock (and such
Parity Stock) pursuant to and subject to the conditions contained in the
Amended Articles; and
(D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for the general
corporate and working capital purposes of the Company and its Restricted
Subsidiaries;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) above, the Company or such Restricted
Subsidiary shall permanently retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions occurring after the Issue Date which are not applied
in accordance with this paragraph exceeds $5 million. Pending application of Net
Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or cash
equivalents: (x) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition, (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash; and (z) Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of
Exchangeable Preferred Stock (and Parity Stock) pursuant to clause (a)(ii)(C)
above, the Company will be required to purchase Exchangeable Preferred Stock
tendered pursuant to an offer by the Company for the Exchangeable Preferred
Stock (and Parity Stock) at a purchase price of 100% of their liquidation
preference plus accrued but unpaid dividends, if any, to the date of purchase
(or, in respect of such Parity Stock, such lesser price, if any, as may be
provided for by the terms of such Parity Stock) in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Amended Articles. If the aggregate purchase price of Exchangeable Preferred
Stock (and any Parity Stock) tendered pursuant to such offer is less than the
Net Available Cash allotted to the purchase thereof, the Company will be
required to apply the remaining Net Available Cash in accordance with clause
(a)(ii)(D) above. The
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Company shall not be required to make such an offer to purchase Exchangeable
Preferred Stock (and Parity Stock) pursuant to this covenant if the Net
Available Cash available therefor is less than $5.0 million (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required by this covenant or by the covenant in the Exchange Indenture described
under "Description of the Exchange Debentures--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Exchangeable Preferred Stock
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, license, lease or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") unless the
terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set
forth in writing and (ii) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction and
(3) if such Affiliate Transaction involves an amount in excess of $5.0 million,
have been determined by a nationally recognized investment banking firm or other
qualified appraiser under the relevant circumstances to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Permitted Investment or any Restricted Payment permitted to be paid pursuant to
the covenant described under "--Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $500,000 in the aggregate outstanding at any one time, (v) the
payment of reasonable fees to directors of the Company and its Restricted
Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries; provided, however,
that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange
Act) of 5% or more of the Capital Stock of the Company holds, directly or
indirectly, any Investments in any such Restricted Subsidiary (other than
indirectly through the Company), (vii) the issuance or sale of any Capital Stock
(other than Disqualified Stock) of the Company and (viii) any transaction
pursuant to an agreement or arrangement in effect on the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Certain Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock (other than Qualified Preferred Stock) of an Existing Restricted
Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
(other than Qualified Preferred Stock), except (i) to the Company or a Wholly
Owned Subsidiary, (ii) if, immediately after giving effect to such issuance,
sale or other disposition, neither the Company nor any of its Subsidiaries own
any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, such Existing
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect thereto would have been
permitted to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale or other
disposition, (iv) to directors of directors' qualifying shares of common stock
of any Restricted Subsidiary, to the extent mandated by applicable law, or (v)
the issuance or sale of Capital
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Stock of a Restricted Subsidiary that has a class of equity security registered
under Section 12 of the Exchange Act pursuant to an employee stock option plan
approved by the Board of Directors.
Limitation on Market Swaps. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any Market Swaps, unless:
(i) at the time of entering into the agreement to swap markets and
immediately after giving effect to the proposed Market Swap, no Default shall
have occurred and be continuing;
(ii) the respective fair market values of the markets and other assets (to
be determined in good faith by the Board of Directors and to be evidenced by a
resolution of such Board set forth in an Officer's Certificate delivered to
the Transfer Agent) being purchased and sold by the Company or any of its
Restricted Subsidiaries are substantially the same at the time of entering
into the agreement to swap markets; and
(iii) the cash payments, if any, received by the Company or such Restricted
Subsidiary in connection with such Market Swap are treated as Net Available
Cash received from an Asset Disposition.
Limitation on Lines of Business. The Company shall not, and shall not permit
any Restricted Subsidiary to, engage in any trade or business other than a
Related Business.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume all the
obligations of the Company under the Exchangeable Preferred Stock and the
Amended Articles;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing,
(iii) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "--Limitation on
Indebtedness;"
(iv) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less than
the Consolidated Net Worth of the Company immediately prior to such
transaction;
(v) the Company shall have delivered to the Transfer Agent an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer comply with the Amended Articles; and
(vi) the Company shall have delivered to the Transfer Agent an Opinion of
Counsel to the effect that the holders of the Exchangeable Preferred Stock
will not recognize income, gain or loss for Federal income tax purposes as a
result of such transaction and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such transaction had not occurred.
The Successor Company shall be the successor to the Company and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under the Amended Articles, but the predecessor
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Company in the case of a conveyance, transfer or lease shall not be released
from the obligation to pay the liquidation preference of, the mandatory
redemption price of and dividends on the Exchangeable Preferred Stock.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the SEC and provide the holders of the Exchangeable Preferred
Stock with such annual reports and such information, documents and other reports
as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to
a U.S. corporation subject to such Sections, such information, documents and
other reports to be so filed and provided at the times specified for the filing
of such information, documents and reports under such Sections if it were
subject thereto (unless the SEC will not accept such a filing, in which case the
Company shall provide such documents to the Transfer Agent). In addition, for so
long as any of the Exchangeable Preferred Stock is outstanding, the Company will
make available to any prospective purchaser of the Exchangeable Preferred Stock
or beneficial owner thereof (upon written request to the Company) in connection
with any sales thereof the information required by Rule144A(d) (4) under the
Securities Act.
DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the Exchange
Indenture, to be dated as of February 15, 1998 (the "Exchange Indenture"),
between the Company and IBJ Schroder Bank and Trust Company, as Trustee (the
"Trustee"). The following is a summary of certain provisions of the Exchange
Indenture and the Exchange Debentures. A copy of the Exchange Indenture and the
form of Exchange Debentures are available upon request to the Company at the
address set forth under "Available Information." The following summary of
certain provisions of the Exchange Indenture does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Exchange Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended. The terms of the Notes limit the Company's ability to issue the
Exchange Debentures. For definition of certain capitalized terms used in the
following summary, see "Description of the New Notes--Certain Definitions."
The Exchange Debentures will be unsecured subordinated obligations of the
Company, limited in aggregate principal amount to the sum of the liquidation
preference of the Exchangeable Preferred Stock, plus, without duplication,
accumulated and unpaid dividends on the Exchange Date of the Exchangeable
Preferred Stock (plus any additional Exchange Debentures issued in lieu of cash
interest as described herein). The Exchange Debentures will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple of $1,000 (other than as described in "--Exchangeable
Preferred Stock--Exchange" or with respect to additional Exchange Debentures
issued in lieu of cash interest as described herein). The Exchange Debentures
will be subordinated to all existing and future senior and senior subordinated
debt of the Company.
Principal of, premium, if any, and interest on the Exchange Debentures will be
payable, and the Exchange Debentures may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar. The
Trustee will initially act as Paying Agent and Registrar. The Company may change
any Paying Agent and Registrar without prior notice to holders of the Exchange
Debentures. Holders of the Exchange Debentures must surrender Exchange
Debentures to the Paying Agent to collect principal payments.
The Exchange Debentures will mature on February 15, 2010. Each Exchange
Debenture will bear interest at the rate of 13 3/4% per annum from the most
recent interest payment date to which interest has been paid or provided for or,
if no interest has been paid or provided for, from the Exchange Date. Interest
will be payable semiannually in cash (or, on or prior to February 15, 2003, in
additional Exchange Debentures, at the option of the Company) in arrears on each
February 15 and August 15, commencing with the first such date after the
Exchange Date. Interest on the Exchange Debentures will be computed on the basis
of a 360-day year comprised of twelve 30-day months and the actual number of
days elapsed.
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OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Exchange Debentures will
not be redeemable at the option of the Company prior to February 15, 2003.
Thereafter, the Exchange Debentures will be redeemable, at the Company's option,
in whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in percentages
of principal amount), plus accrued interest to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period commencing on February 15 of the years set forth below:
REDEMPTION
----------
PERIOD PRICE
- -------- -----
2003....................... 106.8750%
2004....................... 104.5833
2005....................... 102.2917
2006 and thereafter........ 100.0000
In addition, at any time and from time to time prior to February 15, 2001, the
Company may redeem the Exchange Debentures, in whole, but not in part, with the
proceeds of an Equity Offering at 113 3/4% of the principal amount thereof,
plus accrued and unpaid interest to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date).
RANKING
The indebtedness evidenced by the Exchange Debentures will be subordinated,
unsecured obligations of the Company. The payment of the principal of, premium
(if any) and interest on the Exchange Debentures is subordinate in right of
payment, as set forth in the Exchange Indenture, to the prior payment in full of
all Senior Indebtedness (including senior subordinated indebtedness) of the
Company, whether outstanding on the Issue Date or thereafter incurred.
As of December 31, 1997, after giving effect to the Private Placement and the
application of the proceeds thereof, the outstanding Senior Indebtedness of the
Company would have been approximately $200.2 million. Although the Exchange
Indenture contains limitations on the amount of additional Indebtedness that the
Company may incur, under certain circumstances the amount of such Indebtedness
could be substantial and, in any case, such Indebtedness may be Senior
Indebtedness. See "--Certain Covenants--Limitation on Indebtedness."
Substantially all the operations of the Company are or will be conducted
through one or more of its subsidiaries. The Company currently has three wholly-
owned subsidiaries: 21st Century Cable TV of Illinois, Inc.; 21st Century
Telecom of Illinois, Inc.; and 21st Century Telecom Group of Michigan, Inc.
Moreover, 21st Century Telecom Group of Michigan, Inc. has two wholly-owned
subidiaries: 21st Century Cable TV of Grand Rapids, Inc. and 21st Century
Telecom of Michigan, Inc. The Company intends to transfer substantially all its
assets to newly formed Restricted Subsidiaries, and thereafter the Company will
be a holding company with no assets other than the capital stock of its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Exchange Debentures, even if such obligations do not
constitute Senior Indebtedness. The Exchange Debentures, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of the Company. Although the Exchange
Indenture limits the incurrence of Indebtedness and preferred stock of certain
of the Company's subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Exchange Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness or Preferred Stock under the Exchange Indenture. See "--
Certain Covenants--Limitation on Indebtedness."
128
Only Indebtedness of the Company that is Senior Indebtedness (including senior
subordinated indebtedness) will rank senior to the Exchange Debentures in
accordance with the provisions of the Exchange Indenture. The Exchange
Debentures will in all respects rank pari passu with all other Subordinated
Indebtedness of the Company.
The Company may not pay principal of, premium (if any) or interest on, the
Exchange Debentures or make any deposit pursuant to the provisions described
under "Defeasance" below and may not repurchase, redeem or otherwise retire
any Exchange Debentures (collectively, "pay the Exchange Debentures") if (i)
any Designated Senior Indebtedness is not paid when due or (ii) any other
default on Designated Senior Indebtedness occurs and the maturity of such
Designated Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Designated Senior Indebtedness has been
paid in full. However, the Company may pay the Exchange Debentures without
regard to the foregoing if the Company and the Trustee receive written notice
approving such payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth in clause (i)
or (ii) of the immediately preceding sentence has occurred and is continuing.
During the continuance of any default (other than a default described in clause
(i) or (ii) of the second preceding sentence) with respect to any Designated
Senior Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Exchange Debentures for a period (a "Payment Blockage
Period") commencing upon the receipt by the Trustee (with a copy to the
Company) of written notice (a "Blockage Notice") of such default from the
Representative of the holders of such Designated Senior Indebtedness specifying
an election to effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by written notice
to the Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Designated Senior Indebtedness has been
repaid in full). Notwithstanding the provisions described in the immediately
preceding sentence (but subject to the provisions described in the first
sentence of this paragraph), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness, the Company may resume payments on the
Exchange Debentures after the end of such Payment Blockage Period. The Exchange
Debentures shall not be subject to more than one Payment Blockage Period in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the Company upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of such Senior Indebtedness before the
holders of Exchange Debentures are entitled to receive any payment, and until
the Senior Indebtedness is paid in full, any payment or distribution to which
holders of Exchange Debentures would be entitled but for the subordination
provisions of the Exchange Indenture will be made to holders of such Senior
Indebtedness as their interests may appear. If a distribution is made to holders
of Exchange Debentures that, due to the subordination provisions, should not
have been made to them, such holders are required to hold it in trust for the
holders of Senior Indebtedness and pay it over to them as their interests may
appear.
If payment of the Exchange Debentures is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the holders of
Designated Senior Indebtedness or the Representative of such holders of the
acceleration.
By reason of the subordination provisions contained in the Exchange Indenture,
in the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness of the Company may recover more, ratably, than the holders of
Exchange Debentures, and creditors of the Company who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than holders of Exchange Debentures.
129
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Exchange
Debentures pursuant to the provisions described under "--Defeasance."
CHANGE OF CONTROL
The Exchange Indenture will provide that upon the occurrence of a Change of
Control (as defined under "Description of the New Exchangeable Preferred Stock-
- -Change of Control"), each holder of Exchange Debentures shall have the right
to require that the Company repurchase such holder's Exchange Debentures at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date).
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Exchange Debentures at a purchase price in cash equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase (subject to the right of holders of record on the
relevant record date to receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to such Change of Control); (3) the
purchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with the covenant described hereunder, that a Holder must
follow in order to have its Exchange Debentures purchased.
The Company shall comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Exchange Debentures pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between the
Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Exchange Indenture, but
that could increase the amount of indebtedness outstanding at such time or
otherwise affect the Company's capital structure or credit ratings. Restrictions
on the ability of the Company and its Restricted Subsidiaries to incur
additional Indebtedness are contained in the covenants described under "--
Certain Covenants--Limitation on Indebtedness." Such restrictions can only be
waived with the consent of the holders of a majority in principal amount of the
Exchange Debentures then outstanding. Except for the limitations contained in
such covenants, however, the Exchange Indenture will not contain any covenants
or provisions that may afford holders of the Exchange Debentures protection in
the event of a highly leveraged transaction.
Future indebtedness of the Company may contain, prohibitions on the occurrence
of certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require the Company to repurchase the Exchange
Debentures could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Exchange
Debentures following the occurrence of a Change of Control may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
130
In the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Exchange Debentures, the Company could seek the consent of its
lenders to make such purchase, or could attempt to refinance the borrowings that
contain such prohibitions. If the Company does not obtain such consent or repay
such borrowings, the Company will remain prohibited from purchasing Exchange
Debentures. The provisions under the Exchange Indenture relative to the
Company's obligation to make an offer to repurchase the Exchange Debentures as a
result of a Change of Control may be waived or modified with the written consent
of the holders of a majority in principal amount of the outstanding Exchange
Debentures.
CERTAIN COVENANTS
The Exchange Indenture contains covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall not
permit any of its Restricted Subsidiaries to Incur, directly or indirectly, any
Indebtedness, except that the Company may Incur Indebtedness if, on the date of
such Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
would be less than 6.0 to 1.0, for Indebtedness Incurred prior to or on December
31, 1999, and less than 5.0 to 1.0 for Indebtedness Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and (except as
specified below) any Restricted Subsidiary may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Agreement; provided,
however, that the aggregate amount of such Indebtedness, when taken together
with all other Indebtedness Incurred pursuant to this clause (1) and then
outstanding, does not exceed the remainder of (x) $50 million minus (y) the
sum of all principal payments with respect to the permanent retirement of such
Indebtedness pursuant to paragraph (a) (ii) (A) of the covenant described
under "--Limitation on Sales of Assets and Subsidiary Stock;"
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(3) the Notes and the Exchange Debentures (including any Exchange
Debentures issued in lieu of cash interest payments with respect to the
Exchange Debentures);
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5) or
clauses (7), (8) or (11) below; provided, however, that to the extent such
Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a
Restricted Subsidiary described in clause (11), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary;
(6) Hedging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company or any
Restricted Subsidiary pursuant to paragraphs (a) or (b) hereof;
(7) Indebtedness, including Indebtedness of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Subsidiary was
acquired by the Company, Incurred to finance the cost (including the cost of
design, development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network
assets (including real estate) (including acquisitions by way of
131
capital lease and acquisitions of the Capital Stock of a Person that becomes a
Restricted Subsidiary to the extent of the fair market value of the equipment,
inventory or networks assets so acquired) by the Company or a Restricted
Subsidiary after the Issue Date for use in a Related Business;
(8) Indebtedness of the Company in an amount which, when taken together
with the amount of Indebtedness Incurred pursuant to this clause (8) and then
outstanding, does not exceed two times the Net Cash Proceeds received by the
Company after the Issue Date as a capital contribution from, or from the
issuance and sale of its Capital Stock (other than Disqualified Stock) to, a
Person that is not a Subsidiary of the Company, to the extent such Net Cash
Proceeds have not been used pursuant to paragraph (a) (3) (B) or paragraph (b)
(i) of the covenant described under "--Limitation on Restricted Payments" to
make a Restricted Payment; provided, however, that such Indebtedness does not
mature prior to the Stated Maturity of the Exchange Debentures and has an
Average Life longer than the Average Life of the Exchange Debentures;
(9) Indebtedness in respect of performance, surety or appeal bonds or
similar obligations, in each case Incurred in the ordinary course of business
of the Company and its Restricted Subsidiaries and Indebtedness due and owing
to governmental entities in connection with any licenses and franchises issued
by a governmental entity and necessary or desirable to conduct a Related
Business;
(10) Guarantees of the Notes issued by any Restricted Subsidiary;
(11) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company (other
than Indebtedness Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company); provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of additional Indebtedness pursuant to
paragraph (a) hereof; and
(12) Indebtedness Incurred in an aggregate amount which, when taken
together with the aggregate amount of all other Indebtedness of the Company
and its Restricted Subsidiaries outstanding on the date of such Incurrence
(other than Indebtedness permitted by clauses (1) through (11) above or
paragraph (a)) does not exceed the greater of (a) $10 million and (b) an
amount equal to 5% of the Company's Consolidated Net Tangible Assets as of
such date.
(c) Notwithstanding the foregoing, the Company shall not Incur (i) any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Exchange Debentures to at least
the same extent as such Subordinated Obligations or (ii) any Secured
Indebtedness that is not Senior Indebtedness unless contemporaneously therewith
effective provision is made to secure the Exchange Debentures equally and
ratably with such Secured Indebtedness for so long as such Secured Indebtedness
is secured by a Lien.
(d) For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
(e) For the purposes of determining the amount of Indebtedness outstanding at
any time, Guarantees with respect to Indebtedness otherwise included in the
determination of such amount shall not be included.
Limitation on Restricted Payments. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the
132
Company is not able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "--Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments (the amount of any Restricted Payment, if other than in cash, to be
determined in good faith by the Board of Directors and to be evidenced by a
resolution of such Board set forth in an Officer's Certificate delivered to the
Trustee) since the Issue Date would exceed the sum of, without duplication:
(A) the remainder of (x) cumulative EBITDA during the period (taken as a
single accounting period) beginning on the first day of the fiscal quarter of
the Company beginning after the Issue Date and ending on the last day of the
most recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to the date
of such determination minus (y) the product of 1.5 times cumulative
Consolidated Interest Expense during such period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a Subsidiary
of the Company and other than an issuance or sale to an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the fair
value of any other property, distributed by the Company upon such conversion
or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from payments of interest, dividends,
repayments of loans or advances or other transfers of assets, in each case to
the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, and
(ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any acquisition of any Capital Stock of the Company or any Restricted
Subsidiary or any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made out of
the proceeds of the substantially concurrent sale of, or made by exchange for,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however, that (A)
such acquisition of Capital Stock or of Subordinated Obligations shall be
excluded in the calculation of the amount of Restricted Payments pursuant to
clause (3) of paragraph (a) above and (B) the Net Cash Proceeds from such sale
shall be excluded from the calculation of amounts under clause (3) (B) of
paragraph(a) above;
(ii) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations in whole or in part
(including premium, if any, and accrued and unpaid interest) made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of the Company which is permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness;" provided, however,
that such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
133
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend, no
other Default shall have occurred and be continuing (or result therefrom);
provided further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above;
(iv) the purchase, redemption, retirement, repurchase or other acquisition
of shares of, or options to purchase shares of, Capital Stock (other than
Disqualified Stock) of the Company or Capital Stock (other than Preferred
Stock) of any of its Subsidiaries from employees, former employees, directors
or former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former directors
including their estates or beneficiaries under their estates), (a) upon their
death, disability, retirement or termination of employment or (b) otherwise
pursuant to the terms of agreements (including employment agreements) or plans
(or amendments thereto) approved by the Board of Directors under which such
individuals received such Capital Stock; provided, however, that the aggregate
amount of consideration paid for such purchases, redemptions, retirements,
repurchases and other acquisitions made pursuant to this clause (iv) shall not
exceed $500,000 in any calendar year; provided further, however, that such
purchases, redemptions, retirements, repurchases and other acquisitions
pursuant to this clause shall be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above;
(v) any purchase or redemption of Subordinated Obligations in whole or in
part (including premium, if any, and accrued and unpaid interest) from Net
Available Cash to the extent permitted by the covenant described under "--
Limitation on Sales of Assets and Subsidiary Stock;" provided, however, that
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(vi) the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company or any of its
Restricted Subsidiaries to the extent necessary, as determined in good faith
by a majority of the disinterested members of the Board of Directors, to
prevent the loss or to secure the renewal or reinstatement of any license or
franchise held by the Company or any Restricted Subsidiary from any
governmental entity; provided, however, that such purchase or redemption shall
be included in the calculation of the amount of Restricted Payments pursuant
to clause (3) of paragraph (a) above; or
(vii) any purchase or redemption of Subordinated Obligations or Preferred
Stock following a Change of Control pursuant to an obligation in the
instruments governing such Subordinated Obligations or Preferred Stock to
purchase or redeem such Subordinated Obligations or Preferred Stock as a
result of such Change of Control; provided, however, that no such purchase or
redemption shall be permitted until the Company has completely discharged its
obligations described under "--Change of Control" (including the purchase of
all Exchange Debentures tendered for purchase by holders) arising as a result
of such Change of Control; provided further, however, that such purchase or
redemption shall be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary, (b) pay any Indebtedness owed to the
Company, (c) make any loans or advances to the Company or (d) transfer any of
its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to the Indenture, the Exchange
Indenture or any other agreement in effect at or entered into on the Issue
Date;
134
(ii) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement or instrument
referred to in clause (i) or (ii) of this covenant or this clause (iii) or
contained in any amendment to an agreement or instrument referred to in clause
(i) or (ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are no less favorable
to the Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(iv) any such encumbrance or restriction consisting of customary non-
assignment or anti-alienation provisions in (a) leases governing leasehold
interests to the extent such provisions restrict the transfer of the lease or
the property leased thereunder or subletting and (b) licenses or franchises to
the extent such provisions restrict the transfer of the license or franchise;
(v) in the case of clause (d) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such restrictions restrict the transfer of the property subject to
such security agreements or mortgages;
(vi) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(vii) any encumbrance or restriction contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was Incurred
if the Board of Directors determines in good faith that any such encumbrance
or restriction will not materially affect the Company's ability to pay
principal or interest on the Exchange Debentures when due and such encumbrance
or restriction by its terms expressly permits such Restricted Subsidiary, (A)
in the absence of a payment default in respect of such Indebtedness or other
agreement, to make cash payments to the Company (in any form) sufficient to
pay when due all amounts of principal and interest on the Exchange Debentures
and (B) following the occurrence and during the continuance of a payment
default in respect of such Indebtedness or other agreement, to resume making
cash payments to the Company (in any form) sufficient to pay when due all
amounts of principal and interest on the Exchange Debentures upon the earlier
of the cure of such payment default and the lapse of 179 consecutive days
following the date when such encumbrance or restriction became operative to
prohibit or limit such Restricted Subsidiary from making such payments to the
Company; provided, however, that no restricted Subsidiary shall be affected by
the operation of any such encumbrances or restrictions following the
occurrence of a payment default on more than one occasion in any consecutive
360-day period.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be)
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(A) first, to the extent the Company elects in its sole discretion (or is
required by the terms of any Indebtedness), to prepay, repay, redeem or
purchase Indebtedness (other than any Disqualified Stock) of the Company or a
Restricted Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within one year from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company elects in
its sole discretion, to acquire Additional Assets within one year after the
receipt of such Net Available Cash;
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Exchange Debentures to purchase Exchange Debentures pursuant to
and subject to the conditions contained in the Exchange Indenture; and
(D) fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for the general
corporate and working capital purposes of the Company and its Restricted
Subsidiaries;
provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) above, the Company or such Restricted
Subsidiary shall permanently retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions of this paragraph, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this paragraph except to the extent that the aggregate Net Available Cash
from all Asset Dispositions occurring after the Issue Date which are not applied
in accordance with this paragraph or with the covenant in the Amended Articles
described under "Description of Exchangeable Preferred Stock--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" exceeds $5
million. Pending application of Net Available Cash pursuant to this covenant,
such Net Available Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash or cash
equivalents: (x) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary from all
liability on such Indebtedness in connection with such Asset Disposition, (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash; and (z) Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires the purchase of the
Exchange Debentures pursuant to clause (a) (ii) (C) above, the Company will be
required to purchase Exchange Debentures tendered pursuant to an offer by the
Company for the Exchange Debentures at a purchase price of 100% of their
principal amount plus accrued but unpaid interest, if any, to the date of
purchase in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Exchange Indenture. If the aggregate purchase
price of Exchange Debentures tendered pursuant to such offer is less than the
Net Available Cash allotted to the purchase thereof, the Company will be
required to apply the remaining Net Available Cash in accordance with clause (a)
(ii) (D) above. The Company shall not be required to make such an offer to
purchase Exchange Debentures pursuant to this covenant if the Net Available Cash
available therefor (including any Net Available Cash that was not required to be
applied to make on an offer under the corresponding provisions of the Amended
Articles) is less than $5.0 million (which lesser amount shall be carried
forward for purposes of determining whether such an offer is required with
respect to the Net Available Cash from any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Exchange Debentures pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict
136
with provisions of this covenant, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, license, lease or exchange of any
property, employee compensation arrangements or the rendering of any service)
with any Affiliate of the Company (an "Affiliate Transaction") unless the
terms thereof (1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate, (2) if such
Affiliate Transaction involves an amount in excess of $1.0 million, (i) are set
forth in writing and (ii) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction and
(3) if such Affiliate Transaction involves as amount in excess of $5.0 million,
have been determined by a nationally recognized investment banking firm or other
qualified appraiser under the relevant circumstances to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any
Permitted Investment or any Restricted Payment permitted to be paid pursuant to
the covenant described under "--Limitation on Restricted Payments," (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $500,000 in the aggregate outstanding at any one time, (v) the
payment of reasonable fees to directors of the Company and its Restricted
Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a
Restricted Subsidiary or between Restricted Subsidiaries; provided, however,
that no beneficial owner (as defined in Rule 13d-1 and 13d-5 of the Exchange
Act) of 5% or more of the Capital Stock of the Company holds, directly or
indirectly, any Investments in any such Restricted Subsidiary (other than
indirectly through the Company), (vii) the issuance or sale of any Capital Stock
(other than Disqualified Stock) of the Company and (viii) any transaction
pursuant to an agreement or arrangement in effect on the Issue Date.
Limitation on the Sale or Issuance of Capital Stock of Certain Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock (other than Qualified Preferred Stock) of an Existing Restricted
Subsidiary, and shall not permit any Existing Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock
(other than Qualified Preferred Stock), except (i) to the Company or a Wholly
Owned Subsidiary, (ii) if, immediately after giving effect to such issuance,
sale or other disposition, neither the Company nor any of its Subsidiaries own
any Capital Stock of such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, such Existing
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such Person remaining after giving effect thereto would have been
permitted to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of such issuance, sale or other
disposition, (iv) to directors of directors' qualifying shares of common stock
of any Restricted Subsidiary, to the extent mandated by applicable law, or (v)
the issuance or sale of Capital Stock of a Restricted Subsidiary that has a
class of equity security registered under Section 12 of the Exchange Act
pursuant to an employee stock option plan approved by the Board of Directors.
Limitation on Market Swaps. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any Market Swaps, unless:
(i) at the time of entering into the agreement to swap markets and
immediately after giving effect to the proposed Market Swap, no Default shall
have occurred and be continuing;
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(ii) the respective fair market values of the markets and other assets (to
be determined in good faith by the Board of Directors and to be evidenced by a
resolution of such Board set forth in an Officer's Certificate delivered to
the Trustee) being purchased and sold by the Company or any of its Restricted
Subsidiaries are substantially the same at the time of entering into the
agreement to swap markets; and
(iii) the cash payments, if any, received by the Company or such Restricted
Subsidiary in connection with such Market Swap are treated as Net Available
Cash received from an Asset Disposition.
Limitation on Lines of Business. The Company shall not, and shall not permit
any Restricted Subsidiary to, engage in any trade or business other than a
Related Business.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Exchange Debentures and the Exchange Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing,
(iii) immediately after giving effect to such transaction, the Successor
Company would be able to Incur an additional $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under
"--Limitation on Indebtedness;"
(iv) immediately after giving effect to such transaction, the Successor
Company shall have Consolidated Net Worth in an amount that is not less than
the Consolidated Net Worth of the Company immediately prior to such
transaction;
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Exchange Indenture; and
(vi) the Company shall have delivered to the Trustee an Opinion of Counsel
to the effect that the holders of the Notes will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction and will
be subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.
The Successor Company shall be the successor to the Company and shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under the Exchange Indenture, but the predecessor Company in the case of
a conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Exchange Debentures.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the SEC and provide the Trustee and holders of the Exchange
Debentures with such annual reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such
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information, documents and reports under such Sections if it were subject
thereto (unless the SEC will not accept such a filing, in which case the Company
shall provide such documents to the Trustee). In addition, for so long as any of
the Exchange Debentures are outstanding, the Company will make available to any
prospective purchaser of the Exchange Debentures or beneficial owner thereof
(upon written request to the Company) in connection with any sales thereof the
information required by Rule 144A(d) (4) under the Securities Act.
DEFAULTS
An Event of Default is defined in the Exchange Indenture as (i) a default in
the payment of interest on the Exchange Debentures when due and continued for 30
days, (ii) a default in the payment of principal of any Exchange Debenture when
due at its Stated Maturity, upon optional redemption, upon required repurchase,
upon declaration or otherwise, (iii) the failure by the Company to comply with
its obligations under "--Certain Covenants--Merger and Consolidation" above,
(iv) the failure by the Company to comply for 30 days after the notice described
below with any of its obligations in the covenants described above under
"Change of Control" (other than a failure to purchase Exchange Debentures) or
under "--Certain Covenants" under "--Limitation on Indebtedness," "--
Limitation on Restricted Payments," "--Limitation on Restrictions on
Distributions from Restricted Subsidiaries," "--Limitation on Sales of Assets
and Subsidiary Stock" (other than a failure to purchase Exchange Debentures),
"--Limitation on Affiliate Transactions," "--Limitation on the Sale or
Issuance of Capital Stock of Certain Restricted Subsidiaries," "--Limitation
on Market Swaps," "--Limitation on Lines of Business" or "--SEC Reports,"
(v) the failure by the Company to comply for 60 days after notice with its other
agreements contained in the Exchange Indenture, (vi) Indebtedness of the Company
or any Significant Subsidiary is not paid within any applicable grace period
after final maturity or is accelerated by the holders thereof because of a
default and the total amount of such Indebtedness unpaid or accelerated exceeds
$10 million and such nonpayment continues, or such acceleration is not
rescinded, within 10 days after notice (the "cross acceleration provision"),
(vii) certain events of bankruptcy, insolvency or reorganization of the Company
or a Significant Subsidiary (the "bankruptcy provisions") or (viii) any
judgment or decree (not covered by insurance or indemnification by a person
other than the Company or a Restricted Subsidiary, which indemnity party is
solvent and has acknowledged responsibility) for the payment of money in excess
of $10 million is entered against the Company or a Significant Subsidiary,
remains outstanding for a period of 60 days following such judgment and is not
discharged, waived, bonded over or stayed within 10 days after notice (the
"judgment default provision"). However, a default under clauses (iv), (v),
(vi) and (viii) will not constitute an Event of Default until the Trustee or the
holders of 25% in principal amount of the outstanding Exchange Debentures notify
the Company of the default and the Company does not cure such default within the
time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the outstanding Exchange Debentures may
declare the principal of and accrued but unpaid interest on all the Exchange
Debentures to be due and payable. Upon such a declaration, such principal and
interest shall be due and payable immediately. If an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company
occurs and is continuing, the principal of and interest on all the Exchange
Debentures will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders of the
Exchange Debentures. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Exchange Debentures may rescind any such
acceleration with respect to the Exchange Debentures and its consequences.
Subject to the provisions of the Exchange Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Exchange Indenture at the request or direction of any of the holders of the
Exchange Debentures unless such holders have offered to the Trustee reasonable
indemnity or security against any loss, liability or expense. Except to enforce
the right to receive payment of principal, premium (if any) or interest when
due, no holder of an Exchange Debenture may pursue any remedy with respect to
the Exchange Indenture or the Exchange Debentures unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Exchange
Debentures have requested the Trustee to pursue the remedy, (iii) such holders
have offered the Trustee reasonable security or indemnity
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against any loss, liability or expense, (iv) the Trustee has not complied with
such request within 60 days after the receipt thereof and the offer of security
or indemnity and (v) the holders of a majority in principal amount of the
outstanding Exchange Debentures have not given the Trustee a direction
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Exchange Debentures are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Exchange
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of an Exchange Debenture or that would involve the Trustee in
personal liability.
The Exchange Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Exchange
Debentures notice of the Default within 90 days after it occurs. Except in the
case of a Default in the payment of principal of or interest on any Exchange
Debenture, the Trustee may withhold notice if and so long as a committee of its
trust officers determines that withholding notice is not opposed to the interest
of the holders of the Exchange Debentures. In addition, the Company is required
to deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after the Company becomes aware of the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Exchange Indenture may be amended with the
consent of the holders of a majority in principal amount of the Exchange
Debentures then outstanding (including consents obtained in connection with a
tender offer or exchange for the Exchange Debentures) and any past default or
compliance with any provisions may also be waived with the consent of the
holders of a majority in principal amount of the Exchange Debentures then
outstanding. However, without the consent of each holder of an outstanding
Exchange Debenture affected thereby, no amendment may, among other things, (i)
reduce the amount of Exchange Debentures whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Exchange Debenture, (iii) reduce the principal of or extend the Stated
Maturity of any Exchange Debenture, (iv) reduce the premium payable upon the
redemption of any Exchange Debenture or change the time at which any Exchange
Debenture may be redeemed as described under "--Optional Redemption," (v) make
any Exchange Debenture payable in money other than that stated in the Exchange
Debenture, (vi) impair the right of any holder of the Exchange Debentures to
receive payment of principal of and interest on such holder's Exchange
Debentures on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Exchange
Debentures, (vii) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions or (viii) make any change to the
subordination provisions of the Exchange Indenture that would adversely affect
the holders of Exchange Debentures.
Without the consent of any holder of the Exchange Debentures, the Company and
Trustee may amend the Exchange Indenture to cure any ambiguity, omission, defect
or inconsistency, to provide for the assumption by a successor corporation of
the obligations of the Company under the Exchange Indenture, to provide for
uncertificated Exchange Debentures in addition to or in place of certificated
Exchange Debentures (provided that the uncertificated Exchange Debentures are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Exchange Debentures are described in Section
163(f) (2) (B) of the Code), to add guarantees with respect to the Exchange
Debentures, to secure the Exchange Debentures, to add to the covenants of the
Company for the benefit of the holders of the Exchange Debentures or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any holder of the Exchange Debentures or
to comply with any requirement of the SEC in connection with the qualification
of the Exchange Indenture under the Trust Indenture Act. However, no amendment
may be made to the subordination
140
provisions of the Exchange Indenture that adversely affects the rights of any
holder of Senior Indebtedness then outstanding unless the holders of such Senior
Indebtedness (or their Representative) consent to such change.
The consent of the holders of the Exchange Debentures is not necessary under
the Exchange Indenture to approve the particular form of any proposed amendment.
It is sufficient if such consent approves the substance of the proposed
amendment.
After an amendment under the Exchange Indenture becomes effective, the Company
is required to mail to holders of the Exchange Debentures a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the Exchange Debentures, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER
The Exchange Debentures will be issued in registered form and will be
transferable only upon the surrender of the Exchange Debentures being
transferred for registration of transfer. The Company may require payment of a
sum sufficient to cover any tax, assessment or other governmental charge payable
in connection with certain transfers and exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Exchange
Debentures and the Exchange Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Exchange Debentures, to replace
mutilated, destroyed, lost or stolen Exchange Debentures and to maintain a
registrar and paying agent in respect of the Exchange Debentures. The Company at
any time may terminate its obligations under "Change of Control" and under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "--Defaults"
above and the limitations contained in clauses (iii) and (iv) under "--Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If the Company exercises its legal
defeasance option, payment of the Exchange Debentures may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Exchange Debentures may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
(with respect only to Significant Subsidiaries) or (viii) under "--Defaults"
above or because of the failure of the Company to comply with clause (iii) or
(iv) under "--Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay principal and interest on the Exchange Debentures when due
(whether at scheduled maturity or upon redemption as to which irrevocable
instructions have been given to the Trustee) in accordance with terms of the
Exchange Indenture and the Exchange Debentures and must comply with certain
other conditions, including delivery to the Trustee of an Opinion of Counsel to
the effect that holders of the Exchange Debentures will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
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CONCERNING THE TRUSTEE
IBJ Schroder Bank and Trust Company is to be the Trustee under the Exchange
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Exchange Debentures.
The Holders of a majority in principal amount of the outstanding Exchange
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Exchange Indenture provides that if an Event
of Default occurs (and is not cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Exchange Indenture
at the request of any holder of Exchange Debentures, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense and then only to the extent required by the terms
of the Exchange Indenture.
GOVERNING LAW
The Exchange Indenture provides that it and the Exchange Debentures will be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is or becomes a Restricted Subsidiary; provided, however, that any such
Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
For purposes of the provisions described under "--Certain Covenants--Limitation
on Restricted Payments," "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Annualized EBITDA" as of any date of determination means EBITDA for the
most recent two consecutive fiscal quarters for which financial statements have
been made publicly available but in no event ending more than 135 days prior to
the date of such determination multiplied by two.
"Area 1 Franchise" means the Company's cable television franchise pursuant
to a Franchise Agreement between the Company and the City of Chicago in effect
on the Issue Date.
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"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) (that is not for
security purposes) by the Company or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of (i)
any shares of Capital Stock (other than Qualified Preferred Stock) of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets (other than Capital Stock or other Investments in an Unrestricted
Subsidiary) of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (i), (ii) and (iii) above, (a) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary to
another Restricted Subsidiary, (b) for purposes of the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock"
only, a disposition that (x) constitutes a Permitted Investment or a Restricted
Payment permitted by the covenant described under "--Certain Covenants--
Limitation on Restricted Payments," (y) complies with the covenant described
under "--Certain Covenants--Merger and Consolidation" or (z) constitutes a
Market Swap permitted by the covenant described under "--Certain Covenants--
Limitation on Market Swaps" and (c) a disposition of assets with a fair market
value of less than $250,000).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years (calculated to the nearest one-twelfth) from
the date of determination to the dates of each successive scheduled principal
payment of such Indebtedness or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means any day other than a Saturday, Sunday or day on which
banking institutions are not required to be open in the States of New York,
Illinois or Massachusetts.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated, whether voting or nonvoting) equity of such Person,
including any common stock and Preferred Stock, whether outstanding on the Issue
Date or issued after the Issue Date, but excluding any debt securities
convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"consolidated" means the consolidation of accounts of the Company and its
Subsidiaries in accordance with GAAP.
"Consolidated Current Liabilities" as of the date of determination means the
aggregate amount of liabilities of the Company and its Restricted Subsidiaries
which may properly be classified as current liabilities (including taxes
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accrued as estimated), on a consolidated basis, after eliminating (i) all
intercompany items between the Company and any Restricted Subsidiary and (ii)
all current maturities of long-term Indebtedness, all as determined in
accordance with GAAP consistently applied.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred in such period by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing, (vi) net costs associated with Hedging Obligations
(including amortization of fees), (vii) Preferred Stock dividends in respect of
all Preferred Stock held by Persons other than the Company or a Restricted
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations, (ix) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by (or secured by the
assets of) the Company or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust; excluding, however, (y) a proportional amount of any of
the foregoing items or other interest expense incurred by a Restricted
Subsidiary in such period to the extent the net income of such Restricted
Subsidiary is excluded in the calculation of Consolidated Net Income pursuant to
clause (iii) of the definition thereof and (z) any fees or debt issuance costs
(and any amortization thereof) payable in connection with the sale of the Notes
and Units on the Issue Date.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries calculated on a consolidated basis as of the end of the
most recent fiscal quarter for which financial statements have been made
publicly available but in no event ending more than 135 days prior to the date
of such determination to (ii) Annualized EBITDA as of such date of
determination; provided, however, that
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the amount of
Indebtedness outstanding at the end of such fiscal quarter shall be calculated
after giving effect on a pro forma basis to the Incurrence of such
Indebtedness as if such Indebtedness had been outstanding as of the end of
such fiscal quarter and to the discharge of any other Indebtedness to the
extent it was outstanding as of the end of such fiscal quarter and is to be
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such Indebtedness had been discharged as of the
end of such fiscal quarter,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness that was outstanding as of
the end of such fiscal quarter or if any Indebtedness that was outstanding as
of the end of such fiscal quarter is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise to the need to
calculate the Consolidated Leverage Ratio, the aggregate amount of
Indebtedness outstanding as of the end of such fiscal quarter shall be
calculated on a pro forma basis as if such discharge had occurred as of the
end of such fiscal quarter and EBITDA shall be calculated as if the Company or
such Restricted Subsidiary had not earned the interest income, if any,
actually earned during the period of the most recent two consecutive fiscal
quarters for which financial statements have been made publicly available but
in no event ending more than 135 days prior to the date of such determination
(the "Reference Period") in respect of cash or Temporary Cash Investments
used to repay, repurchase, defease or otherwise discharge such Indebtedness,
(3) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for
the Reference Period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for the
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Reference Period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for the Reference Period,
(4) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment
in any Restricted Subsidiary (or any person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of assets
occurring in connection with a transaction requiring a calculation to be made
hereunder, which constitutes all or substantially all an operating unit of a
business, EBITDA for the Reference Period shall be calculated after giving pro
forma effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of the Reference Period,
(5) if since the beginning of the Reference Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such Reference
Period) shall have made any Asset Disposition, any Investment or acquisition
of assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during the Reference
Period, EBITDA for the Reference Period shall be calculated after giving pro
forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of the Reference Period; and
(6) the aggregate amount of Indebtedness outstanding at the end of such
most recent fiscal quarter will be deemed to include the total principal
amount of funds outstanding or available to be borrowed on the date of
determination under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company.
"Consolidated Net Income" means, for any period, the aggregate net income of
the Company and its consolidated Subsidiaries for such period; provided,
however, that the following shall not be included in such Consolidated Net
Income:
(i) any net income (or loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that subject to the exclusion
contained in clause (iv) below, the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
a Restricted Subsidiary, to the limitations contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the payment
of dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that (A) subject to the
exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period shall
be included in determining such Consolidated Net Income;
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(iv) the after-tax gain or loss realized upon the sale or other disposition
of any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business and the
after-tax gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants--Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any payments of interest, dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
interest, dividends, repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a balance sheet of the Company
and its Restricted Subsidiaries, determined on a consolidated basis in
accordance with GAAP, and after giving effect to purchase accounting and after
deducting therefrom Consolidated Current Liabilities and, to the extent
otherwise included, the amounts of: (i) minority interests in consolidated
Subsidiaries held by Persons other than the Company or a Restricted Subsidiary;
(ii) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors; (iii) any revaluation or
other write-up in book value of assets subsequent to the Issue Date as a result
of a change in the method of valuation in accordance with GAAP consistently
applied; (iv) unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks, trade names,
copyrights, licenses, organization or developmental expenses and other
intangible items; (v) treasury stock; (vi) cash set apart and held in a sinking
or other analogous fund established for the purpose of redemption or other
retirement of Capital Stock to the extent such obligation is not reflected in
Consolidated Current Liabilities; and (vii) Investments in and assets of
Unrestricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, the total of
the amounts shown on the balance sheet of the Company and its consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Company for which financial
statements have been made publicly available but in no event ending more than
135 days prior to the taking of any action for the purpose of which the
determination is being made, as (i) the par or stated value of all outstanding
Capital Stock of the Company plus (ii) paid-in capital or capital surplus
relating to such Capital Stock plus (iii) any retained earnings or earned
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Agreement" means one or more term loans or revolving credit or
working capital facilities (including any letter of credit subfacility) with one
or more banks or other institutional lenders in favor of the Company or any
Restricted Subsidiary.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, in the case of the Exchangeable Preferred Stock, a Voting Rights
Triggering Event and, in the case of the Exchange Debentures, an Event of
Default.
"Designated Senior Indebtedness" means (i) the Notes and any Indebtedness
Incurred pursuant to paragraph (b) (1) of the covenant described under "--
Certain Covenants--Limitation on Indebtedness" and (ii) any other Senior
Indebtedness of the Company which, at the date of determination, has an
aggregate amount outstanding of, or under
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which, at the date of determination, the holders thereof are committed to lend
up to, at least $25 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as "Designated
Senior Indebtedness" for purposes of the Exchange Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable or must be purchased, upon the occurrence of certain events
or otherwise, by such Person at the option of the holder thereof, in whole or in
part, in each case on or prior to the first anniversary of the Stated Maturity
of the Exchangeable Preferred Stock or Exchange Debentures, as the case may be;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to purchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first anniversary
of the Stated Maturity of the Exchangeable Preferred Stock or Exchange
Debentures, as the case may be, shall not constitute Disqualified Stock if (x)
the "asset sale" or "change of control" provisions applicable to such
Capital Stock are not more favorable to the holders of such Capital Stock than
the terms applicable to the Exchangeable Preferred Stock or Exchange Debentures,
as the case may be, and described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" and "--Change of Control" and (y) any
such requirement only becomes operative after compliance with such terms
applicable to the Exchangeable Preferred Stock or Exchange Debentures, as the
case may be, including the purchase of any Exchangeable Preferred Stock or
Exchange Debentures, as the case may be, tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(a) Consolidated Interest Expense, (b) all income tax expense of the Company and
its consolidated Restricted Subsidiaries, (c) depreciation expense of the
Company and its consolidated Restricted Subsidiaries, (d) amortization expense
of the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (e) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Equity Offering" means either (a) an underwritten primary public offering
of common stock of Parent or the Company pursuant to an effective registration
statement under the Securities Act or (b) a primary offering of Capital Stock
(other than Disqualified Stock) of the Company to one or more Persons primarily
engaged in a Related Business.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Date" means the date on which the Exchange Debentures are
exchanged for the Exchangeable Preferred Stock.
"Existing Restricted Subsidiary" means any Restricted Subsidiary in
existence on the Issue Date and any Restricted Subsidiary formed after the Issue
Date which thereafter conducts all or any portion of the Company's business
pertaining to its Area 1 franchise in Chicago, as in effect on the Issue Date.
147
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning. The term "Guarantor"
shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Debentureholder" means the Person in whose name an Exchange
Debenture is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when
used as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable, including, in each case, any premium on such indebtedness to the
extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i) through (iii) above) entered into in
the ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on the
letter of credit);
148
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary of such Person (including any Restricted
Subsidiary), the liquidation preference with respect to, any Preferred Stock
(but excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through (v) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i) through (vi)
of other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the fair value of such property or
assets or the amount of the obligation so secured, in each case as of the date
of determination; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Independent Financial Advisor" means a United States investment banking
firm of national standing in the United States which does not, and whose
directors, officers and employees or affiliates do not, have a direct or
indirect financial interest in the Company.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap, floor, collar or forward interest rate
agreement or other financial agreement or arrangement designed to protect such
Person against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments," (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the shares of Old Exchangeable
Preferred Stock were issued pursuant to the Amended Articles.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
149
"Market Assets" means assets used or useful in the ownership or operation of
a Related Business, including any and all licenses, franchises and assets
related thereto.
"Market Swap" means the execution of a definitive agreement, subject only to
governmental approval and other customary closing conditions, that the Company
in good faith believes will be satisfied, for a substantially concurrent
purchase and sale, or exchange, of Market Assets between the Company or any of
its Restricted Subsidiaries and another Person or group of Persons; provided
that any amendment to or waiver of any closing condition which individually or
in the aggregate is material to the Market Swap will be deemed to be a new
Market Swap; provided, however, that the Market Assets to be sold by the Company
or its Restricted Subsidiaries in connection with a Market Swap do not include
assets used in or necessary for the ownership or operation of the Company's
business pertaining to its Area 1 Franchise in Chicago; provided further,
however, that the cash and other assets to be received by the Company or its
Restricted Subsidiaries which do not constitute Market Assets do not constitute
more than 15% of the total consideration to be received by the Company or its
Restricted Subsidiaries in such Market Swap.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law, be repaid out of the proceeds from such Asset Disposition, (iii)
all distributions and other payments required to be made to minority interest
holders in Restricted Subsidiaries as a result of such Asset Disposition and
(iv) the deduction of appropriate amounts provided by the seller as a reserve,
in accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the proceeds of such issuance or sale in the form of cash or cash
equivalents including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in such form of cash or cash equivalents and the conversion of
other property received when converted to such form of cash or cash equivalents,
net of any and all issuance costs, including attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Parent" means any Person that owns directly or indirectly all the Voting
Stock of the Company.
"Permitted Holders" means Purnendu Chatterjee, JK&B Capital, William Farley,
Boston Capital Ventures II, L.P., Glenn W. Milligan, Edward T. Joyce and each of
their affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a Related
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary
150
trade terms as the Company or any such Restricted Subsidiary deems reasonable
under the circumstances; (v) commissions, payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (viii) any
Person to the extent such Investment represents either the non-cash portion of
the consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" or the consideration not constituting Market Assets received
in a Market Swap as permitted pursuant to the covenant described under "--
Certain Covenants--Limitation on Market Swaps;" and (ix) any Person principally
engaged in a Related Business if (a) the Company or a Restricted Subsidiary,
after giving effect to such Investment, will own at least 20% of the Voting
Stock of such Person and (b) the amount of such Investment, when taken together
with the aggregate amount of all Investments made pursuant to this clause (ix)
and then outstanding, does not exceed $10.0 million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated, whether voting or
nonvoting) which is preferred as to the payment of dividends or distributions,
or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of Capital Stock of any
other class of such Person.
"principal" of an Exchange Debenture means the principal amount of the
Exchange Debenture plus the premium, if any, payable on the Exchange Debenture
which is due or overdue or is to become due at the relevant time.
"Public Market" means any time after (x) a Public Offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Parent or the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Public Offering" means an underwritten primary public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
"Qualified Preferred Stock" of a Restricted Subsidiary means a series of
Preferred Stock of such Restricted Subsidiary which (i) has a fixed liquidation
preference that is no greater in the aggregate than the sum of (x) the fair
market value (as determined in good faith by the Board of Directors at the time
of the issuance of such series of Preferred Stock) of the consideration received
by such Restricted Subsidiary for the issuance of such series of Preferred Stock
and (y) accrued and unpaid dividends to the date of liquidation, (ii) has a
fixed annual dividend and has no right to share in any dividend or other
distributions based on the financial or other similar performance of such
Restricted Subsidiary and (iii) does not entitle the holders thereof to vote in
the election of directors, managers or trustees of such Restricted Subsidiary
unless such Restricted Subsidiary has failed to pay dividends on such series of
Preferred Stock for a period of at least 12 consecutive calendar months.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the covenant described under "Certain
Covenants--Limitation on Indebtedness", including Indebtedness that Refinances
Refinancing
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Indebtedness; provided, however, that (i) such Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced, and (iii) such Refinancing
Indebtedness has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus accrued and unpaid
interest, fees and expenses, including any premium and defeasance costs) under
the Indebtedness being Refinanced; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means the businesses of the Company and the Restricted
Subsidiaries on the Issue Date and any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company.
"Restricted Payment" with respect to any Person means
(i) the declaration or payment of any dividends or any other distributions
of any sort (including any payment in connection with any merger or
consolidation involving such Person) in respect of its Capital Stock held by
Persons other than the Company or any Restricted Subsidiary or similar payment
to the direct or indirect holders (other than the Company or a Restricted
Subsidiary) of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), and other
than pro rata dividends or other distributions made by a Subsidiary that is
not a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other than a
corporation)),
(ii) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person or of any Capital Stock
of a Restricted Subsidiary held by any Affiliate of the Company (other than a
Restricted Subsidiary), including the exercise of any option to exchange any
Capital Stock (other than into Capital Stock of the Company that is not
Disqualified Stock),
(iii) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other than the
purchase, repurchase, redemption or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of
the date of such purchase, repurchase, redemption or acquisition) or
(iv) the making of any Investment (other than a Permitted Investment) in
any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means Indebtedness that is secured by a Lien on
assets of the Company or a Restricted Subsidiary.
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"Senior Indebtedness" of the Company means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are not superior in right of
payment to the Exchange Debentures; provided, however, that Senior Indebtedness
shall not include (1) any obligation of such Person to any Subsidiary of such
Person, (2) any liability for Federal, state, local or other taxes owed or owing
by such Person, (3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities) or (4) that portion of any Indebtedness
which at the time of Incurrence is Incurred in violation of the Exchange
Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Exchange Debentures pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Voting Stock is at the time owned or controlled, directly or
indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of
such Person or (iii) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of America
or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 365 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered into
with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 270 days after
the date of acquisition, issued by a corporation (other than an Affiliate of
the Company) organized and in existence under the laws of the United States of
America or any foreign country recognized by the United States of America with
a rating
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at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard and Poor's Ratings Group,
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political subdivision
or taxing authority thereof, and rated at least "A" by Standard & Poor's
Ratings Group or "A" by Moody's Investors Service, Inc., and
(vi) investments in money-market funds (other than single-state funds) that
make investments in instruments of the type described in clauses (i)-(v) above
in accordance with the regulations of the SEC under the Investment Company Act
of 1940, as amended.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under "--
Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Trustee and the Transfer Agent by promptly filing with the
Trustee and the Transfer Agent a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
BOOK-ENTRY, DELIVERY AND FORM
GENERAL
The New Notes and New Exchangeable Preferred Stock will be issued in the form
of one or more fully registered New Notes in global form ("Global Notes") or
one or more shares of New Exchangeable Preferred Stock in global form ("Global
Preferred Stock"). Global Notes and Global Preferred Stock are collectively
referred to herein as "Global Securities."
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Upon issuance of the Global Securities, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the number of New
Notes or New Exchangeable Preferred Stock, as the case may be, represented by
such Global Securities to the accounts of institutions that have accounts with
the Depositary or its nominee ("participants"). The accounts to be credited
shall be designated by the Initial Purchasers. Ownership of beneficial interests
in the Global Securities will be limited to participants or persons that may
hold interests through participants. Ownership of beneficial interest in such
Global Securities will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary or its nominee (with
respect to participants' interests) for such Global Securities, or by
participants or persons that hold interests through participants (with respect
to beneficial interests of persons other than participants). The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and laws may impair
the ability to transfer or pledge beneficial interests in the Global Securities.
So long as the Depositary, or its nominee, is the registered holder of any
Global Securities, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and holder of such New Notes or New Exchangeable
Preferred Stock (or Exchange Debentures), as the case may be, represented by
such Global Securities for all purposes under the Indenture and the Amended
Articles (or the Exchange Indenture) and the New Notes and New Exchangeable
Preferred Stock (or Exchange Debentures), as the case may be. Except as set
forth below, owners of beneficial interests in Global Securities will not be
entitled to have such Global Securities or any New Notes or New Exchangeable
Preferred Stock (or Exchange Debentures) represented thereby registered in their
names, will not receive or be entitled to receive physical delivery or
certificated securities in exchange therefor and will not be considered to be
the owners or holders of such Global Securities or any New Notes or New
Exchangeable Preferred Stock (or Exchange Debentures) represented thereby for
any purpose under the New Notes or New Exchangeable Preferred Stock (or Exchange
Debentures), the Amended Articles or the Indentures. The Company understands
that under existing industry practice, in the event an owner of a beneficial
interest in a Global Security desires to take any action that the Depositary, as
the holder of such Global Security, is entitled to take, the Depositary would
authorize the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Any payment of principal, interest, liquidation preference or dividends due on
the Securities on any payment date or at maturity or upon mandatory redemption
will be made available by the Company to the applicable Trustee or Transfer
Agent by such date. As soon as possible thereafter, the Trustee or Transfer
Agent will make such payments to the Depositary or its nominee, as the case may
be, as the registered owner of the applicable Global Security in accordance with
existing arrangements between the Trustee or the Transfer Agent and the
Depositary.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal, interest, liquidation preference or dividends in respect
of the Global Securities will credit immediately the accounts of the related
participants with payments in amounts proportionate to their respective
beneficial interests in such Global Security as shown on the records of the
Depositary. The Company also expects that payments by participants to owners of
beneficial interests in the Global Securities held through such participants
will be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
None of the Company, the Trustee, the Transfer Agent and any payment agent for
the Global Securities will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in any of the Global Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for
other aspects of the relationship between the Depositary and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Securities owning through such participants.
As long as the New Notes or the New Exchangeable Preferred Stock (or Exchange
Debentures) are represented by a Global Security, the Depositary's nominee will
be the holder of such securities and therefore will be the only
155
entity that can exercise a right to repayment or repurchase of such securities,
including following a change of control or a tender offer for such securities.
Notice by participants or by owners of beneficial interests in a Global Security
held through such participants of the exercise of the option to elect repayment
of beneficial interests in securities represented by a Global Security must be
transmitted to the Depositary in accordance with its procedures on a form
required by the Depositary and provided to participants. In order to ensure that
the Depositary's nominee will timely exercise a right to repayment with respect
to a particular security, the beneficial owner of such security must instruct
the broker or other participant to exercise a right to repayment. Different
firms have cut-off times for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a security in order to
ascertain the cut-off time by which such an instruction must be given in order
for timely notice to be delivered to the Depositary. The Company will not be
liable for any delay in delivery of notices of the exercise of the option to
elect repayment.
Unless and until exchanged in whole or in part for securities in definitive
form in accordance with the terms of such securities, the Global Securities may
not be transferred except as a whole by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor of the Depositary or a nominee of each successor.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among participants of
the Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trustees, the Company and the Transfer Agent will have any responsibility for
the performance by the Depositary or its participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations. The Company, the Trustees and the Transfer Agent may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes.
Certificated Securities
A Global Security shall be exchangeable for corresponding certificated
securities registered in the name of persons other than the Depositary or its
nominee only if (A) the Depositary (i) notifies the Company that it is unwilling
or unable to continue as Depositary for such Global Security or (ii) at any time
ceases to be a clearing agency registered under the Exchange Act, (B) there
shall have occurred and be continuing an Event of Default (as defined in the
Indenture) with respect to the Notes or the Exchange Debentures or a Voting
Rights Triggering Event with respect to the Exchangeable Preferred Stock or (C)
the Company executes and delivers to the applicable Trustee or the Transfer
Agent, as appropriate, an order that such Global Security shall be so
exchangeable. Any certificated Securities will be issued only in fully
registered form, and in the case of Certificated Notes or Certificated Exchange
Debentures, as the case may be, shall be issued without coupons in denominations
of $1,000 and integral multiples thereof. Any Certificated Securities so issued
will be registered in such names and in such denominations as the Depositary
shall request.
The Clearing System
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
156
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the Company's existing equity securities
and of certain provisions of the Company's Articles of Incorporation and Bylaws
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Company's Articles of Incorporation and Bylaws and other
material agreements referenced herein. However, such description describes all
material matters relating to such securities.
AUTHORIZED CAPITAL STOCK
Pursuant to the Company's Articles of Incorporation, the Company has the
authority to issue up to 50,000,000 shares of common stock, with no par value
(the "Common Stock"), 1,000,000 shares of non-voting common stock, with no par
value (the "Non-Voting Common Stock"), 500,000 shares of Class A Convertible
8% Cumulative Preferred Stock, with no par value (the "Class A Preferred
Stock"), 500,000 shares of Class B Convertible 8% Cumulative Preferred Stock,
with no par value (the "Class B Preferred Stock" and, together with the Class
A Preferred Stock, the "Existing Preferred Stock"), and 100,000 shares of
13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010, par value $.01
per share.
The rights of the holders of Common Stock discussed below are subject to the
rights of the holders of Existing Preferred Stock and to such rights as the
Board of Directors may hereafter confer on future holders of other series of the
Company's preferred stock.
COMMON STOCK
At December 31, 1997, there were 2,388,743.5 shares of Common Stock
outstanding and held of record by approximately 60 shareholders. In January 1998
the purchase agreement associated with the Class A Convertible 8% Cumulative
Preferred Stock was amended to replace the initial and debt warrant provisions
with a provision that would provide for the issuance of additional shares of
voting and non-voting common stock that would increase the Class A preferred
shareholders' ownership on a fully-diluted basis by an additional 8%. This
amendment resulted in the Company issuing 522,032.2 shares of voting common
stock related to the Class A Convertible 8% Cumulative Preferred Stock that was
outstanding at December 31, 1997. At December 31, 1997, options and warrants to
purchase an aggregate of 3,220,231.3 shares of Common Stock were outstanding. In
addition, in connection with the sale of shares of Class A Preferred Stock to
several common shareholders and certain other persons and entities in January
1998, the Company agreed to issue warrants to purchase an aggregate of 80,299.6
shares of Common Stock and to issue 28,330 shares of Common Stock. All
outstanding options and warrants provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the corporate structure of the
Company.
Voting Rights. Except as otherwise required by law, the holders of Common
Stock are entitled to attend all special and annual meetings of the shareholders
of the Company. Holders of Common Stock are entitled to vote on all matters
submitted to the shareholders together with holders of the Existing Preferred
Stock, with all such holders voting together as a single class and with each
share of Common Stock entitled to one vote.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary (collectively, a
"Liquidation"), holders of Common Stock, together with holders of non-voting
Common Stock, will be entitled to participate in the distribution of any assets
of the Company remaining after the Company shall have paid, or provided for
payment of, all debts and liabilities of the Company (including the Notes and,
if issued, the Exchange Debentures) and after the Company shall have paid, or
set aside for payment, to the holders of the Existing Preferred Stock and any
other class of stock having a liquidation preference over the Common Stock
(including the Exchangeable Preferred Stock), up to the full preferential
amounts to which they are entitled.
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NON-VOTING COMMON STOCK
In January 1998 the purchase agreement associated with the Class A Convertible
8% Cumulative Preferred Stock was amended to replace the initial and debt
warrant provisions with a provision that would provide for the issuance of
additional shares of voting and non-voting common stock that would increase the
Class A preferred shareholders' ownership on a fully-diluted basis by an
additional 8%. This amendment resulted in the Company issuing 522,032.2 shares
of non-voting common stock related to the Class A Convertible 8% Cumulative
Preferred Stock that was outstanding at December 31, 1997. In addition, in
connection with the sale of shares of Class A Preferred Stock to several common
shareholders and certain other persons and entities in January 1998, the Company
has agreed to issue 28,330.0 shares of Non-Voting Common Stock. The terms of the
Non-Voting Common Stock are the same as those of the Common Stock, except that
shares of the Non-Voting Common Stock do not have voting rights.
CLASS A PREFERRED STOCK
At December 31, 1997, 1,453.1 shares of Class A Preferred Stock were
outstanding and held of record by approximately 35 shareholders. The Company
issued to several common shareholders and certain other persons and entities in
January 1998 an aggregate of 95.4 shares of Class A Preferred Stock at a price
of $15,793.84 per share.
Voting Rights. Except as otherwise required by law, the holders of shares of
Class A Preferred Stock are entitled to attend all special and annual meetings
of the shareholders of the Company. Holders of Class A Preferred Stock are
entitled to vote on all matters submitted to the shareholders for a vote,
together with holders of the Common Stock and the Class B Preferred Stock, with
all such holders voting together as a single class and with each share of Class
A Preferred Stock entitled to one vote for each share of Common Stock issuable
upon conversion of such share of Class A Preferred Stock.
Nominees to the Board of Directors. Pursuant to the Shareholders Agreement
dated as of January 30, 1997, as amended (the "Shareholders Agreement"), the
shareholders of the Company have agreed to elect to the Board of Directors three
persons designated by the holders of Class A Preferred Stock.
Liquidation Rights. Upon a Liquidation, each holder of shares of Class A
Preferred Stock will be entitled to receive out of the assets of the Company
remaining after the Company shall have paid, or provided payment for, all debts
and liabilities of the Company (including the Notes and, if issued, the Exchange
Debentures) and after the Company shall have paid, or set aside for payment, to
the holders of the Exchangeable Preferred Stock and any other class of stock
having a liquidation preference senior to the Class A Preferred Stock, up to the
full preferential amounts to which they are entitled, but before any payment or
distribution is made on the Common Stock or any other class of stock of the
Company ranking junior to the Class A Preferred Stock as to liquidation
preference, an amount in cash equal to the greater of (i) that amount which such
holder would have received if such holder had converted all its Class A
Preferred Stock into Common Stock immediately prior to the Liquidation; and (ii)
the aggregate Liquidation Value (defined below) of all shares of Class A
Preferred Stock then held by such holder (plus all accrued and unpaid dividends
thereon). The Liquidation Value of any share of Class A Preferred Stock is equal
to the aggregate purchase price paid pursuant to the Stock Purchase Agreement
dated January 30, 1997, as amended (the "Stock Purchase Agreement"), by and
among the Company and certain investors (the "Investors") for Class A
Preferred Stock and warrants to purchase Common Stock divided by the number of
shares of Class A Preferred Stock issued pursuant to the Stock Purchase
Agreement.
If the assets distributable upon such dissolution, liquidation or winding up
are insufficient to pay cash in the full amount of the liquidation preference on
the Existing Preferred Stock, then such assets or the proceeds thereof will be
distributed among the holders of shares of Existing Preferred Stock ratably
based upon the aggregate Liquidation Value (plus all accrued and unpaid
dividends) of the Existing Preferred Stock then held by such holders.
Conversion Into Common Stock. At any time and from time to time, any holder
of Class A Preferred Stock may convert all or any portion of the Class A
Preferred Stock (including any fraction of a share) held by such holder
158
into Common Stock, with each share of Class A Preferred Stock being convertible
into one thousand shares of Common Stock (subject to adjustment under certain
circumstances). The Class A Preferred Stock will be automatically so converted
into Common Stock upon the closing of a firm commitment underwritten public
offering (a "Qualified Public Offering") of Common Stock in which (i) the
aggregate public offering price is at least $25 million, (ii) the price per
share of Common Stock is at least twice the Liquidation Value per share of Class
A Preferred Stock (subject to adjustment in the event of an "Organic Change," as
defined in the Company's Articles of Incorporation), (iii) the Common Stock will
be traded on a national securities exchange or The Nasdaq Stock Market and (iv)
the shares of Common Stock issued in such offering represent at least 20% of the
sum of (a) the aggregate shares of Common Stock outstanding after such offering
plus (b) the number of shares of Common Stock underlying options having an
exercise price less than the "Conversion Price," as defined in the Company's
Articles of Incorporation, in effect at the time of issuance of said options,
plus (c) the number of shares of Common Stock issuable upon conversion or
exchange of a convertible security issuable upon exercise of options and having
a conversion price less than the Conversion Price in effect at the time of
issuance of said convertible securities, plus (d) the number of shares of Common
Stock issuable upon conversion or exchange of a convertible or exchangeable
security having a per share conversion or exchange price less than the
Conversion Price in effect at the time of issuance of said convertible or
exchangeable securities.
CLASS B PREFERRED STOCK
As of the date hereof, there are no outstanding shares of Class B Preferred
Stock. Pursuant to the Stock Purchase Agreement, shares of Class B Preferred
Stock are issuable in exchange for a like number of shares of Class A Preferred
Stock upon the refusal of a holder of Class A Preferred Stock to purchase such
holder's pro rata portion of additional shares of Class A Preferred Stock
offered to the holders of Class A Preferred Stock. The terms of the Class B
Preferred Stock are the same as those of the Class A Preferred Stock, except
that the conversion rights associated with the Class B Preferred Stock have more
limited anti-dilution protection than the Class A Preferred Stock.
WARRANTS
At December 31, 1997, pursuant to the Stock Purchase Agreement, the Company
had issued warrants ("Secondary Warrants") to the holders of Class A Preferred
Stock to purchase, in the aggregate, 1,222,569.0 shares of Common Stock at a
price of $.000001 per share. In addition, in connection with the sale of shares
of Class A Preferred Stock to several holders of Common Stock in January 1998,
the Company has agreed to issue warrants to purchase an aggregate of 80,299.6
shares of Common Stock. These warrants are exercisable at any time until January
30, 2007. In addition, warrants having the same terms as the Secondary Warrants
entitling the holder thereof to purchase 18,994.6 shares of Common Stock are
held by a financial advisor of the Company.
CERTAIN COVENANTS
Pursuant to the Shareholders Agreement, the Company has agreed that, unless it
has obtained the prior approval of a majority of the members of the Company's
Board of Directors elected by the holders of Class A Preferred Stock, voting as
a separate class, it will not (i) pay or declare dividends on any of its equity
securities other than the Exchangeable Preferred Stock and the Existing
Preferred Stock, (ii) redeem or otherwise acquire any of its equity securities
other than mandatory redemptions of the Exchangeable Preferred Stock and
mandatory repurchases of the Warrants, (iii) issue or sell any Existing
Preferred Stock or any other equity securities other than equity securities that
rank junior to the Existing Preferred Stock, (iv) merge or consolidate with
another person or entity, (v) sell more that 20% of the consolidated assets of
the Company and its subsidiaries, (vi) liquidate itself, (vii) agree to
restrictions on its ability to perform its obligations in respect of the
Existing Preferred Stock (other than as set forth in the Indenture, the Amended
Articles, the Warrant Agreement, the Exchange Indenture or in
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connection with certain senior indebtedness) and (viii) incur or commit to incur
more than $500,000 of indebtedness (subject to certain limited exceptions).
These restrictions will terminate upon consummation of a Qualified Public
Offering.
In addition, pursuant to the Stock Purchase Agreement, the Company has agreed
that, without the prior written consent of the holders of a majority of the
Common Stock issuable upon conversion of the Class A Preferred Stock, it will
not (i) increase the authorized number of shares of the Existing Preferred Stock
or impair the rights of the holders thereof, (ii) prior to May 31, 1999, grant
or issue any phantom stock, shadow stock, stock appreciation or other right
directly or indirectly to participate in or benefit from the common equity of
the Company on an ongoing basis, other than capital stock of the Company or
options, warrants or other securities exercisable or exchangeable for or
convertible into any such capital stock or (iii) grant to the Company's
employees, directors and consultants any options, warrants or other rights to
subscribe for capital stock of the Company other than pursuant to the Company's
stock option plan in effect on the date of the Stock Purchase Agreement, unless
all options covered by such plan have been granted.
REGISTRATION RIGHTS
The Company is obligated under the Registration Rights Agreement dated January
30, 1997 (the "1997 Registration Rights Agreement") at any time after the
earlier of January 30, 2001 or the completion of a public offering of its equity
securities, at the demand of the holders (the "Majority Holders") of a
majority of the Common Stock underlying the Existing Preferred Stock and the
Existing Warrants (the "Underlying Common Stock") to register under the
Securities Act the Underlying Common Stock held by such holders.
In addition, if the Company proposes to register any of its securities under
the Securities Act (subject to certain limited exceptions, including the
Exchange Offer or the Shelf Registration Statement for the Old Notes or the Old
Exchangeable Preferred Stock and any registration statement for the Warrants and
the Common Stock underlying the Warrants) it must include in such registration
all Registrable Common Stock (as defined below) that the Company has been
requested to include therein. "Registrable Common Stock" means (i) Underlying
Common Stock (when issued) and any other Common Stock held by a holder (other
than an Original Common Stock Holder (as defined below)) of such Underlying
Common Stock (collectively, "New Registrable Common Stock") and (ii) Common
Stock that on January 30, 1997 was held, and that when requested to be
registered is held, by a person or entity that owned Common Stock on January 30,
1997 (such person or entity being herein referred to as an "Original Common
Stock Holder.")
Pursuant to the 1997 Registration Rights Agreement, except with respect to the
Notes and the Units, the Company may not grant demand registration rights to any
other person or entity without the prior written consent of the holders of a
majority of the Underlying Common Stock. The Company can, however, grant rights
to other persons to (i) participate in a piggyback registration so long as such
rights are subordinate to the rights of the holders of New Registrable Common
Stock and (ii) demand registration so long as the holders of New Registrable
Common Stock are entitled to participate in any such registrations with such
persons or entities pro rata on the basis of the number of shares owned by each
such holder. Except with respect to the shares of Common Stock issuable upon the
exercise of the Warrants, the Company may not include in any demand registration
triggered by the holders of New Registrable Common Stock any securities which
are not New Registrable Common Stock without the prior written consent of the
holders of a majority of the New Registrable Common Stock that requested such
demand registration.
PREEMPTIVE RIGHTS
If the Company issues any equity securities subject to certain limited
exemptions (including the New Exchangeable Preferred Stock), the Company must
first offer to sell such equity securities to the holders of Class A
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Preferred Stock ratably based on the number of shares then held by such holders.
If the holders of Class A Preferred Stock do not purchase all the offered
securities, then the Company may sell the remaining securities, for a period of
120 days, to purchasers on terms no more favorable to such purchasers than those
offered to the holders of Class A Preferred Stock.
RIGHT TO REQUIRE SALE
Unless the Company has theretofore consummated a Qualified Public Offering,
beginning on the fourth anniversary of the date of issuance of the Notes and
terminating on the earlier to occur of three years thereafter or the
consummation of a Qualified Public Offering, the Majority Holders shall have the
right to require the Company to retain an investment banking firm of nationally
recognized standing, selected by the Company and reasonably acceptable to the
Designated Holders (as defined below), for the purpose of soliciting bids in
connection with a sale of the Company. The Board of Directors of the Company
shall consider all bona fide bids received, and shall, in good faith, select the
best offer. The Company's shareholders have agreed to vote for the approval of
the bid selected by the Board of Directors, and to sell their shares of Company
capital stock if the transaction is structured as a stock sale. "Designated
Holders" means holders of not less than 51% of the sum of (i) the shares of
outstanding Common Stock held by holders of Class A Preferred Stock and (ii) the
shares of Common Stock issuable upon conversion of the Class A Preferred Stock.
RESTRICTIONS ON TRANSFER
If any Original Common Stock Holder proposes to transfer any of the Company's
equity securities held by it, it must first offer such equity securities to the
holders of the Existing Preferred Stock on the same terms and conditions as the
proposed transfer. Such holders of Existing Preferred Stock (or their designees)
may purchase all, but not less than all, of such equity securities, which will
be allocated among the holders of the Existing Preferred Stock (or their
designees) ratably in accordance with the number of shares of Existing Preferred
Stock held by such holders. If holders of the Existing Preferred Stock do not
purchase all such equity securities, then such Original Common Stock Holder may
sell the equity securities for a period of 60 days to other purchasers on terms
no more favorable to such purchasers than those offered to the holders of the
Existing Preferred Stock.
In addition, if any Original Common Stock Holder or holder of Existing
Preferred Stock (the "Transferring Holder") proposes to transfer any of the
Company's equity securities, it must offer the right to participate in the
proposed transfer to the other Original Common Stock Holders and holders of
Existing Preferred Stock (collectively, the "Other Holders"). If any of the
Other Holders elects to participate in the proposed transfer, the Transferring
Holder and such Other Holders will be entitled to transfer their equity
securities to the proposed transferee ratably in accordance with their
securities to be transferred. If the prospective transferee declines to allow
the participation of Other Holders, then no equity securities are permitted to
be sold to such prospective transferee. Furthermore, no Original Common Stock
Holder or holder of Existing Preferred Stock may encumber any of the Company's
equity securities without the prior consent of the Majority Holders.
DIVIDEND POLICY
Except with respect to the Exchangeable Preferred Stock and the Existing
Preferred Stock, the Board of Directors may not declare or pay any dividends on
any class or series of stock without the prior consent of the Majority Holders.
When and if dividends are declared (other than with respect to the Exchangeable
Preferred Stock), and to the extent permitted under the Illinois Business
Corporation Act, the Company is required to pay preferential dividends in cash
to holders of Existing Preferred Stock. Dividends on each share of Existing
Preferred Stock will accrue on a daily basis at a rate of eight percent (8%) per
annum of the sum of the Liquidation Value plus all accumulated and unpaid
dividends from and including the date of issuance. Such dividends will accrue
whether
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or not they have been declared and whether or not there are profits, surpluses
or other funds of the Company legally available for payment of dividends.
Accrued dividends on the Existing Preferred Stock are required to be paid upon a
Liquidation, although no portion of such accrued dividends may be paid in shares
of Common Stock or Existing Preferred Stock and no portion of such accrued
dividends may be converted into Common Stock. Except as otherwise provided, if
at any time the Company pays less than the total amount of dividends than
accrued with respect to the Existing Preferred Stock, such payment shall be
distributed pro rata among holders thereof based on the number of shares of the
Existing Preferred Stock held by each such holder.
If the Company declares or pays a dividend upon any class of Common Stock
payable otherwise than in cash out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently applied)
except for a stock dividend payable in shares of such class of Common Stock,
then the Company shall pay to the holders of Existing Warrants the dividend that
would have been paid on the shares of Common Stock issuable upon the exercise of
the Existing Warrants had the Existing Warrants been exercised in full
immediately prior to the date on which a record is taken, or if no record is
taken, the date as of which the record holders of Common Stock entitled to such
dividends are to be determined.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Federal income tax discussion set forth below summarizes certain United
States Federal income tax consequences that may be relevant to initial holders
of the New Exchangeable Preferred Stock, Exchange Debentures, and New Notes who
are United States Persons (as defined below) and hold their New Exchangeable
Preferred Stock, Exchange Debentures and New Notes as capital assets
("Holders"). The discussion is intended only as a summary and does not purport
to be a complete analysis or listing of all potential tax considerations that
may be relevant to such Holders of the New Exchangeable Preferred Stock,
Exchange Debentures and New Notes. The discussion does not include special rules
that may apply to certain holders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, and persons holding the
New Exchangeable Preferred Stock, Exchange Debentures and New Notes as part of a
"straddle," "hedge" or "conversion transaction," and investors who are not
United States Persons), and does not address the tax consequences of the law of
any state, locality or foreign jurisdiction. The discussion is based upon
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury regulations promulgated
thereunder and current administrative rulings and court decisions. All of the
foregoing are subject to change (possibly with retroactive effect) and any such
change could affect the continuing validity of this discussion.
As used herein, "United States Person" means a beneficial owner of the New
Exchangeable Preferred Stock, Exchange Debentures or New Notes who or that (i)
is a citizen or resident of the United States, (ii) is a corporation,
partnership or other entity created or organized in or under the laws of the
United States or political subdivision thereof, (iii) is an estate the income of
which is subject to United States Federal income taxation regardless of its
source, (iv) is a trust if (A) a United States court is able to exercise primary
supervision over the administration of the trust and (B) one or more United
States fiduciaries have authority to control all substantial decisions of the
trust or (v) is otherwise subject to United States Federal income tax on a net
income basis in respect of its worldwide taxable income.
THE NEW NOTES
THE EXCHANGE. The exchange of Old Notes for New Notes will not be treated as
an exchange for federal income tax purposes because the New Notes will not
differ materially in kind or extent from the Old Notes and because the exchange
will occur by operation of the original terms of the Old Notes. As a result,
U.S. Holders who exchange their Old Notes for New Notes will not recognize any
income, gain or loss for federal income tax purposes. A U.S. Holder will have
the same adjusted issue price, adjusted basis and holding period in the New
Notes immediately after the exchange as it had in the Old Notes immediately
before the exchange.
STATUS OF THE NEW NOTES FOR FEDERAL INCOME TAX PURPOSES. The discussion set
forth in this section is based on the assumption that the New Notes will be
treated as indebtedness for Federal income tax purposes. Based upon the facts
that the Company's sole business enterprise is in a developmental stage, the New
Notes are effectively subordinated to indebtedness incurred by the Restricted
Subsidiaries, and the proceeds of the New Notes are to be used in substantial
part to acquire basic business assets, the IRS may contend that the New Notes do
not, in whole or in part, constitute indebtedness for Federal income tax
purposes. If it were determined that the New Notes should be treated, in whole
or in part, as an equity interest in the Company, rather than as indebtedness,
some portion or all of the interest expense (including original issue discount)
on the New Notes would not be deductible for Federal income tax purposes. As a
result, the amount of after tax income available to pay amounts due under the
New Notes, as well as distributions with respect to the New Exchangeable
Preferred Stock, could be substantially reduced with a material adverse affect
on the Holders of the New Notes and the New Exchangeable Preferred Stock. In
addition, the tax consequences of holding the New Notes would differ
significantly from those described below.
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The determination of whether an instrument issued by a corporation constitutes
indebtedness for Federal income tax purpose or should be treated, in whole or in
part, as an equity interest in the corporation is determined under current law
by reference to certain general guidelines and factors distilled from decisional
law and IRS rulings. The following are the principal factors that weigh in favor
of treating an instrument as indebtedness (i) the instrument has a fixed
maturity that is not unreasonably far in the future, (ii) the instrument
contains an unconditional obligation to pay a fixed amount upon maturity, (iii)
the instrument contains an unconditional obligation to pay interest determined
at a fixed rate, (iv) the holder has customary creditor remedies upon default,
(v) the instrument is not convertible into equity of the issuer, does not
provide for payments based upon the income or profits of the issuer and does not
confer upon the holder voting rights or other powers to affect control of the
management of the issuer, (vi) the issuer has sufficient anticipated cash flow
to satisfy the payments anticipated to become due under the instrument, (vii)
there is substantial disparity between the holdings of the instrument and the
holdings of the stock of the issuer in terms of the identity of the holders and
their proportionate interest, (viii) the issuer's debt/equity ratio is not
excessive, (ix) the obligations evidenced by the instrument are not subordinated
to other creditors, (x) subsequent to issuance, the holder takes reasonable
steps to enforce its rights as a creditor and (xi) the instrument was not issued
to provide funds for the acquisition of basic business assets. The presence or
absence of any one of the foregoing factors is not determinative. Counsel to the
Company has given an opinion that, more likely than not, the New Notes will be
treated as indebtedness for Federal income tax purposes. Counsel's opinion is
based upon the clear presence of factors (i), (ii), (iii), (iv) and (v) and its
assessment of the other factors, relying significantly on the validity and
reasonableness (without independent investigation) of the Company's business
plan under which there is projected sufficient cash flow to satisfy all payment
obligations under the New Notes. Moreover, Counsel's view is based in part on
its understanding that the Old Notes would not be sold at original issuance to
holders of the Company's Common Stock or Class A Preferred Stock and would be
sold at original issuance to traditional purchasers of high yield debt and that
the original purchasers of the Old Notes and the original purchasers of the
Units would not, in every case, purchase the Old Notes and Units in identical
proportions. No assurance can be given that the IRS will not assert that the New
Notes do not, in whole or in part, constitute indebtedness for federal income
tax purposes. Moreover, although the opinion represents counsel to the Company's
view that the factors indicating that the New Notes should be treated as
indebtedness outweigh those indicating that it should be treated, in whole or in
part, as a form of equity interest in the Company, that opinion is not binding
on any court that might have jurisdiction to adjudicate the matter.
ORIGINAL ISSUE DISCOUNT. The New Notes have original issue discount for
Federal income tax purposes. The amount of OID on a New Note is the excess of
its "stated redemption price at maturity" (the sum of all payments to be made
on the New Note, whether denominated as interest or principal) over its "issue
price." The "issue price" of each New Note is equal to the first price at
which a substantial amount of the Notes were sold for money (excluding sales to
bond houses, brokers or similar persons acting as underwriters, placement agents
or wholesalers). Each New Note Holder (whether a cash or accrual method
taxpayer) is required to include in income such OID as it accrues, in advance of
the receipt of some or all of the related cash payments.
The amount of OID includable in income by the initial Holder of a New Note is
the sum of the "daily portions" of OID with respect to the New Note for each day
during the taxable year or portion of the taxable year on which such Holder held
such New Note ("accrued OID"). The daily portion is determined by allocating to
each day in any "accrual period" a pro rata portion of the OID allocable to that
accrual period. The accrual periods for a New Note will be periods that are
each selected by the New Note Holder that are no longer than one year, provided
that each scheduled payment occurs either on the final day of an accrual period
or on the first day of an accrual period. The amount of OID allocable to any
accrual period other than the initial short accrual period (if any) and the
final accrual period is an amount equal to the product of the New Note's
"adjusted issue price" at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period). The amount
of OID allocable to the final accrual period is the difference between the
amount payable at maturity and the adjusted issue price of the New Note at the
beginning of the final accrual period. The amount of OID allocable to any
initial short accrual period may be computed under any reasonable method. The
adjusted issue price of the New Note at the start of any accrual period
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is equal to its issue price increased by the accrued OID for each prior accrual
period and reduced by any prior payments (whether stated as interest or
principal) with respect to such New Note. The Company is required to report the
amount of OID accrued on New Notes held of record by persons other than
corporations and other exempt New Note Holders, which may be based on accrual
periods other than those chosen by the New Note Holder. A New Note Holder is not
required to recognize any income upon the receipt of interest payments on the
New Notes. The tax basis of a New Note in the hands of the Holder will be
increased by the amount of OID, if any, on the New Note that is included in the
Holder's income pursuant to these rules, and will decreased by the amount of any
payments (whether stated as interest or principal) made with respect to the New
Note.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATION. If the yield to maturity of the New
Notes (as determined for United States Federal income tax purposes) exceeds the
AFR plus 500 basis points, the New Notes will be subject to the AHYDO rules of
the Code. The AFR is an interest rate, announced monthly by the IRS, that is
based on the yield of debt obligations issued by the U.S. Treasury. The AFR for
the month of February, 1998 for instruments with a weighted average maturity in
excess of nine years providing for semi-annual compounding is 5.93%. Pursuant to
the AHYDO rules, the Company's deductions with respect to OID will be suspended
until such OID is actually paid, and the "disqualified portion" of such OID
(defined as the portion that is attributable to the yield on such New Note in
excess of the applicable Federal rate plus 600 basis points) will be permanently
nondeductible. These rules generally do not affect the amount, timing or
character of a Holder's income; however, domestic corporate Holders may be
eligible for a dividends-received deduction with respect to their inclusion in
income of the "disqualified portion" (as defined above) if such amount, if
paid with respect to stock, would have been treated as a dividend (i.e., among
other things, would have been paid out of earnings and profits, which the
Company does not believe that it currently has). See "--The New Exchangeable
Preferred Stock--Certain Federal Income Tax Consequences to the Company and to
Corporate Holders" for a more extensive discussion of the AHYDO rules. The
availability of the dividends-received deduction is subject to a number of
complex limitations. See "--The New Exchangeable Preferred Stock--Distributions
on the New Exchangeable Preferred Stock."
MARKET DISCOUNT. If a New Note is acquired by a subsequent purchaser at a
"market discount," some or all of any gain realized upon a disposition
(including a sale or a taxable exchange) or payment at maturity of such New Note
may be treated as ordinary income. "Market discount" with respect to a
security is, subject to a de minimis exception, the excess of (i) the issue
price of the security increased by all previously accrued original issue
discount and probably reduced (although the Code does not expressly so provide)
by any cash payments in respect of such security over (ii) such Holder's initial
tax basis in the security. The amount of market discount treated as having
accrued will be determined either on a ratable basis, or, if the Holder so
elects, on a constant interest method. Upon any subsequent disposition
(including a gift or payment at maturity) of such New Note (other than in
connection with certain nonrecognition transactions), the lesser of any gain on
such disposition (or appreciation, in the case of a gift) or the portion of the
market discount that accrued while the New Note was held by such Holder will be
treated as ordinary interest income at the time of the disposition. In lieu of
including accrued market discount in income at the time of disposition, a Holder
may elect to include market discount in income currently. Unless a New Note
Holder so elects, such Holder may be required to defer a portion of any interest
expense that may otherwise be deductible on any indebtedness incurred or
maintained to purchase or carry such New Note until the Holder disposes of the
New Note. The election to include market discount in income currently, once
made, is irrevocable and applies to all market discount obligations acquired on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the IRS.
ACQUISITION PREMIUM. A subsequent Holder of a Note is generally subject to
rules for accruing OID described above. However, if such Holder's purchase price
for the Note exceeds the "revised issue price" (the sum of the issue price of
the Note and the aggregate amount of the OID includible in the gross income of
all Holders for periods before the acquisition of the Note by such Holder and
probably reduced (although the Code does not expressly so provide) by any cash
payment in respect of such security), the excess (referred to as "acquisition
premium") is offset ratably against the amount of OID otherwise includable in
such Holder's taxable income (i.e., such Holder may reduce the daily portions of
OID by a fraction, the numerator of which is the excess of such Holder's
purchase price
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for the Note over the revised issue price, and the denominator of which is the
excess of the sum of all amounts payable on the Note after the purchase date
over the Note's revised issue price).
DISPOSITION OF NEW NOTES. A Holder of New Notes will recognize gain or loss
upon the sale, redemption, retirement or other disposition of such New Notes;
such gain or loss will generally be equal to the difference between (i) the
amount of cash and the fair market value of property received and (ii) the
Holder's adjusted tax basis (increased by any accrued OID or market discount
previously included in income by the Holder and reduced by any previous payments
with respect to the New Notes) in such New Notes. Subject to the market discount
rules discussed above, gain or loss recognized will be capital gain or loss,
provided such New Notes are held as capital assets by the Holder, and will be
long term capital gain or loss if the Holder has held such New Notes (or is
treated as having held such New Notes) for longer than one year. Under current
law, capital gains recognized by corporations are currently taxed at a maximum
rate of 35% and the maximum rate on net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) in the case of
individuals is currently 20% for New Notes held for more than 18 months (28% if
held more than 12 months but not more than 18 months). Under the Code, an
individual Holder's net capital losses are currently deductible only to the
extent of $3,000 per year.
REPORTING REQUIREMENTS. The Company will provide annual information statements
to Holders of the New Notes and to the Internal Revenue Service, setting forth
the amount of original issue discount determined to be attributable to the New
Notes for that year.
THE NEW EXCHANGEABLE PREFERRED STOCK
THE EXCHANGE. U.S. Holders who exchange their Old Exchangeable Preferred
Stock for New Exchangeable Preferred Stock will not recognize any income, gain
or loss for federal income tax purposes. A U.S. Holder will have the same issue
price, adjusted basis and holding period in the New Exchangeable Preferred Stock
immediately after the exchange as it had in the Old Exchangeable Preferred Stock
immediately before the exchange.
DISTRIBUTIONS ON THE NEW EXCHANGEABLE PREFERRED STOCK. Distributions on the
New Exchangeable Preferred Stock paid in cash will be taxable to the Holder as
ordinary income and treated as a dividend to the extent of the Company's current
and accumulated earnings and profits (as determined for Federal income tax
purposes). A distribution on the New Exchangeable Preferred Stock made in the
form of additional shares of New Exchangeable Preferred Stock ("PIK Shares")
will be treated as being in an amount equal to the fair market value of the PIK
Shares and will be a taxable distribution treated as a dividend to the extent of
the Company's current and accumulated earnings and profits (as determined for
Federal income tax purposes). The holding period of any such PIK Shares will
commence on the date of their distribution.
To the extent that the amount of any distribution paid on the New Exchangeable
Preferred Stock (including distributions made in the form of PIK Shares) exceeds
the Company's current and accumulated earnings and profits allocable to such
distributions (as determined for Federal income tax purposes), such distribution
will be treated as a return of capital, thus reducing the Holder's adjusted tax
basis in such New Exchangeable Preferred Stock. Any such excess distribution
that is greater than the Holder's adjusted basis in the New Exchangeable
Preferred Stock will be taxed as capital gain and will be long-term capital gain
if the Holder's holding period for such New Exchangeable Preferred Stock exceeds
one year. For purposes of the remainder of this discussion, the term
"dividend" refers to a distribution paid out of the Company's allocable
earnings and profits, unless the context indicates otherwise.
It is anticipated that the mandatory redemption price of the New Exchangeable
Preferred Stock will exceed such stock's issue price by more than a de minimis
amount. As a result, such excess (a "redemption premium") will be required,
pursuant to section 305(c) of the Code, to be accrued by the Holder as a
constructive distribution of additional New Exchangeable Preferred Stock over
the term of the New Exchangeable Preferred Stock in a manner similar to the
accrual of original issue discount as described below in the discussion "--
Taxation of Stated Interest
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and Original Issue Discount on Exchange Debentures." The Company determined the
issue price of the Exchangeable Preferred Stock by allocating the aggregate
issue price of each Unit between the Exchangeable Preferred Stock and associated
Warrants comprising such Unit based upon their relative fair market values. The
Company intends to allocate $946 of the aggregate issue price of a Unit to the
Exchangeable Preferred Stock and $54 of the aggregate issue price to the
associated Warrants as set forth in the Private Placement offering circular.
That allocation by the Company will be binding on each holder, unless the holder
explicitly discloses (on a statement attached to the holder's timely filed
United States Federal income tax return for the year that includes the
acquisition date of the Unit) that its allocation of the Unit's issue price
between the Exchangeable Preferred Stock and the Warrants is different from the
Company's allocation. The Company's allocation, however, is not binding on the
IRS, and therefore, there can be no assurance that the IRS will respect such
allocation. If a holder purchases a Unit as part of the initial issuance at a
price that is lower than the aggregate issue price assumed in computing the
dollar amounts set forth above, then the issue price of such Unit will be
allocated between the Exchangeable Preferred Stock and the associated Warrants
in proportion to the allocation described above. A Holder's initial tax basis in
each security comprising a Unit will be the issue price allocated thereto.
Constructive distributions (including those arising from a redemption premium)
are taxable to the Holder as dividends to the extent of the Company's current or
accumulated earnings and profits. If the size of the constructive dividend is
greater than the Company's current or accumulated earnings and profits, the
excess is treated as a tax-free recovery of basis in the New Exchangeable
Preferred Stock until such Holder's basis is equal to zero, and then as capital
gain from the sale or exchange of the New Exchangeable Preferred Stock.
If the fair market value of any PIK Shares at the time of distribution is less
than the redemption price of such PIK Shares by more than a statutorily defined
de minimis amount, then the resulting redemption premium will be required,
pursuant to section 305(c) of the Code, to be accrued by the Holder as a
constructive distribution of additional PIK Shares over the term of the PIK
Shares in a manner similar to the accrual of original issue discount as
described below in the discussion "--Taxation of Stated Interest and Original
Issue Discount on Exchange Debentures."
PIK Shares issued on different dates will very likely have different amounts
of redemption premium. A Holder would be treated as having received constructive
distributions on its PIK Shares in differing amounts depending on the issue
price of each PIK Share and PIK Shares would not be interchangeable with each
other or with New Exchangeable Preferred Stock due to their differing United
States Federal income tax characteristics.
Dividends received by corporate Holders generally will be eligible for the 70%
dividends-received deduction available under Section 243 of the Code. The
availability of such dividends-received deduction is subject to numerous
exceptions and restrictions, including those relating to (i) the holding period
of the stock, (ii) stock treated as "debt-financed portfolio stock" within the
meaning of Section 246A of the Code, (iii) dividends treated as "extraordinary
dividends" for purposes of Section 1059 of the Code and (iv) Holders who pay
alternative minimum tax. A recent amendment made by the Taxpayer Relief Act of
1997 requires a corporate Holder to satisfy a separate 46-day holding period
requirement with respect to each dividend (91 days in the case of preferred
stock dividends with respect to periods aggregating more than 366 days) in order
to be eligible for such dividends-received deduction. Corporate shareholders
should consult their own tax advisors regarding the extent, if any, to which
such exceptions and restrictions may apply to their particular factual
situations.
The Company does not now have any current or accumulated earnings and profits
and is unable to predict whether or when it will have sufficient earnings and
profits for distributions with respect to the New Exchangeable Preferred Stock
to be treated as dividends. Until such time, if any, as such distributions are
treated as dividends, corporate Holders of the New Exchangeable Preferred Stock
will not be eligible for the dividends-received deduction described above.
SALE, REDEMPTION AND EXCHANGE OF EXCHANGEABLE PREFERRED STOCK. A redemption of
shares of New Exchangeable Preferred Stock for cash or in exchange for Exchange
Debentures would be a taxable event.
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A redemption of shares of New Exchangeable Preferred Stock for cash will
generally be treated as a sale or exchange if the Holder does not own, actually
or constructively within the meaning of Section 318 of the Code, any stock of
the Company other than the New Exchangeable Preferred Stock. For this purpose, a
Holder that holds Warrants will be treated as constructively owning shares of
Common Stock that it can acquire upon exercise of the Warrants. In addition,
under Section 318 of the Code, a person generally will be treated as the owner
of stock of the Company owned by certain related parties or certain entities in
which the person owns an interest. If a Holder does own, actually or
constructively, other stock of the Company, a redemption of New Exchangeable
Preferred Stock may be treated as a dividend to the extent of the Company's
current and accumulated earnings and profits (as determined for Federal income
tax purposes). Dividend treatment would not apply, however, if the redemption is
"not essentially equivalent to a dividend" with respect to the Holder under
Section 302(b)(1) of the Code. A distribution to a Holder will be "not
essentially equivalent to a dividend" if it results in a "meaningful
reduction" in the Holder's stock interest in the Company. For this purpose, a
redemption of New Exchangeable Preferred Stock that results in a reduction in
the proportionate interest in the Company (taking into account any actual
ownership of Common Stock of the Company and any stock constructively owned) of
a Holder whose relative stock interest in the Company is minimal should be
regarded as a meaningful reduction in the Holder's stock interest in the
Company.
If a redemption of the New Exchangeable Preferred Stock for cash is not
treated as a distribution taxable as a dividend, the redemption would result in
capital gain or loss equal to the difference between the amount of cash received
and the Holder's adjusted tax basis in the New Exchangeable Preferred Stock
redeemed, except to the extent that the redemption price includes dividends
which have been declared by the Board of Directors of the Company prior to the
redemption. Similarly, upon the sale of the New Exchangeable Preferred Stock
(other than in a redemption or in exchange for the Exchange Debentures), the
difference between the sum of the amount of cash and the fair market value of
other property received and the Holder's adjusted basis in the New Exchangeable
Preferred Stock would result in capital gain or loss. This gain or loss would be
long-term capital gain or loss if the Holder's holding period for the New
Exchangeable Preferred Stock exceeds one year. Under current law, capital gains
recognized by corporations are currently taxed at a maximum rate of 35% and the
maximum rate on net capital gains in the case of individuals is currently 20%
for property held for more than 18 months (28% if held more than 12 months but
not more than 18 months). A redemption of New Exchangeable Preferred Stock in
exchange for Exchange Debentures will be subject to the same general rules as a
redemption for cash, except that any gain or loss generally will be determined
based upon the issue price of the Exchange Debentures (as determined for
purposes of computing the original issue discount on such Exchange Debentures).
See the discussion below under "--Original Issue Discount."
If a redemption of the New Exchangeable Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash or the issue price of the Exchange Debentures,
as the case may be, received by the Holder. It is possible, however, that the
fair market value of the Exchange Debentures (if different from their issue
price) may constitute the amount of the distribution. The Holder's adjusted tax
basis in the redeemed New Exchangeable Preferred Stock will be transferred to
any remaining stock holdings in the Company, subject to reduction or possible
gain recognition under Section 1059 of the Code in respect of the nontaxed
portion of such dividend. If the Holder does not retain any actual stock
ownership in the Company (i.e., such Holder is treated as having received a
dividend because he constructively owns stock in the Company but such Holder
does not actually own any Company Stock), such Holder may lose the benefit of
his basis in the New Exchangeable Preferred Stock. However, such basis may be
transferred to the person or entity whose ownership of New Exchangeable
Preferred Stock was attributed to the Holder.
ORIGINAL ISSUE DISCOUNT. In the event that the New Exchangeable Preferred
Stock is exchanged for Exchange Debentures and the "stated redemption price at
maturity" of the Exchange Debentures exceeds their "issue price" by more than
a de minimis amount, the Exchange Debentures will be treated as having OID equal
to the amount of such excess.
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If the Exchange Debentures are traded on an established securities market
within the 60-day period ending thirty days after the Exchange Date, the issue
price of the Exchange Debentures will be their fair market value as of their
issue date. Subject to certain limitations described in the Treasury
Regulations, the Exchange Debentures will be deemed to be traded on an
established securities market if, at a minimum, price quotations will be readily
available from dealers, brokers or traders. If the New Exchangeable Preferred
Stock, but not the Exchange Debentures issued in exchange therefor, is traded on
an established securities market within the 60-day period ending thirty days
after the Exchange Date, then the issue price of each Exchange Debenture should
be the fair market value of the New Exchangeable Preferred Stock exchanged
therefor at the time of the exchange. The New Exchangeable Preferred Stock
generally will be deemed to be traded on an established securities market if, at
a minimum, it appears on a system of general circulation that provides a
reasonable basis to determine fair market value based either on recent price
quotations or recent sales transactions. In the event that neither the New
Exchangeable Preferred Stock nor the Exchange Debentures are traded on an
established securities market within the applicable period, the issue price of
the Exchange Debentures will be their stated principal amount (i.e., their face
value) unless either (i) the Exchange Debentures do not bear "adequate stated
interest" within the meaning of Section 1274 of the Code, which is unlikely or
(ii) the Exchange Debentures are issued in a so-called "potentially abusive
situation" as defined in the Treasury Regulations under Section 1274 of the
Code (including a situation involving a recent sales transaction), which is
unlikely, in which case the issue price of such Exchange Debentures generally
will be the fair market value of the New Exchangeable Preferred Stock
surrendered in exchange therefor.
The "stated redemption price at maturity" of the Exchange Debentures should
equal the total of all payments under the Exchange Debentures. The "stated
redemption price at maturity" would include any optional redemption premium on
the Exchange Debentures if assuming that such optional redemption will occur
would result in a lower yield to maturity on the Exchange Debentures.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE
DEBENTURES. Each Holder of an Exchange Debenture with OID will be required to
include in gross income an amount equal to the sum of the "daily portions" of
the OID for all days during the taxable year in which such Holder holds the
Exchange Debenture. The daily portions of OID required to be included in a
Holder's gross income in a taxable year will be determined under a constant
yield method by allocating to each day during the taxable year in which the
Holder holds the Exchange Debenture a pro rata portion of the OID thereon which
is attributable to the "accrual period" in which such day is included. The
amount of the OID attributable to each accrual period will be the product of the
"adjusted issue price" of the Exchange Debenture at the beginning of such
accrual period multiplied by the "yield to maturity" of the Exchange Debenture
(properly adjusted for the length of the accrual period). The adjusted issue
price of an Exchange Debenture at the beginning of an accrual period is the
original issue price of the Exchange Debenture plus the aggregate amount of OID
that accrued in all prior accrual periods, and less any cash payments. The
"yield to maturity" is the discount rate that, when used in computing the
present value of all principal and interest payments to be made under the
Exchange Debenture, produces an amount equal to the issue price of the Exchange
Debenture. An "accrual period" may be of any length and may vary in length
over the term of the debt instrument, provided that each accrual period is no
longer than one year and each scheduled payment of principal or interest occurs
either on the final day or the first day of an accrual period.
In the event that the Exchange Debentures are issued on or before February 15,
2003, the Company will have the option to pay interest thereon in PIK
Debentures. The issuance of PIK Debentures in lieu of cash interest is not
treated as a payment of interest. Instead, the underlying Exchange Debenture and
any PIK Debenture that may be issued thereon are treated as a single debt
instrument under the OID rules. Moreover, because the terms of the PIK
Debentures and the underlying Exchange Debentures are identical so that the two
are fungible in all respects, the issuance of a PIK Debenture should be treated
simply as a division of the underlying Exchange Debenture, so that the Holder's
tax basis and adjusted issue price in the underlying Exchange Debenture should
be allocated between the underlying Exchange Debenture and the PIK Debenture in
proportion to their relative principal amounts.
For purposes of determining the stated redemption price at maturity and the
rate at which OID accrues on an Exchange Debenture issued on or before February
15, 2003, applicable regulations require that it be assumed that
169
the Company will pay interest in the form of PIK Debentures to the maximum
extent permitted under the terms of the Exchange Debentures if doing so would
reduce the yield to maturity on such Exchange Debentures. In such a case, if the
Company elects to pay in cash an interest payment on such Exchange Debentures
payable in cash or in PIK Debentures, the cash payment will be treated as a pro
rata prepayment on the Exchange Debentures. As a result, the Holder would
realize gain in an amount equal to the excess of the cash payment over the
portion of the Holder's tax basis that would have been allocated to such PIK
Debentures, and the Holder's tax basis in the Exchange Debentures held would be
reduced by such allocated portion of the Holder's tax basis. For purposes of
determining the stated redemption price at maturity and the rate at which OID
accrues on an Exchange Debenture issued on or before February 15, 2003,
applicable regulations require that it be assumed that the Company will pay
interest in cash and not in the form of PIK Debentures if paying interest in the
form of PIK Debentures would not reduce the yield to maturity on such Exchange
Debentures. In such a case, if the Company elects to pay in the form of PIK
Debentures an interest payment on such Exchange Debentures payable in cash or in
PIK Debentures, the future accruals of OID will be calculated based on a
redetermination of the stated redemption price at maturity and yield to maturity
made by treating the Exchange Debenture as if it were retired and reissued on
such payment date at a price equal to the adjusted issue price of the Exchange
Debentures at such time.
In the event that Exchange Debentures are issued after February 15, 2003 when
the Company does not have the option to pay interest thereon in PIK Debentures,
stated interest would be included in income by a Holder in accordance with such
Holder's usual method of accounting. In all other cases, all stated interest
paid will be treated as payments on Exchange Debentures under the rules
discussed above.
BOND PREMIUM ON EXCHANGE DEBENTURES. If the Holder's basis in the Exchange
Debentures exceeds the sum of all amounts payable on the Exchange Debentures
after the date on which Holder acquires them (computed by applying certain
provisions of the Treasury Regulations regarding the determination of the
amounts of future payments), such excess will be deductible by the Holder of the
Exchange Debentures as amortizable bond premium over the term of the Exchange
Debentures (or the period ending on such earlier call date) under a yield-to-
maturity formula, if an election by the Holder under Section 171 of the Code is
made or is already in effect. This election is revocable only with the consent
of the IRS and applies to all obligations owned or acquired by the Holder on or
after the first day of the taxable year to which the election applies. To the
extent the excess is deducted as amortizable bond premium, the Holder's adjusted
tax basis in the Exchange Debentures is reduced. Except as may otherwise be
provided in future Treasury Regulations, the amortizable bond premium will be
treated as an offset to interest income on the Exchange Debentures rather than
as a separate deduction item.
ACQUISITION PREMIUM ON EXCHANGE DEBENTURES. A Holder of an Exchange Debenture
issued with OID who purchases such Exchange Debenture for an amount that is
greater than its then adjusted issue price but equal to or less than the sum of
all amounts payable on the Exchange Debenture after the purchase date will be
considered to have purchased such Exchange Debenture at an "acquisition
premium." Under the acquisition premium rules, the amount of OID that such
Holder must include in income with respect to such Exchange Debenture for any
taxable year will be reduced by the portion of such acquisition premium properly
allocable to such year.
MARKET DISCOUNT ON EXCHANGE DEBENTURES. Holders of shares of Old Exchangeable
Preferred Stock who tender such shares for shares of New Exchangeable Preferred
Stock should be aware that the disposition of Exchange Debentures may be
affected by the market discount provisions of the Code. The market discount
rules generally provide that if a Holder of a debt instrument purchases it at a
"market discount" and thereafter realizes gain upon a disposition or a
retirement of the debt instrument, the lesser of such gain or the portion of the
market discount that has accrued on a straight-line basis (or, if the Holder so
elects under Section 1276(b) of the Code, on a constant interest rate basis)
while the debt instrument was held by such Holder will be taxed as ordinary
income at the time of such disposition. "Market discount" with respect to the
Exchange Debentures is the amount, if any, by which the "revised issue price"
of an Exchange Debenture (or its stated redemption price at maturity if the
Exchange Debenture does not have any OID) exceeds the Holder's basis in the
Exchange Debenture immediately after such Holder's acquisition, subject to a de
minimis exception. The "revised issue price" of an Exchange Debenture is its
issue price increased by the portion of OID previously includible in the gross
income of prior holders for periods
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prior to the acquisition of the Exchange Debenture by the Holder (without regard
to any acquisition premium exclusion) and reduced by prior payments with respect
to the Exchange Debentures.
A Holder who acquires an Exchange Debenture at a market discount also may be
required to defer a portion of any interest expense that otherwise may be
deductible on any indebtedness incurred or maintained to purchase or carry such
Exchange Debenture until the Holder disposes of the Exchange Debenture in a
taxable transaction. Moreover, any partial principal payment with respect to
Exchange Debentures will be includible as ordinary income to the extent of any
accrued market discount on such Exchange Debentures. Such accrued market
discount will also generally be includible as ordinary income upon the
occurrence of certain otherwise non-taxable transfers (such as gifts). A Holder
of Exchange Debentures acquired at a market discount may elect for Federal
income tax purposes to include market discount in gross income as the discount
accrues, either on a straight-line basis or on a constant interest rate basis.
This current inclusion election, once made, applies to all market discount
obligations acquired on or after the first day of the first taxable year to
which the election applies, and may not be revoked without the consent of the
IRS. If a Holder of Exchange Debentures makes such an election, the foregoing
rules with respect to the recognition of ordinary income on sales and other
dispositions of such debt instruments, and with respect to the deferral of
interest deductions on indebtedness incurred or maintained to purchase or carry
such debt instruments, would not apply.
REDEMPTION OR SALE OF EXCHANGE DEBENTURES. Generally, any redemption or sale
of Exchange Debentures by a Holder would result in taxable gain or loss equal to
the difference between the sum of the amount of cash and the fair market value
of other property received (except to the extent that cash received is
attributable to accrued but previously untaxed interest, which portion of the
consideration would be taxed as ordinary income) and the Holder's adjusted tax
basis in the Exchange Debentures. The adjusted tax basis of a Holder who
receives an Exchange Debenture in exchange for New Exchangeable Preferred Stock
will generally be equal to the issue price of the Exchange Debenture increased
by any OID or market discount with respect to the Exchange Debenture included in
the Holder's income prior to sale or redemption of the Exchange Debenture,
reduced by any amortizable bond premium applied against the Holder's income
prior to sale or redemption of the Exchange Debenture and by payments on the
Exchange Debentures. Subject to the above discussion of market discount, such
gain or loss would be long-term capital gain or loss if the Holder's holding
period for the Exchange Debentures exceeds one year. The same principles with
respect to acquisition premium affect the Exchange Debentures as described in
"--Acquisition Premium" discussion with respect to the New Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE
HOLDERS. It is possible that the Exchange Debentures will be treated as AHYDOs
for Federal income tax purposes, especially if the Exchange Debentures are
issued on or before February 15, 2003. The Exchange Debentures will constitute
AHYDOs if they (i) have a term of more than five years, (ii) have a yield to
maturity equal to or greater than the sum of the applicable Federal rate (the
"AFR") at the time of issuance of the Exchange Debentures plus 500 basis
points and (iii) have "significant OID." The AFR is an interest rate,
announced monthly by the IRS, that is based on the yield of debt obligations
issued by the United States Treasury. A debt instrument is treated as having
"significant OID" if the aggregate amount that would be includible in gross
income with respect to such debt instrument for periods before the close of any
accrual period ending after the date five years after the date of issue exceeds
the sum of (i) the aggregate amount of interest to be paid in cash under the
debt instrument before the close of such accrual period and (ii) the product of
the initial issue price of such debt instrument and its yield to maturity. In
determining whether any Exchange Debentures issued on or prior to February 15,
2003 are AHYDOs, it will be presumed that interest will be paid in the form of
PIK Debentures to the maximum extent permitted under the terms of the Exchange
Debentures. Because the amount of OID, if any, attributable to the Exchange
Debentures will be determined at the time such Exchange Debentures are issued
and the AFR at that point in time is not predictable, it is impossible currently
to determine whether Exchange Debentures will be treated as AHYDOs.
If the Exchange Debentures are treated as AHYDOs, (i) as described in the
following paragraph, a portion of the OID that accrues on the Exchange
Debentures may be treated as a dividend generally eligible for the dividends-
received deduction in the case of corporate Holders, (ii) the Company would not
be entitled to deduct the
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"disqualified portion" of the OID that accrues on the Exchange Debentures and
(iii) the Company would be allowed to deduct the remainder of the OID only when
it pays amounts attributable to such OID in cash. (In particular, in the case of
a payment in cash of an interest payment payable on or before February 15, 2003
on an Exchange Debenture issued on or prior to February 15, 2003 and interest on
which (for purposes of accruing OID under applicable regulations) is presumed to
be paid in the form of PIK Debentures to the maximum extent permitted under the
terms of the Exchange Debentures, the Company may be able to deduct only a small
portion of such cash payment attributable to OID because the payment as a whole
would be treated as a prepayment of a ratable portion of the Exchange
Debentures.)
If an Exchange Debenture is treated as an AHYDO, a corporate Holder would be
treated as receiving dividend income to the extent of the lesser of (i) an
allocable portion of the Company's current and accumulated earnings and profits
and (ii) the "disqualified portion" of the OID of such AHYDO. The
"disqualified portion" of the OID is equal to the lesser of (x) the amount of
OID or (y) the portion of the "total return" (i.e., the excess of all payments
to be made with respect to the Exchange Debenture over its issue price) with
respect to the Exchange Debenture in excess of the AFR at issuance plus 600
basis points per annum.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A Holder may be subject to backup withholding at the rate of 31 percent with
respect to interest on the New Notes, distributions (actual or constructive) on
the New Exchangeable Preferred Stock interest (including OID) on the Exchange
Debentures or sales proceeds of any of the foregoing, unless such Holder (i) is
a corporation or comes within certain other exempt categories and, when
required, demonstrates its exempt status or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A Holder who does not provide the Company with the Holder's
correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding would be creditable against the
Holder's Federal income tax liability.
The Company will furnish annually to the IRS and to record Holders of the New
Exchangeable Preferred Stock (other than with respect to certain exempt holders)
information relating to dividends paid during the calendar year. In the case of
New Exchangeable Preferred Stock or PIK Shares subject to Section 305(c) of the
Code, such information may be based upon dividends accruing to the record Holder
of such New Exchangeable Preferred Stock or PIK Shares at the time of issuance.
The Company will furnish annually to the IRS and to record Holders of the New
Notes and Exchange Debentures (other than with respect to certain exempt
holders) information relating to the stated interest and the OID, if any,
accruing during the calendar year. Such information will be based on the amount
of OID that would have accrued to a Holder who acquired the New Note or the
Exchange Debenture on original issue. Accordingly, other Holders will be
required to determine for themselves whether they are eligible to report a
reduced amount of OID for Federal income tax purposes.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION
THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES, NEW EXCHANGEABLE
PREFERRED STOCK OR EXCHANGE DEBENTURES IN LIGHT OF HIS PARTICULAR CIRCUMSTANCES
AND INCOME TAX SITUATION. EACH HOLDER OF NEW NOTES, NEW EXCHANGEABLE PREFERRED
STOCK OR EXCHANGE DEBENTURES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, NEW EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, OR
SUBSEQUENT VERSIONS THEREOF.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes or shares of New Exchangeable
Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes or shares of Exchangeable Preferred Stock. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with the resale of New Notes or shares of New Exchangeable
Preferred Stock received in exchange for Old Notes or shares of Old Exchangeable
Preferred Stock where such Old Notes or shares of Old Exchangeable Preferred
Stock were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. Each broker-dealer that acquired Old
Securities directly from the Company, and not as a result of market-making or
trading activities, must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the secondary resale of the New Securities and cannot rely on
the position of the staff of the Commission enunciated in no-action letters
issued to third parties. In addition, until [________, 1998] (90 days after the
date of this Prospectus), all dealers effecting transactions in the New Notes or
shares of New Exchangeable Preferred Stock may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes or shares
of New Exchangeable Preferred Stock by broker-dealers. New Notes and shares of
New Exchangeable Preferred Stock received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or New Exchangeable Preferred
Stock or a combination of such methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such New Notes or shares of New Exchangeable Preferred Stock. Any broker-dealer
that resells New Notes or shares of New Exchangeable Preferred Stock that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Notes or shares of New
Exchangeable Preferred Stock may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit of any such resale of New Notes or
shares of New Exchangeable Preferred Stock and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letters of Transmittal state that, by acknowledging
that it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in a Letter of
Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the reasonable fees and expenses, if any, of one
counsel for the Initial Purchasers of the Old Notes and the Old Exchangeable
Preferred Stock) other than commissions or concessions of any brokers or dealers
and will indemnify the Holders of the Notes and the Exchangeable Preferred Stock
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The legality of the Notes and Exchange Debentures offered hereby is being
passed upon for the Company by the Piper & Marbury L.L.P., Washington, D.C.,
special counsel for the Company. The legality of the Exchangeable Preferred
Stock offered hereby is being passed upon for the Company by Neal, Gerber &
Eisenberg, Chicago, Illinois, counsel for the Company. Mark Tauber, a partner of
Piper & Marbury L.L.P., owns 68,056.0 shares of the Company's Common Stock and
options to acquire 34,730.4 shares of the Company's Common Stock. In addition,
in January 1998, Mr. Tauber acquired beneficial ownership of 6.3 shares of Class
A Convertible 8% Cumulative Preferred Stock at a price of $15,793.84 per share,
and warrants to purchase up to 5,327.0 shares of Common Stock at a price of
$.000001 per share. The Percent of Aggregate Voting Rights excludes 2,250.261
shares of non-voting Common Stock beneficially owned by Mr. Tauber which the
Company has agreed to issue.
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EXPERTS
The balance sheets of 21st Century Telecom Group, Inc. as of March 31, 1996
and 1997 and the related statements of income, shareowner's equity and cash
flows for each of the three years in the period ended March 31, 1997 and for the
period from inception (October 29, 1992 to March 31, 1997) included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-4
(including all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, with respect to the New Notes and New Exchangeable
Preferred Stock offered in connection with the Exchange Offer. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the New Notes and New Exchangeable Preferred
Stock offered in connection with the Exchange Offer, reference is made to the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the contents of any contract
or any other document referred to are not necessarily complete; reference is
made in each instance to the copy of such contract or document filed as an
exhibit to the Registration Statement. Each such statement is qualified in all
respects by such reference to such exhibits. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission. The Commission also maintains a Web site that contains reports,
proxy statements and other information regarding registrants, including the
Company, that file such information electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov.
174
GLOSSARY
ADI Area of Dominant Influence.
ADSL Asymmetrical Digital Subscriber Line. A modem technology that
enhances copper telephone wiring allowing for high-speed data
transmission over ordinary telephone lines.
ANSI American National Standards Institute. A standards-setting, non-
government organization founded in 1918, which develops and
publishes standards for "voluntary" use in the United States.
CLASS Custom Local Area Signalling Services. Consists of number
translation services, such as call-forwarding and caller
identification as well as services including automatic callback,
distinctive ringing, call-waiting and selective call rejection.
CLEC Competitive Local Exchange Carrier. A term coined for the
deregulated, competitive telecommunications environment
envisioned by the Telecommunications Act of 1996. The CLECs
compete for local and long distance service.
CPS Cable Program Service.
DBS Direct Broadcast Satellite. A term for a satellite which sends
relatively powerful signals to small dishes at homes.
DRS NETWORK Distributed Ring-Star Network. An advanced integrated fiber optic
network designed by the Company to provide voice, video and high-
speed data services. Key attributes of the network include (i)
distributive switching and traffic routing mechanics at specific
locations throughout the network (rather than being concentrated
at one point as in conventional networks), (ii) SONET-based,
self-healing ring architecture possessing both circuit and route
diversity and (iii) a large fiber capacity permitting delivery of
advanced two-way, fully interactive broadband and narrowband
services.
DTH Direct-to-home Satellite TV.
DOC Data Operations Center. The location for housing the equipment
necessary to provide subscribers with high-speed data and
Internet access.
ESMR Enhanced Specialized Mobile Radio. Two-way dispatch service with
the capability to provide wireless voice telephone service to
compete against cellular.
HFC Hybrid Fiber Coaxial. An outside plant distribution cabling
concept employing both fiber optic and coaxial cable. Fiber is
deployed as the backbone distribution medium, terminating in a
remote unit where optoelectric conversion takes place. At that
remote unit, the signal then is passed on to coaxial cables which
carry the data to the individual business or residence.
ILEC Incumbent Local Exchange Carrier. The existing local telephone
company in a market, which can be either a RBOC or an independent
telephone company that provides local transmission service.
ISDN Integrated Services Digital Network. Connections that use
ordinary phone lines to transmit digital instead of analog
signals, allowing data to be transmitted at a much faster rate
than with a traditional modem.
ISP Internet Service Provider. A vendor who provides direct access to
the Internet and a core group of Internet utilities like E-mail,
News Group Readers and sometimes weather reports and local
restaurant reviews. The user reaches the ISP by dialing-up over
normal phone lines with its own computer and modems.
IXC Interexchange Carriers. A telephone company that provides long-
distance telephone service between LATAs.
KBPS Kilobits per second. Used to refer to data transmission speeds.
LATA Local Access and Transport Area. One of the 161 local
geographical areas in the United States within which a LEC may
offer local telecommunications services.
LEC Local Exchange Carrier. A local phone company which provides
local access and transmission.
LMDS Local Multipoint Distribution Services. The use of broadcast
microwave signals to contact dishes typically located on the top
of apartment buildings. The signal is then distributed to
individual units in the building.
MBPS Megabits per second. Used to refer to data transmission speeds.
One Mbps equals 1,000 Kbps.
MDU Multiple Dwelling Units. High-rise residential buildings.
MHZ Megahertz. Used to measure band and bandwidth.
MMDS Microwave Multipoint Distribution System. A means of distributing
cable television programming, through microwave, from a single
transmission point to multiple receiving points.
MTSO Mobile Telephone Switching Office. This central office houses the
field monitoring and relay stations for switching calls between
the cellular and wire-based (land-line) central office. It is a
sophisticated computer that monitors all cellular calls, keeps
track of the location of all cellular-equipped vehicles traveling
in the system, arranges handoffs and keeps track of billing
information.
MVPD Multichannel Video Programming Distribution.
NOC Network Operations Center. The location for housing the equipment
necessary to provide subscribers with voice, video and high-speed
data services and to monitor system performance.
PCS Personal Communications Service. A new, lower powered, higher-
frequency competitive technology to cellular that will consist
primarily of enhanced voice, two-way data and text messaging
services directed at the mass consumer wireless communications
market.
PEG Public, Educational or Government access. The local public access
channels.
POP Point of Presence. The place where a long-distance carrier
terminates long distance lines just before those lines are
connected to the local phone company's lines or a direct
connection to a targeted user.
POTS Plain Old Telephone Services. Basic single line telephone
service.
RBOC Regional Bell Operating Company.
SBS Small Business Services.
SMATV Satellite Master Antenna Television. A distribution system that
feeds satellite signals to hotels, apartments, etc.
SONET Synchronous Optical NETwork. A family of fiber-optic transmission
rates from 51.84 Mbps to 13.22 Gbps, created to provide the
flexibility needed to transport many digital signals with
different capacities, and to provide a standard for which
manufacturers design. SONET is an optical interface standard that
allows interworking of transmission products from multiple
vendors.
STS Shared Tenant Services. Providing centralized telecommunications
services to tenants in a building or a complex.
VLAN Virtual Local Area Network. Work stations connected to an
intelligent device which provides the capabilities to define LAN
membership.
INDEX TO FINANCIAL STATEMENTS
Page
------
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Balance Sheets as of March 31, 1996 and 1997 F-3
Statements of Income for the years ended March 31, 1995, 1996, and 1997 and for the period from
inception (October 29, 1992) to March 31, 1997 F-4
Statements of Changes in Shareholders' Equity for the years ended March 31, 1995, 1996 and 1997
and for the period from inception (October 29, 1992) to March 31, 1997 F-5
Statements of Cash Flows for the years ended March 31, 1995, 1996 and 1997 and for the period
from inception (October 29, 1992) to March 31, 1997 F-6
Notes to Financial Statements for the years ended March 31, 1995, 1996 and 1997 and for the period
from inception (October 29, 1992) to March 31, 1997 F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Balance Sheet as of December 31, 1997 F-15
Condensed Statements of Income for the nine months ended December 31, 1996 and 1997 and for the
period from inception (October 29, 1992) to December 31, 1997 F-16
Statements of Changes in Shareholders' Equity for the nine months ended December 31, 1997
and for the period from inception (October 29, 1992) to December 31, 1997
Condensed Statements of Cash Flows for the nine months ended December 31, 1996 and 1997 and for
the period from inception (October 29, 1992) to December 31, 1997 F-17
Notes to Financial Statements for the nine months ended December 31, 1996 and 1997 and for the
period from inception (October 29, 1992) to December 31, 1997 F-18
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
21st Century Telecom Group, Inc.:
We have audited the accompanying balance sheets of 21st Century Telecom Group,
Inc. (an Illinois corporation in the development stage) as of March 31, 1997 and
1996, and the related statements of income, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 1997, and for the
period from inception (October 29, 1992) to March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 21st Century Telecom Group,
Inc. as of March 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1997, and
for the period from inception to March 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 9, 1998
F-2
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1997
ASSETS 1996 1997
------ --------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 956 $ 8,230,942
Accounts receivable from shareholders 153,660 86,000
Accounts receivable from subscribers -- 27,480
Prepayments -- 149,250
----------- -----------
Total current assets 154,616 8,493,672
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements -- 177,526
Vehicles and computer equipment -- 69,337
Less--Accumulated depreciation -- (6,934)
----------- -----------
-- 239,929
OTHER ASSETS:
Restricted cash collateral reserve -- 1,796,880
Accounts receivable from associated company 1,058,723 1,156,780
Prepaid franchise fees -- 3,216,575
Deferred franchise costs, net of amortization of $158,875 and $309,641,
respectively 451,538 587,615
Deferred mapping and design, net of amortization of $12,407 -- 62,037
----------- -----------
Total other assets 1,510,261 6,819,887
----------- -----------
Total assets $ 1,664,877 $15,553,488
=========== ===========
LIABILITIES AND PREFERRED AND COMMON EQUITY
-------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 358,482 $ 238,775
Debentures payable 805,303 --
Interest payable 299,212 --
Accounts payable to associated company 1,569,622 1,294,860
Notes payable 226,930 --
----------- -----------
Total current liabilities 3,259,549 1,533,635
NONCURRENT LIABILITIES:
Debentures payable 81,551 81,551
Interest payable 68,333 103,676
----------- -----------
Total noncurrent liabilities 149,884 185,227
REDEEMABLE PREFERRED STOCK:
Class A convertible 8% cumulative preferred stock, no par value,
1,380.3 shares outstanding -- 16,794,963
COMMON SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,683,000 and 2,374,343.6 shares outstanding,
respectively, 1,161,307.6 secondary common share warrants outstanding
and 1,000,966.8 initial and debt common share warrants converted
to voting and non-voting common stock in 1998 488,001 5,946,904
Deficit accumulated during development stage (2,226,557) (5,522,830)
Related party purchase, in excess of cost -- (3,381,300)
Unearned compensation (6,000) (3,111)
----------- -----------
Total common shareholders' equity (1,744,556) (2,960,337)
----------- -----------
Total liabilities and equity $ 1,664,877 $15,553,488
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-3
21ST CENTURY TELECOM GROUP, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
OCT. 29, 1992
Year Ended YEAR ENDED YEAR ENDED TO
MARCH 31, 1995 MARCH 31,1996 MARCH 31,1997 MARCH 31,1997
----------------- ----------------- --------------- ---------------
Subscriber revenues $ -- $ -- $ 27,480 $ 27,480
Operating expenses -- 9,617 200,911 210,528
Selling, general and administrative expenses 624,963 694,122 2,337,534 4,027,428
Depreciation and amortization 38,923 108,182 170,108 328,983
---------- ----------- ----------- -----------
Operating loss (663,886) (811,921) (2,681,073) (4,539,459)
Interest income -- -- 301,624 301,624
Interest expense 115,428 214,688 437,843 806,014
---------- ----------- ----------- -----------
Loss before income taxes (779,314) (1,026,609) (2,817,292) (5,043,849)
PROVISION (CREDIT) for INCOME
TAXES -- -- -- --
---------- ----------- ----------- -----------
NET LOSS (779,314) (1,026,609) (2,817,292) (5,043,849)
Preferred stock requirements -- -- (478,981) (478,981)
---------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE to COMMON
SHARES $ (779,314) $(1,026,609) $(3,296,273) $(5,522,830)
========== =========== =========== ===========
Weighted average common shares outstanding 1,508,000 1,609,129 1,988,365 1,624,895
LOSS PER COMMON SHARE $(.52) $(.64) $(1.66) $(3.40)
========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-4
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
DEFICIT
ACCUMULATED
DURING RELATED
COMMON DEVELOPMENT PARTY
TOTAL STOCK STAGE PURCHASE
------------ ----------- ------------ ------------
Balances, October 29, 1992 $ -- $ -- $ -- $ --
Net loss (420,634) -- (420,634) --
Stock issuances 138,001 138,001 -- --
Unearned compensation (16,000) -- -- --
Amortization of unearned
compensation 11,600 -- -- --
----------- ---------- ----------- ------------
Balances, March 31, 1994 (287,033) 138,001 (420,634) --
Net loss (779,314) -- (779,314) --
Amortization of unearned
compensation 3,226 -- -- --
----------- ---------- ----------- ------------
Balances, March 31, 1995 (1,063,121) 138,001 (1,199,948) --
Net loss (1,026,609) -- (1,026,609) --
Stock issuances 350,000 350,000 -- --
Unearned compensation (8,000) -- -- --
Amortization of unearned
compensation 3,174 -- -- --
----------- ---------- ----------- ------------
Balances, March 31, 1996 (1,744,556) 488,001 (2,226,557) --
Net loss (2,817,292) -- (2,817,292) --
Stock issuances 1,421,281 1,421,281 -- --
Accrued preferred stock
dividend (280,795) -- (280,795) --
Class A preferred stock proceeds
allocated to related common
share warrants 4,324,549 4,324,549
Class A preferred stock issuance
costs allocated to related common
share warrants (286,927) (286,927)
Preferred stock accretion (198,186) (198,186)
Amortization of unearned
compensation 2,889 -- -- --
Related party purchase, in excess
of cost (3,381,300) -- -- (3,381,300)
----------- ---------- ----------- ------------
Balances, March 31, 1997 $(2,960,337) $5,946,904 $(5,522,830) $(3,381,300)
=========== ========== =========== ============
COMMON
UNEARNED COMMON SHARES
COMPENSATION SHARES WARRANTS
------------- ----------- -----------
Balances, October 29, 1992 $ -- -- --
Net loss -- -- --
Stock issuances -- 1,508,000 --
Unearned compensation (16,000) -- --
Amortization of unearned
compensation 11,600 -- --
-------- ----------- -----------
Balances, March 31, 1994 (4,400) 1,508,000 --
Net loss -- -- --
Amortization of unearned
compensation 3,226 -- --
-------- ----------- -----------
Balances, March 31, 1995 (1,174) 1,508,000 --
Net loss -- -- --
Stock issuances -- 175,000 --
Unearned compensation (8,000) -- --
Amortization of unearned
compensation 3,174 -- --
-------- ----------- -----------
Balances, March 31, 1996 (6,000) 1,683,000 --
Net loss -- -- --
Stock issuances -- 691,343.6 --
Accrued preferred stock
dividend -- -- --
Class A preferred stock proceeds
allocated to related common
share warrants -- -- 1,161,307.6
Class A preferred stock issuance
costs allocated to related common
share warrants -- -- --
Preferred Stock accretion -- -- --
Amortization of unearned
compensation 2,889 -- --
Related party purchase, in excess
of cost -- -- --
-------- ----------- -----------
Balances, March 31, 1997 $ (3,111) 2,374,343.6 1,161,307.6
======== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-5
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
OCT. 29, 1992
Year Ended YEAR ENDED YEAR ENDED TO
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997
---------------- ---------------- ---------------- ----------------
Net loss $(779,314) $(1,026,609) $(2,817,292) $(5,043,849)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Amortization and depreciation 38,923 108,182 170,108 328,983
Compensation for professional services
through the issuance of common
stock -- -- 44,190 44,190
Interest expense related to debenture
conversions -- 168,762 147,533 427,257
Increase in accounts receivable -- -- (27,480) (27,480)
Increase in prepayments -- -- (3,365,825) (3,365,825)
Increase in deferred charges (153,825) (338,887) (361,287) (971,700)
Change in intercompany receivable and
payable, net 347,019 114,964 (372,819) 138,080
Increase in interest payable 115,428 45,926 15,612 103,676
(Decrease)/Increase in accounts payable 38,856 201,926 (119,707) 238,775
(Decrease)/Increase in notes payable 114,969 111,961 (226,930) --
Other 13,728 2,548 3,131 20,889
--------- ----------- ----------- -----------
Net cash used by operating
activities (264,216) (611,227) (6,910,766) (8,107,004)
Net cash used in investing activities--
Purchase of subscribers from affiliate -- -- (3,381,300) (3,381,300)
Capital expenditures -- -- (246,863) (246,863)
--------- ----------- ----------- -----------
Net cash used in investing
activities -- -- (3,628,163) (3,628,163)
Cash flows from financing activities--
Cash paid for letters of credit -- -- (1,796,880) (1,796,880)
Proceeds from issuance of debentures 266,429 266,765 153,660 886,854
Proceeds from issuance of preferred stock,
net of issuance costs -- -- 20,267,604 20,267,604
Proceeds from issuance of common
stock -- 342,000 144,531 608,531
--------- ----------- ----------- -----------
Net cash provided by financing
activities 266,429 608,765 18,768,915 19,966,109
--------- ----------- ----------- -----------
Net increase/(decrease) in cash 2,213 (2,462) 8,229,986 8,230,942
Cash at beginning of period 1,205 3,418 956 --
--------- ----------- ----------- -----------
Cash at end of period $ 3,418 $ 956 $ 8,230,942 $ 8,230,942
========= =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-6
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO MARCH 31, 1997
1. DESCRIPTION OF BUSINESS:
21st Century Telecom Group, Inc. (the Company) is a Chicago-based company,
formed by shareholders of 21st Century Technology Group, Inc. (Technology) on
October 29, 1992. The Company was originally incorporated as 21st Century Cable
TV, Inc. and its name was subsequently changed to 21st Century Telecom Group,
Inc. on January 5, 1998. The Company was formed for the purpose of building a
cable and communication network in the Area 1 franchise of the City of Chicago.
Area 1 is the populous downtown and near downtown commercial and residential
districts. As part of its business plan, the Company intends to become a full
service communications provider via its installation of a state-of-the-art fiber
optic cable network. This distribution system is designed to provide a barrier-
free information super highway that can accommodate a wide range of
communication services, including interactive video, teleconferencing, business-
to-business connectivity, and 24-hour on-line computer interconnects, in
addition to basic telephony and an extensive selection of cable programming
options.
On March 26, 1996, the Company was awarded a non-exclusive franchise from the
City of Chicago to construct, install, maintain and operate a cable television
system within franchise Area 1. The franchise is for a period of 15 years. The
Company will be required to pay the City a franchise fee of 5% of the annual
gross revenues received, which it will pass through to its customers. The
Company was required to prepay $3,000,000 of franchise fees within 120 days of
being awarded the franchise. The payment was made in two equal installments, the
first payment was made on June 24, 1996, and the second payment was made on July
24, 1996.
The Company has reached an agreement with the Chicago Transit Authority (CTA)
for a 15-year license to attach its 15-mile fiber-optic trunk to the CTA's
overhead rail structures.
Financing the construction and initial start-up of the Company's system
remains an ongoing activity. On January 30, 1997, the Company sold $21.8 million
of convertible preferred stock. On November 25, 1997, the Company obtained a $15
million interim financing facility. The Company repaid this interim financing
facility upon the execution of a concurrent preferred equity and high yield debt
offering on February 9, 1998. These offerings resulted in gross proceeds of $200
million from the issuance of 12 1/4% Senior Discount Notes Due 2008 and $50
million from the issuance of 50,000 Units of 13 3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010 and Warrants to purchase 438,870 shares of
Common Stock. The net proceeds from these offerings will be used to assist the
Company in meeting its construction, development and working capital needs.
Although the Company has been successful in attracting the necessary financing
to complete the buildout of the franchise, the Company still needs to generate
sufficient revenues to service its debt and realize its investments in fixed
assets in future periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting and reporting principles conform to generally
accepted accounting principles.
Cash and Cash Equivalents
Cash and cash equivalents at March 31, 1997, consist of cash on hand at
certain banks as well as commercial paper investments. The commercial paper is
stated at cost, which approximates market value, and all mature within
F-7
seven days of purchase. At March 31, 1996, cash and cash equivalents consist
solely of cash on hand at certain banks.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to 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 financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Property, Plant and Equipment
The Company has recorded vehicle and computer equipment purchases at their
original cost. The purchases are being depreciated on a straight-line basis over
five years.
The Company capitalized leasehold improvements incurred as of March 31, 1997.
However, as the associated lease begins July 1, 1997, no related depreciation
was recognized for the year ended March 31, 1997. Beginning in fiscal 1998,
leasehold improvements will be depreciated on a straight-line basis over the
term of the lease, fifteen years.
Deferred Franchise Costs
The Company has deferred franchise costs, including legal costs, associated
with the organization of its business and obtaining the franchise from the City.
Deferred franchise costs are being amortized over five years.
Deferred Mapping and Design Costs
The Company has deferred certain mapping and design costs associated with
strand mapping the Area 1 region within the City. Deferred mapping and design
costs are being amortized over three years.
Revenue Recognition
The Company recognizes cable television revenues as services are provided to
subscribers.
Operating Expenses Other than Interest and Amortization
From inception to March 31, 1996, operating expenses, except interest and
amortization, had been allocated from Technology, a related party through some
common ownership and common management, based on estimates of time spent by
management and employees of Technology on Company activities. The Company's
Board of Directors approved these allocations. Technology's Board of Directors
did not formally approve these allocations. However, at the time the allocations
were made, the Company's and Technology's Boards contained substantially the
same individuals. For the years ended March 31, 1995 and 1996, the Company also
recognized 100% of expenses paid by Technology on behalf of the Company, as well
as 100% of expenses incurred by the Company. As these expenses were allocated,
an affiliate payable was recognized. Effective April 1, 1996, the Company began
recognizing and paying substantially all of its own expenses. Therefore, for the
year ended March 31, 1997, there were no significant allocations from Technology
or payments made by Technology on the Company's behalf.
Cash Flow Information
From inception to March 31, 1997, the Company has not paid any income taxes.
From inception to March 31, 1996, no interest was paid. For the year ending
March 31, 1997, the Company paid $274,993 in interest.
F-8
Earnings Per Share
For the twelve months ended March 31, 1995, 1996 and 1997, and the period from
inception to March 31, 1997, per share amounts were based on weighted average
common shares outstanding of 1,508,000, 1,609,129, 1,988,365 and 1,624,895
shares, respectively.
Effective for the nine months ended December 31, 1997, the Company adopted FAS
No. 128, "Earnings per Share" (see Note 5 in the interim financial statements).
The retroactive adoption of this standard for March 31, 1995, 1996 and 1997 did
not have an impact on the denominator of the basic loss per common share given
the anti-dilutive effects of including potential common shares in the
denominator of the diluted earnings per share calculation. At March 31, 1997
these potential common shares included the following: (1) 1,161,307.6 common
share warrants related to the Class A Convertible 8% Cumulative Preferred Stock,
(2) 1,000,966.8 shares of voting and non-voting common stock which replaced the
initial and debt warrants associated with the Class A Convertible 8% Cumulative
Preferred Stock as discussed in Note 4, (3) 1,250,000 options issued in
connection with certain Directors' guarantee of a loan, and (4) 18,994.7 stock
warrants issued to a financial advisor. At March 31, 1996 these potential common
shares included 627,199.5 shares related to the convertible debenture. At March
31, 1995 these potential common shares included 321,741.5 shares related to the
convertible debentures. The net loss attributable to common shares on which the
basic earnings per share calculation is based, reflects the net loss increased
by the amount of preferred dividends and accretion related to the Class A
Convertible 8% Cumulative Preferred Stock.
Accounting for Stock-Based Compensation
In fiscal 1998, when the Company adopts Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation," it intends to
continue to recognize compensation cost based on Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The fair value
disclosures required by Statement of Financial Accounting Standard 123 will be
supplementely shown.
3. INCOME TAXES:
The Company uses an asset and liability approach to account for income taxes.
Deferred income taxes (credit) reflect the impact of temporary differences
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. These temporary differences are determined
in accordance with Statement of Financial Accounting Standards (FAS) No. 109,
''Accounting for Income Taxes.'' The temporary difference and net operating loss
carryforward, which give rise to deferred tax assets at March 31, 1996 and 1997,
are as follows:
March 31, 1996 MARCH 31, 1997
DEFERRED DEFERRED
TAX ASSET TAX ASSET
----------------- -----------------
Net operating loss carryforward $ 871,270 $ 1,969,962
Valuation allowance (871,270) (1,969,962)
--------- -----------
$ -- $ --
========= ===========
The provision (credit) for income taxes is summarized as follows:
Year Ended YEAR ENDED YEAR ENDED INCEPTION TO
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997
----------------- ----------------- ----------------- -----------------
Current--
Federal $ -- $ -- $ -- $ --
State -- -- -- --
Deferred--
Federal (249,502) (327,033) (896,666) (1,607,966)
State (56,026) (73,683) (202,026) (361,996)
--------- --------- ----------- -----------
(305,528) (400,716) (1,098,692) (1,969,962)
Valuation allowance 305,528 400,716 1,098,692 1,969,962
--------- --------- ----------- -----------
$ -- $ -- $ -- $ --
========= ========= =========== ===========
The income tax provision (credit) differs from amounts at the statutory
federal income tax rate as follows:
Year Ended YEAR ENDED YEAR ENDED INCEPTION TO
MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997
----------------- ----------------- ----------------- -----------------
Income tax provision (credit) at
statutory rate $(272,760) $(359,313) $ (986,052) $(1,765,347)
Meals and entertainment 3,649 6,642 19,210 31,437
State income taxes (36,417) (48,045) (131,850) (236,052)
Valuation allowance 305,528 400,716 1,098,692 1,969,962
--------- --------- ---------- -----------
Income tax provision (credit) as
reported $ -- $ -- $ -- $ --
========= ========= ========== ===========
At March 31, 1997, the Company has cumulative net operating loss carryforwards
aggregating $4,865,397 expiring between 2009 and 2012. At March 31, 1997, the
Company has recorded a valuation allowance related to its deferred tax assets
aggregating $1,969,962.
F-9
4. DEBT:
A summary of debt outstanding at March 31, 1996 and 1997, is as follows:
March 31, 1996 MARCH 31, 1997
-------------- --------------
Convertible Subordinated Debentures, Series 1, 25%, due 1998 $200,000 $52,702
Convertible Subordinated Debentures, Series 2, 25%, due 1999 140,000 28,849
Convertible Subordinated Debentures, Series 3, 25%, due 1998 150,000 --
Convertible Subordinated Debentures, Series 4, 25%, due 1999 200,000 --
Convertible Subordinated Debentures, Series 5, 25%, due 2000 196,854 --
-------- -------
Total $886,854 $81,551
======== =======
All debentures are convertible to common stock based on a conversion ratio of
$2 to 1 share of common stock.
Conversion of $147,298 of the Series 1 convertible debentures occurred on May
17, 1996. Conversion of $111,151 of the Series 2 convertible debentures occurred
on April 28, 1996. Conversion of $150,000 of the Series 3 convertible debentures
occurred on November 14, 1996. Conversion of $200,000 of the Series 4
convertible debentures and $196,854 of the Series 5 convertible debentures
occurred on January 31, 1997.
Total debenture conversions to common stock for Series 1 through 5 convertible
debentures resulted in the issuance of 616,280 additional shares of common stock
between April 1996 and January 1997. (See ''Common Shares'' footnote for
conversion effects on common shares outstanding.)
During the period August 1994 to March 1996, the Company signed a series of
promissory notes aggregating $226,930 at March 31, 1996, with Kubasiak,
Cremieux, Flystra & Reigers, P.C. (Kubasiak). These notes accrued interest at a
rate of 9% and were due between February 1, 1995, and September 1, 1996. At
March 31, 1996, none of these promissory notes had been repaid and had accrued
interest aggregating $19,730. On July 1, 1996, Kubasiak canceled its notes that
were outstanding as of March 31, 1996, along with additional notes issued
through June 1996, and consolidated them into a single note, due January 2,
1997. This new note was paid in full on December 31, 1996.
5. COMMON SHARES:
On January 9, 1998, the common shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized common shares to
50,000,000 from 1,000,000. On the same date, the directors of the Company
declared a 1,000 for 1 share split of the Company's issued and outstanding
common shares. All common share amounts and per share amounts have been restated
to reflect this amendment and related split.
At March 31, 1996 and 1997, the Company has 50,000,000 shares of no par common
stock authorized, of which 1,683,000 and 2,374,343.6 are issued and outstanding,
respectively.
Changes in the Company's common shares and related amounts from the Company's
inception date through March 31, 1997, are as follows:
COMMON
SHARES AMOUNT
------------- -------------
October 29, 1992 1,439,000.0 $ 1
January 4, 1993 8,000.0 16,000
August 29, 1993 15,000.0 30,000
December 6, 1993 46,000.0 92,000
----------- ----------
March 31, 1994 1,508,000.0 138,001
March 31, 1995 1,508,000.0 138,001
September 20, 1995 171,000.0 342,000
October 17, 1995 4,000.0 8,000
----------- ----------
March 31, 1996 1,683,000.0 488,001
April 28, 1996 84,490.0 168,980
May 17, 1996 146,540.0 293,080
November 14, 1996 115,410.0 230,820
January 28, 1997 75,063.6 188,721
January 30, 1997 -- 4,037,622
January 31, 1997 269,840.0 539,680
----------- ----------
March 31, 1997 2,374,343.6 $5,946,904
=========== ==========
F-10
On October 29, 1992, the Company sold 1,439,000 shares to the shareholders of
21st Century Technology for an aggregate purchase price of $1. On January 4,
1993, the Company issued 8,000 shares of restricted stock, to officers of the
Company, at an estimated fair value of $2 per share. On August 29, 1993, the
Company exchanged 15,000 shares of common stock with an estimated fair value of
$2 per share for $30,000 of personal loans made to the Company by certain
directors of the Company. On December 6, 1993, the Company sold 46,000 shares of
common stock to certain shareholders of the Company at an estimated fair value
of $2 per share.
On September 20, 1995, the Company sold 171,000 shares of common stock to
various third-party investors for $342,000 at an estimated fair value of $2 per
share. On October 17, 1995, the Company issued 4,000 shares of restricted stock,
to an officer of the Company, at an estimated fair value of $2 per share.
As discussed earlier, Series 1 through 5 of the Company's convertible
debentures were converted to common stock throughout the year ended March 31,
1997. On April 28, 1996, debenture conversions of $111,151 in principal and
$57,829 in related interest resulted in the issuance of 84,490 shares of common
stock. On May 17, 1996, debenture conversions of $147,298 in principal and
$145,782 in related interest resulted in the issuance of 146,540 shares of
common stock. On November 14, 1996, debenture conversions of $150,000 in
principal and $80,820 in related interest resulted in the issuance of 115,410
shares of common stock. On January 31, 1997, debenture conversions of $396,854
in principal and $142,826 in related interest resulted in the issuance of
269,840 shares of common stock. The impacts of these noncash financing
activities are not included in the net cash provided or used by operating or
financing activities in the statements of cash flows.
The Company also had an arrangement with a law firm to compensate it for its
professional services by issuing 2,797.9 shares of common stock to it at a per
share price of $15.79, which was based upon the offering price of the Company's
preferred stock offering discussed below. The shares were issued on January 28,
1997.
Also on January 28, 1997, certain shareholders of Technology (a related party)
were allowed to purchase shares of the Company's common stock with the proceeds
from their loan repayment from Technology. This transaction resulted in the
issuance of 72,265.7 shares of additional common stock, at $2 per share.
As discussed in Note 6, portions of the proceeds and issuance costs associated
with the January 30, 1997 sale of Class A Convertible 8% Cumulative Preferred
Stock were allocated to the related common share warrants. This allocation
resulted in a net amount of $4,037,622 being recorded as common equity at March
31, 1997 (see Note 6 for additional discussion related to the allocation of the
proceeds and issuance costs).
In order to prepay the City's franchise fees, mentioned above, the Company
requested and received a $5 million Loan and Security Agreement on June 21,
1996, with LaSalle Northwest National Bank which expired on January 1, 1997. The
Company paid the loan including interest on January 31, 1997. Certain members of
the Company's Board of Directors had individually guaranteed the full line of
credit. The Company, in return for the Directors' guarantees, issued to the
Directors options to acquire 1,250,000 additional common shares of the Company,
at a price of $4 per share, exercisable until the expiration date of June 30,
2006. As of March 31, 1997, all options are outstanding.
In February 1997, the Company issued stock warrants representing 18,994.7
shares to its financial advisor at an exercise price of $15.79, aggregating
$300,000. The exercise price was based upon the offering price of the Company's
preferred stock offering discussed below. As of March 31, 1997, all warrants are
outstanding.
6. REDEEMABLE PREFERRED SHARES:
PREFERRED
SHARES AMOUNT
--------- ---------------
March 31, 1996 -- --
January 30, 1997
Proceeds 1,380.3 $17,475,451
Issuance costs -- (1,159,469)
Accrued dividends -- 280,795
Accretion -- 198,186
------- -----------
March 31, 1997 1,380.3 $16,794,963
======= ===========
On January 30, 1997 several investors contracted with the Company to
purchase 1,380.3 shares of the Company's Class A Convertible 8% Cumulative
Preferred Stock and initial, secondary and debt warrants for an aggregate
purchase price of $15,793.84 per share, totaling $21.8 million. A portion of the
initial purchase price was allocated to the common share warrants. The
allocation was based on the fair market value of the common stock at the date of
the sale of the Class A Convertible 8% Cumulative Preferred Stock and the number
of related secondary warrants, initial warrants and debt warrants associated
with such preferred stock. The fair market value of the common stock at the date
of the sale was estimated to be $2 per share. The number of secondary warrants
associated with the initial purchase amounted to 1,161,307.6. The number of
initial and debt warrants associated with the initial purchase was based on the
number of voting and non-voting common shares that these warrants were replaced
with as a result of the subsequent amendment to the related stock purchase
agreement as discussed in Note 11, "Subsequent Events." These initial and debt
warrants were replaced with 1,000,967 shares of voting and non-voting common
stock in January 1998. This allocation resulted in $4,324,549 and $17,475,451
being recorded as common stock and redeemable preferred stock, respectively, at
March 31, 1997. Issuance costs of $1,446,396 were incurred in conjunction with
the sale of the Class A Convertible 8% Cumulative Preferred Stock. These
issuance costs were allocated between the Class A Convertible 8% Cumulative
Preferred Stock and the related warrants based on the relative portions of the
proceeds allocated to each. The carrying value of the Class A Convertible 8%
Cumulative Preferred Stock is being accreted to its redemption value (using the
effective interest method) over the four year period from the date of the
original preferred stock purchase agreement to the date the stock becomes
mandatorily redeemable, January 30, 2001. The Class A Convertible 8% Cumulative
Preferred Stock is recorded on the balance sheet at the allocated portion of the
purchase price paid by the investors, less the allocated portion of the issuance
costs, plus accrued and unpaid preferred stock dividends, plus accretion.
Certain of the provisions of the agreement are summarized below:
- -- Each preferred share is convertible into one thousand common shares.
- -- Dividends accrue daily on the aggregate amount paid at an annual rate of
8%. Unpaid dividends compound on a semi-annual basis on June 30 and
December 31. At the consummation of a qualified public offering, all
accrued and unpaid dividends would be converted into common stock without
the issuance of additional shares. A qualified public offering is one in
which (1) the public purchases at least $25 million of common stock, (2)
the price per share paid is at least twice the liquidation value per share
of the Class A Convertible 8% Cumulative Preferred Stock, (3) the common
stock is traded on a national exchange or The Nasdaq Stock Market, and (4)
the shares issued and sold represent at least 20% of the common stock
outstanding after the public offering.
- -- Upon consummation of a qualified public offering, all preferred shares are
required to be converted into common shares.
- -- At any time after the fourth anniversary of the date of the purchase and
before the earlier of the date of the consummation of a qualified public
offering or the seventh anniversary of the date of the purchase, each
holder of the stock has the right from time to time to require the Company
to repurchase all, but not less than all, of their shares held (the put
arrangement). The shares would be repurchased by the Company for the
greater of: (1) the purchase price paid by the holder of the stock, plus
all accrued and unpaid dividends, or (2) the market value of the shares.
- -- "Initial Warrants" were granted to the investors who may increase their
ownership percentage up to another 12%. These warrants expire on May 31,
2008. The warrants are exercisable at $.000001 per share of common stock
only if the Company does not meet certain pre-established performance
indicators. The Company has until May 31, 1998 to meet these performance
indicators.
- -- "Secondary Warrants" to purchase up to 1,331,774.8 shares of common stock
at $.000001 per share of common stock were also granted to the investors.
These secondary warrants expire on January 30, 2007.
- -- "Debt Warrants", in addition to the initial and secondary warrants
discussed above, will vest to the new investors if the Company does not
receive Board of Director approval by July 31, 1997, for a $50 million
senior debt financing arrangement. Under this provision the Company is to
issue warrants to purchase shares representing 2% of the outstanding common
stock on the first day of each month until the definitive document with
respect to such debt is in place. Any such warrants issued would expire ten
years from the date of issue. Any debt warrants would also be exercisable
at $.000001 per share of common stock.
F-11
Of the $21.8 million, $21.7 million was received by March 31, 1997, with the
remainder received by April 22, 1997. The purchase resulted in the preferred
shareholders having an approximate 37% ownership interest in the Company on a
fully diluted basis excluding the contingently issuable common shares from the
exercise of the initial warrants and the debt warrants. The proceeds from this
preferred stock offering were used to (1) repay a $5 million revolving credit
note to LaSalle Northwest National Bank, (2) purchase the subscriber base of
Technology located in the Chicago franchise area for $3,381,000, (3) retire
existing Company debt and accounts payable in the amount of $541,166, and (4)
pay transaction costs of $1,446,396. The balance of the proceeds will be used
for working capital and capital expenditures to build the network, operating
center and network infrastructure.
The holders of the Class A Convertible 8% Cumulative Preferred Stock are
collectively in a position to control the taking of many significant corporate
actions by the Company, including the making of any significant capital
commitments, the incurrence of any significant indebtedness, mergers and the
payment of dividends on the Common Stock, pursuant to agreements which provide
that prior to taking such actions, the Company will need to obtain the approval
of the nominees to the Board of Directors of the holders of the Class A
Convertible 8% Cumulative Preferred Stock. These restrictions terminate upon the
consummation of a qualified public offering.
7. RESTRICTED STOCK AWARDS:
The Company has awarded restricted stock to certain officers. The restricted
shares vest over a 33-month period. Vested shares are subject to certain
transfer restrictions and forfeiture under certain circumstances. Unearned
compensation, representing the fair value of the stock on the date of award
(estimated at $2 by management), is amortized to salary expense over the vesting
period. During the period from inception to March 31, 1994, 8,000 shares of
restricted stock were issued and were fully vested at March 31, 1996. In October
1995, an additional 4,000 shares of restricted stock were awarded.
8. PREPAID FRANCHISE FEES:
As mentioned earlier, the Company was required to prepay $3,000,000 of
franchise fees within 120 days of being awarded the franchise by the City. In
accordance with the franchise agreement, the prepaid franchise fees earn
interest for the period outstanding at a rate equal to the Company's cost of
borrowed funds. The rate on the Company's $5 million loan with LaSalle Northwest
National Bank of approximately 10% was used to compute the interest earned on
the prepaid franchise fees. The interest accrued on the prepaid franchise fees
for the year ended March 31, 1997, amounted to $216,575. These prepaid franchise
fees will be reduced over time as revenues are billed to customers.
9. RELATED-PARTY TRANSACTIONS:
The Company is related through some common ownership and common management to
Technology.
Activities pertaining to the Company's development from its inception date to
March 31, 1996, have, for the most part, been intermingled with the activities
of Technology. As discussed in Note 2, from inception to March 31, 1996,
operating expenses, except interest and amortization, have been allocated to the
Company based on estimates of time spent on the Company's activities by
employees of Technology.
In January 1997, the Company purchased Technology's Area 1 subscriber base and
related equipment for $3,381,300. As this is considered to be a related party
transaction, the Company could only capitalize Technology's book value of the
purchased subscribers and the related equipment. As Technology's book value was
zero at the time of purchase, the entire purchase price is shown as a reduction
to common shareholders' equity.
In January 1997, the Company paid approximately $459,000 of accrued legal fees
to one of its directors, either individually or to entities controlled by him,
for legal services rendered by him to the Company in connection with the
Company's cable service offering and its obtaining the Chicago franchise.
F-12
10. COMMITMENTS AND CONTINGENCIES:
The Company obtained two letters of credit totaling $1,796,880. The first
letter, for $500,000, was obtained as part of the franchise agreement mentioned
earlier and expires on February 10, 1998. The second letter is for the benefit
of the Merchandise Mart totaling $1,296,880 and was obtained in place of a
security deposit related to the Merchandise Mart lease. This letter
automatically renews on an annual basis for 1/15 less than the initial amount.
These letters of credit are fully collateralized by cash, which is reflected as
a restricted cash collateral reserve on the balance sheet. The Company invests
the cash in commercial paper which matures daily. As of March 31, 1997, the
commercial paper investments had earned $11,411 in interest income.
On January 31, 1997, the Company entered into a lease agreement with the
Merchandise Mart beginning July 1, 1997 for 32,422 square feet, which will
increase by 7,975 square feet within four years. The leased space will house all
video and head-end equipment, as well as serve as the corporate offices. The
term of the lease is fifteen years. As of March 31, 1997, the aggregate
minimum rental commitments under the Merchandise Mart lease agreement were
as follows:
Year Ending
March 31,
-----------
1998 $ 437,697
1999 626,729
2000 676,662
2001 735,152
2002 789,388
Thereafter 10,633,500
-----------
$ 13,899,128
===========
The Company has contracted with a construction company for the buildout of the
leased space, totaling approximately $4.5 million. Of this amount, the
Merchandise Mart is responsible for $1,296,880 under the lease agreement. The
Company is responsible for the remainder.
Rental expense under operating leases was $26,565, $34,266 and $55,152 for
the years ended March 31, 1995, 1996 and 1997, respectively
11. SUBSEQUENT EVENTS:
On July 1, 1997, the Company entered into an open-ended master fleet lease
with Enterprise Leasing Company. The agreement allows the Company to lease
vehicles as they are needed. Total lease payments are therefore dependent upon
the types and quantities of vehicles leased.
Subsequent to March 31, 1997, the Company incurred approximately $15 million
in capital expenditures.
On September 23, 1997, the Company entered into an agreement for the issuance
of additional preferred stock representing 63.3 shares at a purchase price of
$15,793.84 per share, aggregating $1 million. The Company incurred issuance
costs of $60,000 in conjunction with this transaction. The agreement is based on
the same terms as the previously mentioned $21.8 million preferred stock
issuance.
On November 20, 1997, the Company entered into an agreement for the issuance
of additional preferred stock representing 9.5441 shares at a purchase price of
$15,793.84 per share, aggregating approximately $150,000. The agreement is based
on the same terms as the previously mentioned $21.8 million preferred stock
issuance.
On November 25, 1997, the Company entered into an agreement with Credit Suisse
First Boston Corporation (a Swiss bank), BankBoston, N.A. and Bank of America
NT&SA, establishing a $15 million interim credit facility. This interim credit
facility and accrued interest was repaid from the proceeds of a concurrent
preferred equity and high yield debt offering. The concurrent preferred equity
and high yield debt offering, executed on February 9, 1998, consists of $200
million of senior discount notes and $50 million of senior exchangeable
preferred stock. The interim credit facility provided for an interest rate based
on either (i) 5% plus a rate tied to the prime rate, a certificate-of-deposit
rate or the Federal funds rate or (ii) 6% plus the London interbank offered
rate. To secure this interim credit facility the Company granted the lender a
security interest in substantially all of its properties, and certain holders of
the Company's common stock pledged such stock for the benefit of the lenders.
This interim credit facility contained restrictive covenants typical for a
facility of this type.
Effective January 30, 1997, the Company established a common stock option
plan. No options were granted under the plan until October 14, 1997. The options
expire ten years from the date of grant. The exercise price of each option is
$1.12 per share and the Company estimated the fair market value of each option
to be $4.50 at the date of grant. As of December 31, 1997, the maximum number of
options, 728,667.7, were granted under the terms of the plan. The options vest
over 48 months and the vesting period starts from the date of employment. The
beginning vesting dates range from November 11, 1992, to December 26, 1997.
F-13
During December 1997, the Company and its Class A Convertible 8% Cumulative
Preferred Stock shareholders negotiated a number of changes to the original
Stock Purchase Agreement. These changes were formally ratified on January 8 and
14, 1998. The original put arrangement as discussed in Note 6 was removed and
was replaced by the right of the Class A preferred shareholders to require the
sale of the Company. The new provision provides that at any time and from time
to time after the fourth anniversary of the date of issuance of the senior
discount notes and senior cumulative exchangeable preferred stock (discussed in
Note 1) and ending on the earlier to occur of the consummation of a qualified
public offering and the seventh anniversary of the date of issuance of the
senior discount notes, the Class A preferred shareholders have the right to
require the sale of the Company. The liquidation value of the preferred stock is
the sum of the original cost plus any accrued and unpaid dividends. The right to
obtain additional common shares under the initial warrant and debt warrant
provisions as discussed in Note 6 was removed and was replaced by an agreement
to increase the Class A preferred shareholders ownership on a fully diluted
basis by an additional 8% by issuing additional common stock. One-half of this
additional stock is voting and the other half is non-voting. A portion of the
proceeds and issuance costs associated with the sale of the Class A Convertible
8% Cumulative Preferred stock were allocated to the initial and debt warrants
and reflected in common stock at December 31, 1997. In addition, the holders of
the Class A preferred stock are collectively in a position to control the taking
of many significant corporate actions by the Company, including the making of
any significant capital commitments, the incurrence of any significant
indebtedness, merger and the payment of dividends on the common stock, pursuant
to agreements which provide that prior to taking such actions, the Company will
need to obtain the approval of the nominees to the Board of Directors of the
holders of the Class A preferred stock. These restrictions on corporate actions
by the Company terminate upon consummation of a qualified public offering.
Subsequent to year end, the Company obtained the approval of the common
shareholders for an amendment to the Articles of Incorporation to authorize
1,000,000 shares of non-voting common stock.
F-14
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS December 31, 1997 December 31, 1997
------ ------------------ ------------------
(Unaudited) (Pro Forma)
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,404,975 $ 1,404,975
Accounts receivable from subscribers 19,222 19,222
Prepayments 6,750 6,750
Inventory 678,866 678,866
------------ ------------
Total current assets 2,109,813 2,109,813
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements 3,984,541 3,984,541
Other property, plant and equipment 11,270,073 11,270,073
Less--Accumulated depreciation (473,725) (473,725)
------------ ------------
14,780,889 14,780,889
OTHER ASSETS:
Restricted cash collateral reserve 1,796,880 1,796,880
Accounts receivable from associated company 1,156,780 1,156,780
Prepaid franchise fees 3,442,603 3,442,603
Deferred franchise costs, net of amortization of $451,707 445,549 445,549
Deferred mapping and design, net of amortization of $46,977 90,974 90,974
Other deferred costs 12,000 12,000
------------ ------------
Total other assets 6,944,786 6,944,786
------------ ------------
Total assets $ 23,835,488 $ 23,835,488
============ ============
LIABILITIES AND PREFERRED AND COMMON EQUITY
-------------------------------------------
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 6,352,103 $ 6,352,103
Debentures payable 52,702 52,702
Interest payable 107,677 107,677
Interim credit facility 8,000,000 8,000,000
Accounts payable to associated company 1,294,860 1,294,860
------------ ------------
Total current liabilities 15,807,342 15,807,342
NONCURRENT LIABILITIES:
Debentures payable 28,849 28,849
Interest payable 37,957 37,957
------------ ------------
Total noncurrent liabilities 66,806 66,806
REDEEMABLE PREFERRED STOCK:
Class A convertible 8% cumulative preferred stock, no par
value, 1,453.1 shares outstanding 19,974,325 --
SHAREHOLDERS' EQUITY:
Class A convertible 8% cumulative preferred stock, no par value, 1,453.1 shares
outstanding -- 19,974,325
Voting common stock no par value, 2,388,743.5 shares issued and outstanding,
1,222,569.0 secondary common share warrants outstanding and 1,044,064.6
initial and debt common share warrants converted to voting and non-voting
common stock in 1998 at December 31, 1997 and 2,910,776.5 shares of voting
common stock outstanding, 1,222,569.0 common share warrants outstanding,
and 522,032.3 shares of non-voting common stock outstanding at
December 31, 1997 on a pro forma basis 7,023,934 7,023,934
Deficit accumulated during development stage (15,655,619) (15,655,619)
Related party purchase, in excess of cost (3,381,300) (3,381,300)
------------ ------------
Total common shareholders' equity (12,012,985) 7,961,340
------------ ------------
Total liabilities and equity $ 23,835,488 $ 23,835,488
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
F-15
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
OCT. 29, 1992
Nine Months Ended NINE MONTHS ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997
---------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Subscriber revenues $ -- $ 123,532 $ 151,012
Operating expenses 190,817 413,979 624,507
Selling, general and administrative expenses 1,572,936 7,276,439 11,303,867
Depreciation and amortization 114,734 643,427 972,410
----------- ------------ ------------
Operating loss (1,878,487) (8,210,313) (12,749,772)
Interest income 142,603 484,678 786,302
Interest expense 376,828 119,226 925,240
----------- ------------ ------------
Loss before income taxes (2,112,712) (7,844,861) (12,888,710)
PROVISION (CREDIT) for INCOME TAXES -- -- --
----------- ------------ ------------
NET LOSS (2,112,712) (7,844,861) (12,888,710)
Preferred stock requirements -- (2,287,928) (2,766,909)
----------- ------------ ------------
NET LOSS ATTRIBUTABLE to COMMON
SHARES $(2,112,712) $(10,132,789) $(15,655,619)
=========== ============ ============
Weighted average common shares outstanding 1,900,527 2,380,926 1,735,296
LOSS PER COMMON SHARE $(1.11) $(4.26) $(9.02)
=========== ============ ============
The accompanying notes to financial statements are an integral part of these
statements.
F-16
(a development stage company)
---------------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
-------------------------------------------
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
-------------------------------------------------------------------------
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT RELATED PARTY UNEARNED COMMON SHARE
TOTAL COMMON STOCK STAGE PURCHASE COMPENSATION COMMON SHARES WARRANTS
------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 29, 1992 $ - $ - $ - $ - $ - - -
Net loss (420,634) - (420,634) - - - -
Stock issuances 138,001 138,001 - - - 1,508,000.0 -
Unearned compensation (16,000) - - - (16,000) - -
Amortization of unearned
compensation 11,600 - - - 11,600 - -
-----------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1994 (287,033) 138,001 (420,634) - (4,400) 1,508,000.0 -
Net loss (779,314) - (779,314) - - - -
Stock issuances - - - - - - -
Amortization of unearned
compensation 3,226 - - - 3,226 - -
-----------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995 (1,063,121) 138,001 (1,199,948) - (1,174) 1,508,000.0 -
Net loss (1,026,609) - (1,026,609) - - - -
Stock issuances 350,000 350,000 - - - 175,000.0 -
Unearned compensation (8,000) - - - (8,000) - -
Amortization of unearned
compensation 3,174 - - - 3,174 - -
-----------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 (1,744,556) 488,001 (2,226,557) - (6,000) 1,683,000.0 -
Net loss (2,817,292) - (2,817,292) - - - -
Stock issuances 1,421,281 1,421,281 - - - 691,343.60 -
Accrued preferred stock dividend (280,795) - (280,795) - - - -
Class A preferred stock proceeds
allocated to related common
share warrants 4,324,549 4,324,549 - - - - 1,161,307.6
Class A preferred stock issuance
costs allocated to related common
share warrants (286,927) (286,927) - - - - -
Preferred stock accretion (198,186) - (198,186) - - - -
Amortization of unearned
compensation 2,889 - - - 2,889 - -
Related party purchase, in excess
of cost (3,381,300) - - (3,381,300) - - -
-----------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 (2,960,337) 5,946,904 (5,522,830) (3,381,300) (3,111) 2,374,343.6 1,161,307.6
Net loss (7,844,861) - (7,844,861) - - - -
Accrued preferred stock dividend (1,349,934) - (1,349,934) - - - -
Class A preferred stock proceeds
allocated to related common
share warrants 209,364 209,364 - - - - 61,261.4
Class A preferred stock issuance
costs allocated to related common
share warrants (10,834) (10,834) - - - - -
Preferred stock accretion (937,994) - (937,994) - - - -
Stock option accrual 849,700 849,700 - - - - -
Stock compensation 28,800 28,800 - - - 14,400 -
Amortization of unearned
compensation 3,111 - - - 3,111 - -
-----------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $(12,012,985) $7,023,934 $(15,655,619) $(3,381,300) $ - 2,388,743.5 1,222,569.0
===============================================================================================
The accompanying notes to financial statements
are an integral part of these statements.
F-17
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
OCT. 29, 1992
Nine Months Ended NINE MONTHS ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1997
-------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Net cash used by operating activities $(5,006,135) (5,987,369) (14,094,373)
Net cash used in investing activities--
Purchase of subscribers from affiliate -- -- (3,381,300)
Investment in subsidiaries -- (2,000) (2,000)
Investment in franchises -- (10,000) (10,000)
Capital expenditures (47,118) (10,002,597) (10,249,460)
----------- ------------ ------------
Net cash used in investing activities (47,118) (10,014,597) (13,642,760)
----------- ------------ ------------
Cash flows from financing activities--
Draw on loan 4,954,762 -- --
Proceeds from interim credit facility -- 8,000,000 8,000,000
Cash paid for letters of credit -- -- (1,796,880)
Proceeds from issuance of debentures 153,664 -- 886,854
Proceeds from issuance of preferred stock, net of
issuance costs -- 1,175,999 21,443,603
Proceeds from issuance of common stock -- -- 608,531
----------- ------------ ------------
Net cash provided by financing activities 5,108,426 9,175,999 29,142,108
----------- ------------ ------------
Net increase (decrease) in cash 55,173 (6,825,967) 1,404,975
Cash at beginning of period 956 8,230,942 --
----------- ------------ ------------
Cash at end of period $ 56,129 $ 1,404,975 $ 1,404,975
=========== ============ ============
The accompanying notes to financial statements are an integral part of these
statements.
F-18
21ST CENTURY TELECOM GROUP, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 29, 1992) TO DECEMBER 31, 1997
1. PREPARATION OF INTERIM FINANCIAL STATEMENTS:
The interim financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements include estimates and assumptions that
affect the reported amounts of assets and liabilities and the amounts of
revenues and expenses. Actual amounts could differ from those estimates.
However, in the opinion of management of the Company, the interim financial
statements include all adjustments, consisting only of normally recurring
adjustments, necessary for a fair statement of results for each period shown.
The interim financial statements should be read in conjunction with the
financial statements and notes thereto for the fiscal year ended March 31, 1997,
included in this Prospectus.
2. LEASING ACTIVITIES:
On July 1, 1997, the Company entered into an open-ended master fleet lease
with Enterprise Leasing Company. The agreement allows the Company to lease
vehicles as they are needed. Total lease payments are therefore dependent upon
the types and quantities of vehicles leased. Through December 31, 1997, eleven
vehicles had been leased at an annual cost of $130,913 for all eleven vehicles.
The respective leases range from three to four years.
3. STOCK OPTION PLAN:
Effective January 30, 1997, the Company established a common stock option
plan. No options were granted under the plan until October 14, 1997. The options
expire ten years from the date of grant. The exercise price of each option is
$1.12 per share and the Company estimated the fair market value of each option
to be $4.50 at the date of grant. As of December 31, 1997, the maximum number of
options, 728,667.7, were granted under the terms of the plan which resulted in
deferred compensation of $2,462,897. The options vest over 48 months and the
vesting period starts from the date of employment. The beginning vesting dates
range from November 11, 1992, to December 26, 1997. The Company recorded
$849,700 of compensation expense for the nine months ended December 31, 1997, to
reflect the vesting periods for the various individuals in the plan. At December
31, 1997, approximately 251,000 options had vested.
4. CHANGES TO THE PREFERRED STOCK AGREEMENT
During December 1997, the Company and its Class A Convertible 8% Cumulative
Preferred Stock shareholders negotiated a number of changes to the original
Stock Purchase Agreement. These changes were formally ratified on January 8 and
14, 1998. The original put arrangement as discussed in Note 6 was removed and
was replaced by the right of the Class A preferred shareholders to require the
sale of the Company. The new provision provides that at any time and from time
to time after the fourth anniversary of the date of issuance of the senior
discount notes and senior cumulative exchangeable preferred stock (discussed in
Note 1) and ending on the earlier to occur of the consummation of a qualified
public offering and the seventh anniversary of the date of issuance of the
senior discount notes, the Class A preferred shareholders have the right to
require the sale of the Company. The liquidation value of the preferred stock is
the sum of the original cost plus any accrued and unpaid dividends. The right to
obtain additional common shares under the initial warrant and debt warrant
provisions as discussed in Note 6 was removed and was replaced by an agreement
to increase the Class A preferred shareholders ownership on a fully diluted
basis by an additional 8% by issuing additional common stock. One-half of the
additional stock is voting and the other half is non-voting. A portion of the
proceeds and issuance costs associated with the sale of the Class A Convertible
8% Cumulative Preferred Stock were allocated to the initial and debt warrants
and reflected as common stock at December 31, 1997. In addition, the holders of
the Class A preferred stock are collectively in a position to control the taking
of many significant corporate actions by the Company, including the making of
any significant capital commitments, the incurrence of any significant
indebtedness, merger and the payment of dividends on the common stock, pursuant
to agreements which provide that prior to taking such actions, the Company will
need to obtain the approval of the nominees to the Board of Directors of the
holders of the Class A preferred stock. These restrictions on corporate actions
by the Company terminate upon consummation of a qualified public offering.
5. EARNINGS PER SHARE:
Effective for the nine months ended December 31, 1997, the Company adopted FAS
No. 128, "Earnings per Share". The adoption of this standard did not have an
impact on the denominator of the basic loss per common share given the anti-
dilutive effects of including potential common shares in the denominator of the
diluted earnings per share calculation. At December 31, 1997 these potential
common shares included the following: (1) 1,222,569.0 common share warrants
related to the Class A Convertible 8% Cumulative Preferred Stock, (2)
1,044,064.6 shares of voting and non-voting common stock which replaced the
initial and debt warrants associated with the Class A Convertible 8% Cumulative
Preferred Stock, as discussed in Note 4, (3) 1,250,000 options issued in
connection with certain Directors' guarantees of a loan, (4) 18,994.7 stock
warrants issued to a financial advisor, and (5) 728,667.7 options granted under
the terms of the stock option plan. At December 31, 1996 the potential dilutive
common shares included the 1,250,000 options issued in connection with certain
Directors' guarantees of a loan. The net loss attributable to common shares on
which the basic earnings per share calculation is based, reflects the net loss
increased by the amount of preferred dividends and accretion related to the
Class A Convertible 8% Cumulative Preferred Stock.
F-19
6. PREFERRED STOCK TRANSACTIONS:
On September 23, 1997 and November 20, 1997, the Company entered into
agreements for the issuance of additional Class A Convertible 8% Cumulative
Preferred Stock and initial, secondary and debt warrants. The September 23, 1997
and November 20, 1997 sales represented 63.3 and 9.5441 shares of the Class A
Convertible 8% Cumulative Preferred Stock, respectively, with purchase prices of
$15,793.84 per share, aggregating $1 million and $150,000, respectively. The
agreements were based on the same terms as the $21.8 million preferred stock
issuance discussed in Note 6 to the March 31, 1997 financial statements. A
portion of the purchase prices were allocated to the common share warrants. The
allocation was based on the fair market value of the common stock at the date of
the sales of the Class A Convertible 8% Cumulative Preferred Stock and the
number of related secondary warrants, initial warrants and debt warrants. The
fair market value of the common stock at the date of the sales was estimated to
be $2 per share. The number of secondary warrants associated with the purchases
amounted to 61,261. The number of initial and debt warrants associated with the
purchases was based on the number of voting and non-voting common shares that
these warrants were replaced with as a result of the subsequent amendment to the
related stock purchase agreement as discussed in Note 4, "Changes to the
Preferred Stock Agreement." These initial and debt warrants were replaced with
43,098 shares of voting and non-voting common stock. This allocation resulted in
$209,364 and $940,636 being recorded as common stock and redeemable preferred
stock, respectively, at December 31, 1997. Issuance costs of $60,000 were
incurred in conjunction with the September 23, 1997, sale of the Class A
Convertible 8% Cumulative Preferred Stock. These issuance costs were allocated
between the Class A Convertible 8% Cumulative Preferred Stock and the related
warrants based on the relative portions of the proceeds allocated to each. The
carrying value of the Class A Convertible 8% Cumulative Preferred Stock is being
accreted to its redemption value (using the effective interest method) over the
four year period from the date of the original preferred stock purchase
agreement to the date the stock becomes mandatorily redeemable, January 30,
2001. The Class A Convertible 8% Cumulative Preferred Stock is recorded on the
balance sheet at the allocated portion of the purchase price paid by the
investors, less the allocated portion of the issuance costs, plus accrued and
unpaid preferred stock dividends, plus accretion. The following is a rollforward
of the Class A Convertible 8% Cumulative Preferred Stock from March 31, 1997 to
December 31, 1997:
Preferred
---------
Shares Amount
------ ------
March 31, 1997 1,380.3 $16,794,963
Sales and allocation of proceeds 72.8 940,635
Issuance costs -- (49,166)
Accrued dividends -- 1,349,933
Accretion -- 937,960
------- -----------
December 31, 1997 1,453.1 $19,974,325
======= ===========
7. PRO FORMA FINANCIAL INFORMATION:
As discussed in Note 4, in January 1998 the Company negotiated a number of
changes to the original Class A Convertible 8% Cumulative Preferred Stock
Agreement (Preferred Stock Agreement). One change resulted in the removal of a
put arrangement. This change would allow for the classification of the Class A
Convertible 8% Cumulative Preferred Stock as equity at March 31, 1998. The pro
forma impacts of this change on the December 31, 1997 balance sheet have been
reflected in the pro forma column on the December 31, 1997 balance sheet. The
pro forma change consists of reflecting the Class A Convertible 8% Cumulative
Preferred Stock within equity at December 31, 1997. Another change resulted in
the replacement of the initial and debt warrant provisions with a provision that
provided for the preferred shareholders to receive additional voting and non-
voting shares of common stock. The number of voting and non-voting shares of
common stock that will be issued in 1998 related to the Class A Convertible 8%
Cumulative Preferred Stock outstanding at December 31, 1997, are 522,032.3 and
522,032.3, respectively. The pro forma impacts of this change have been
reflected on the December 31, 1997 balance sheet. The pro forma change
consists of reflecting the additional shares of voting and non-voting common
stock as outstanding at December 31, 1997.
8. SUBSEQUENT EVENTS
On February 9, 1998, the Company executed a concurrent preferred equity and
high yield debt offering. This offering resulted in gross proceeds of $200
million from the issuance of 12-1/4% Senior Discount Notes Due 2008 and $50
million from the issuance of 50,000 Units of 13-3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010 and Warrants to purchase 438,870 shares of
common stock. The net proceeds from these offerings were used to repay the
interim financing facility outstanding at that date as well as to assist the
Company in meeting its construction, development and working capital needs. The
Senior Discount Notes have a maturity value of $363,135,000. No cash interest
will accrue on the Notes prior to 2003. Beginning in 2003, cash interest will
be payable semi-annually. The Senior Discount Notes are not redeemable at the
option of the Company prior to 2003 except that prior to 2001 the Company may
redeem in the aggregate up to 35% of the original principal amount at maturity
with the proceeds of a public equity offering. The Exchangeable Preferred Stock
will accrue dividends at a 13-3/4% rate from date of issuance. Prior to 2003,
dividends may be paid, at the Company's option, by the issuance of additional
shares of Exchangeable Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends. The Exchangeable Preferred
Stock is not redeemable prior to 2003 except that prior to 2001 the Company may
redeem in whole but not in part the outstanding Exchangeable Preferred Stock
with the proceeds of a public equity offering.
F-20
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or any Initial Purchasers. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof or that there has been no change in the affairs of the
Company since such date.
TABLE OF CONTENTS
Page
----
Prospectus Summary................................... 5
Risk Factors......................................... 19
Dividend Policy...................................... 30
Use of Proceeds...................................... 30
Capitalization....................................... 31
Selected Financial Data.............................. 32
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 33
The Exchange Offer................................... 36
Business............................................. 44
Industry Structure and Technology.................... 59
Legislation and Regulation........................... 61
Management........................................... 71
Certain Transactions................................. 77
Principal Shareholders............................... 78
Description of Certain Indebtedness.................. 81
Description of the New Notes......................... 83
Description of the New Exchangeable
Preferred Stock....................................112
Description of the Exchange Debentures...............127
Book-Entry, Delivery and Form........................154
Description of Capital Stock.........................157
Certain United States Federal Income
Tax Consequences...................................163
Plan of Distribution.................................173
Legal Matters........................................173
Experts..............................................174
Additional Information...............................174
Glossary.............................................175
Index to Financial Statements........................F-1
LOGO
21ST CENTURY TELECOM GROUP, INC.
Offer to Exchange (i) 12 1/4% Senior Discount Notes Due 2008, which have been
registered under the Securities Act of 1933, as amended, for any and all of its
outstanding 12 1/4% Senior Discount Notes Due 2008 and (ii) 13 3/4% Senior
Cumulative Exchangeable Preferred Stock Due 2010, which has been registered
under the Securities Act of 1933, as amended, for any and all of its outstanding
13 3/4% Senior Cumulative Exchangeable Preferred Stock Due 2010
____________
PROSPECTUS
____________
May [__], 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Illinois Business Corporation Act (the "Act") empowers the Registrant,
subject to certain exceptions, to indemnify officers and directors against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred by reason of the fact that he or she is or was an officer,
director, employee or agent of the Registrant, or is or was serving as such at
the request of the Registrant with respect to another corporation, partnership,
joint venture, trust, or other enterprise. The Act also empowers the Registrant
to purchase and maintain insurance on behalf of any such officer or director of
the Registrant against any liability asserted against or incurred by him or her
in any such capacity, whether or not the Registrant would have power to
indemnify such officer or director against such liability under the provisions
of the Act.
Article X, of the Company's Bylaws provides that the Company shall
indemnify, any person made a party to any action, suit or proceeding, by reason
of the fact that such person is or was a director, officer or employee of the
Company, or is or was serving at the request of the Company as a director,
officer or employee of another corporation, from and against all reasonable
expenses (including attorneys' fees), actually and necessarily incurred by him
in connection with the defense of such action, suit or proceeding or in
connection with any appeal therein, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding, or in connection with any
appeal therein that such officer, director or employee is liable for negligence
or misconduct in performance of his duties. The amount of such indemnification
shall be fixed by the Board of Directors, except in the case when there is no
disinterested majority of the Board available, that amount shall be fixed by
arbitration pursuant to the then existing rules of the American Arbitration
Association.
The Registrant has purchased and currently maintains liability coverage for
its officers and directors insuring them against losses arising from any
wrongful act in his or her capacity as an officer and director.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No.
Exhibit No. Document
1.1 Purchase Agreement dated as of February
2, 1998 by and among the Company and
Credit Suisse First Boston Corporation,
BancAmerica Robertson Stephens and
BancBoston Securities, Inc., as Initial
Purchasers.
3.1 Articles of Incorporation of the Company
as filed on October 29, 1992 and as
amended on February 9, 1998.
3.2 By-laws of the Company.
4.1 Indenture dated February 15, 1998
between the Company, as Issuer, and
State Street Bank and Trust, as
Trustee, with respect to the 12 1/4
Senior Discount Notes Due 2008.
4.2 Form of the 12 1/4 Senior Discount
Notes Due 2008.
4.3 Indenture dated as of February 15, 1998
between the Company and IBJ Schroder
Bank & Trust Company, as Trustee, with
respect to the Exchange Debenture.
4.4 Form of the 13 3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010.
4.5 Registration Rights Agreement dated as
of February 2, 1998 by and among the
Company and Credit Suisse First Boston
Corporation, BancAmerica Robertson
Stephens and BancBoston Securities,
Inc., as Initial Purchasers.
5.1 Opinion of Neal, Gerber and Eisenberg.
5.2 Opinion of Piper & Marbury LLP.
10.1 Franchise Agreement dated as of June
24, 1996 by and among the City of
Chicago and the Company.
10.2 License Agreement dated as of October
27, 1994 by and among the Chicago
Transit Authority and the Company.
10.3*+ CSG Master Subscriber Management System
Agreement dated as of May 28, 1997 by
and among CSG Systems, Inc. and the
Company.
10.4*+ Telemarketing Consultation Agreement
dated as of August 5, 1997 by and among
the Company and ITI Marketing Services,
Inc.
10.5*+ Pole Attachment Agreement dated as of
April 3, 1996 by and among the Company
and Commonwealth Edison Company.
10.6*+ Pole Attachment Agreement dated as of
November 14, 1996 by and among the
Company and Ameritech--Illinois.
10.7*+ Office Lease dated January 31, 1997 by
and among the Company and LaSalle
National Bank.
10.8 Franchise Agreement dated as of March
16, 1998 by and between the Village of
Skokie, Illinois and 21st Century
Cable TV of Illinois, Inc.
10.9 Interconnection Agreement dated as of
May 5, 1997 by and between Ameritech
Information Industry Services and 21st
Century Telecom of Illinois, Inc.
10.10*+ Network Products Purchase Agreement by
and between Northern Telecom Inc. and
the Company.
12.1 Statement regarding Computation of
Earnings Ratio to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1* Consent of Arthur Andersen with Respect
to the Company.
23.2 Consent of Piper & Marbury LLP
23.3 Consent of Neal, Gerber and Eisenberg.
24.1 Power of Attorney (included on the
signature page of this Registration
Statement).
25.1 Statement of Eligibility of State
Street Bank and Trust, as Trustee.
99.1 Form of Letter of Transmittal to 12 1/4%
Senior Discount Notes Due 2008 of the
Company.
99.2 Form of Letter of Transmittal to 13 3/4%
Senior Cumulative Exchangeable
Preferred Stock Due 2010 of the Company.
99.3 Form of Notice of Guaranteed Delivery
for 12-1/4% Senior Discount Notes Due
2008.
99.4 Form of Notice of Guaranteed Delivery
for 13-3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010.
99.5 Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees for 12-1/4% Senior
Discount Notes Due 2008.
99.6 Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees for 13-3/4% Senior
Cumulative Exchangeable Preferred Stock
Due 2010.
99.7 Form of Letter to Clients of Brokers,
Dealers, Commercial Banks, Trust
Companies and Other Nominees for
12-1/4% Senior Discount Notes Due 2008.
99.8 Form of Letter to Clients of Brokers,
Dealers, Commercial Banks, Trust
Companies and Other Nominees for
13-3/4% Senior Cumulative Exchangeable
Preferred Stock Due 2010.
99.9 Form of Instruction from Owner of 12
1/4% Senior Discount Notes Due 2008 of
the Company.
99.10 Form of Instruction from Owner of 13
3/4% Senior Cumulative Exchangeable
Preferred Stock of the Company.
- -------------
* Filed herewith. All other exhibits previously filed.
+ Portions of this Exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registration's Application
Requesting Confidential Treatment under Rule 406 of the Act.
Item 22.
UNDERTAKINGS
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement ; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Chicago,
state of Illinois, on May 14, 1998.
21st CENTURY TELECOM GROUP, INC.
/s/ Ronald D. Webster
-----------------------------------------------------
By: Ronald D. Webster, Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Chief Executive Officer and
- ----------------------------- Chairman of the Board of Directors May 14, 1998
Glenn W. Milligan (Principal Executive Officer)
President, Chief Operating May 14, 1998
* Officer and Director
- -----------------------------
Robert J. Currey
/s/ Ronald D. Webster Chief Financial Officer May 14, 1998
- -----------------------------
Ronald D. Webster
* Chief Technical Officer May 14, 1998
- -----------------------------
Jay E. Carlson
* Director May 14, 1998
- -----------------------------
Edward T. Joyce
* Director May 14, 1998
- -----------------------------
Dr. Charles E. Kaegi
* Director May 14, 1998
- -----------------------------
James H. Lowry
* Director May 14, 1998
- -----------------------------
David Kronfeld
* Director May 14, 1998
- -----------------------------
Thomas Neustaetter
By: /s/ Edwin M. Martin, Jr. May 14, 1998
- -----------------------------
Edwin M. Martin, Jr.
Attorney-in-fact
EXHIBIT INDEX
Exhibit No. Document
1.1 Purchase Agreement dated as of February
2, 1998 by and among the Company and
Credit Suisse First Boston Corporation,
BancAmerica Robertson Stephens and
BancBoston Securities, Inc., as Initial
Purchasers.
3.1 Articles of Incorporation of the Company as
filed on October 29, 1992 and as amended
on February 9, 1998.
3.2 By-laws of the Company.
4.1 Indenture dated February 15, 1998
between the Company, as Issuer, and
State Street Bank and Trust, as
Trustee, with respect to the 12 1/4
Senior Discount Notes Due 2008.
4.2 Form of the 12 1/4 Senior Discount
Notes Due 2008.
4.3 Indenture dated as of February 15, 1998
between the Company and IBJ Schroder
Bank & Trust Company, as Trustee, with
respect to the Exchange Debenture.
4.4 Form of the 13 3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010.
4.5 Registration Rights Agreement dated as
of February 2, 1998 by and among the
Company and Credit Suisse First Boston
Corporation, BancAmerica Robertson
Stephens and BancBoston Securities,
Inc., as Initial Purchasers.
5.1 Opinion of Neal, Gerber and Eisenberg.
5.2 Opinion of Piper & Marbury LLP.
10.1 Franchise Agreement dated as of June
24, 1996 by and among the City of
Chicago and the Company.
10.2 License Agreement dated as of October
27, 1994 by and among the Chicago
Transit Authority and the Company.
10.3*+ CSG Master Subscriber Management System
Agreement dated as of May 28, 1997 by
and among CSG Systems, Inc. and the
Company.
10.4*+ Telemarketing Consultation Agreement
dated as of August 5, 1997 by and among
the Company and ITI Marketing Services,
Inc.
10.5*+ Pole Attachment Agreement dated as of
April 3, 1996 by and among the Company
and Commonwealth Edison Company.
10.6*+ Pole Attachment Agreement dated as of
November 14, 1996 by and among the
Company and Ameritech--Illinois.
10.7*+ Office Lease dated January 31, 1997 by
and among the Company and LaSalle
National Bank.
10.8 Franchise Agreement dated as of March
16, 1998 by and between the Village of
Skokie, Illinois and 21st Century
Cable TV of Illinois, Inc.
10.9 Interconnection Agreement dated as of
May 5, 1997 by and between Ameritech
Information Industry Services and 21st
Century Telecom of Illinois, Inc.
10.10*+ Network Products Purchase Agreement by
and between Northern Telecom Inc. and
the Company.
12.1 Statement regarding Computation of
Earnings Ratio to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1* Consent of Arthur Andersen with Respect
to the Company.
23.2 Consent of Piper & Marbury LLP
23.3 Consent of Neal, Gerber and Eisenberg
24.1 Power of Attorney (included on the
signature page of this Registration
Statement).
25.1 Statement of Eligibility of State
Street Bank and Trust, as Trustee.
99.1 Form of Letter of Transmittal to 12 1/4%
Senior Discount Notes Due 2008 of the
Company.
99.2 Form of Letter of Transmittal to 13 3/4%
Senior Cumulative Exchangeable
Preferred Stock Due 2010 of the Company.
99.3 Form of Notice of Guaranteed Delivery
for 12-1/4% Senior Discount Notes Due
2008.
99.4 Form of Notice of Guaranteed Delivery
for 13-3/4% Senior Cumulative
Exchangeable Preferred Stock Due 2010.
99.5 Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees for 12-1/4% Senior
Discount Notes Due 2008.
99.6 Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees for 13-3/4% Senior
Cumulative Exchangeable Preferred Stock
Due 2010.
99.7 Form of Letter to Clients of Brokers,
Dealers, Commercial Banks, Trust
Companies and Other Nominees for
12-1/4% Senior Discount Notes Due 2008.
99.8 Form of Letter to Clients of Brokers,
Dealers, Commercial Banks, Trust
Companies and Other Nominees for
13-3/4% Senior Cumulative Exchangeable
Preferred Stock Due 2010.
99.9 Form of Instruction from Owner of 12
1/4% Senior Discount Notes Due 2008 of
the Company.
99.10 Form of Instruction from Owner of 13
3/4% Senior Cumulative Exchangeable
Preferred Stock of the Company.
- -------------
* Filed herewith. All other exhibits previously filed.
+ Portions of this Exhibit were omitted and have been filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under rule 406 of the Act.