UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 333-47235
21st CENTURY TELECOM GROUP, INC.
(Exact Name of Registrant as specified in its charter)
ILLINOIS 36-4076758
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
WORLD TRADE CENTER
350 NORTH ORLEANS
SUITE 600
CHICAGO, ILLINOIS 60654
(Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 470-2100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
The number of shares outstanding of the Registrant's Common Stock, as of
November 9, 1998 was 3,493,965.7 shares of Common Stock.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements PAGE
Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998 1
Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 1998 and September 30, 1997 2
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1998 and September 30, 1997 3
Consolidated Statements of Changes in Shareholders' Equity for the Year
Ended March 31, 1998 and for the Six Months Ended September 30, 1998 4 4
Notes to Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
ASSETS 1998 1998
------ -------------- -------------
Current Assets (Unaudited)
Cash and cash equivalents $ 93,036,071 $ 217,640,238
Accounts receivable, less allowances
of $1,376 and $0, respectively 90,306 10,359
Short term investments 99,561,203 10,000,000
Inventory 3,137,226 1,991,690
Prepaid expenses and other 703,188 168,152
--------------- ----------------
Total current assets 196,527,994 229,810,439
Property, Plant and Equipment
Leasehold improvements 4,765,858 4,010,868
Other property, plant and equipment 45,252,239 16,588,094
Less: accumulated depreciation 3,138,580 1,193,236
--------------- ----------------
Property, plant and equipment, net 46,879,517 19,405,726
Other assets
Restricted cash collateral reserve 1,796,880 1,796,880
Prepaid franchise fees 3,633,944 3,505,706
Debt issuance costs, net of amortization
of $993,043 and $218,411, respectively 6,994,200 7,668,414
Deferred franchise costs, net of amortization
of $578,818 and $489,093, respectively 503,100 463,989
Bank commitment fee, net of amortization
of $30,664 843,267 -
Deferred mapping and design, net of
amortization of $81,548 and $58,501, respectively 56,403 79,450
Other deferred costs 2,000 2,000
--------------- ----------------
Total other assets 13,829,794 13,516,439
--------------- ----------------
Total assets $ 257,237,305 $ 262,732,604
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 8,471,553 $ 6,691,683
Accrued expenses and other 1,945,272 2,060,410
--------------- ----------------
Total current liabilities 10,416,825 8,752,093
Noncurrent Liabilities
Debentures payable - 28,849
Interest payable - 42,203
Senior discount notes, net of discount of
$147,194,049 and $159,656,983, respectively 215,940,951 203,478,017
--------------- ----------------
Total noncurrent liabilities 215,940,951 203,549,069
--------------- ----------------
Total liabilities 226,357,776 212,301,162
Redeemable Preferred Stock
13 3/4% senior cumulative exchangeable
preferred stock, .01 par value,
53,615.1 and 50,000 shares
outstanding, respectively 50,524,033 46,492,812
Shareholders' Equity
Class A convertible 8% cumulative preferred
stock, no par value,
1,554.8 shares outstanding 23,657,752 21,751,665
Voting common stock 11,069,364 10,356,136
Retained deficit (50,990,320) (24,787,871)
Related party purchase, in excess of cost (3,381,300) (3,381,300)
--------------- ----------------
Total shareholders' equity (19,644,504) 3,938,630
--------------- ----------------
Total liabilities and shareholders' equity $ 257,237,305 $ 262,732,604
=============== ================
21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Operating revenues $ 280,159 $ 37,158 $ 420,037 $ 79,655
Operating expenses
Network operations 991,259 210,676 1,969,654 226,739
Sales and marketing 882,437 - 1,929,272 -
General and administrative 4,479,229 1,942,702 7,603,443 3,115,232
Depreciation and amortization 1,220,384 74,062 2,096,892 131,567
--------- ------ --------- -------
Total operating expenses 7,573,309 2,227,440 13,599,261 3,473,538
--------- --------- ---------- ---------
Operating loss (7,293,150) (2,190,282) (13,179,224) (3,393,883)
Interest expense (6,262,339) 76,358 (12,495,974) (23,481)
Interest income 2,971,087 238,126 6,155,074 356,817
Amortization of issuance costs (407,346) - (800,827) -
-------- -------- -------- --------
Net loss (10,991,748) (1,875,798) (20,320,951) (3,060,547)
Preferred stock requirements (2,987,123) (762,857) (5,881,522) (1,499,049)
---------- -------- ---------- ----------
Net loss attributable to common shares $ (13,978,871) $ (2,638,655) $ (26,202,473) $ (4,559,596)
=============== ================ ================= =================
Weighted average common
shares outstanding 3,493,965.7 2,379,679.4 3,493,621.6 2,376,917.0
Basic and diluted loss per share $ (4.00) $ (1.11) $ (7.50) $ (1.92)
=============== ================ ================= =================
21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months
Ended September 30,
1998 1997
Operating Activities
Net loss $ (20,320,951) $ (3,060,547)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 2,096,892 131,567
Amortization of debt discount 12,462,934 -
Amortization of debt issuance costs 800,827 -
Stock compensation 669,017 -
Changes in operating assets and liabilities:
Receivables, net (79,947) 11,601
Other current assets (1,688,684) (431,340)
Accounts payable (993,583) 882,957
Accrued expenses and other
current liabilities (115,138) (150,000)
Noncurrent assets and liabilities, net (1,328,649) (94,445)
---------- -------
Net Cash Used for Operating Activities (8,497,282) (2,710,207)
---------- ----------
Investing Activities
Purchase of held-to-maturity securities (89,561,203) -
Capital expenditures (26,645,682) (4,317,278)
----------- ----------
Net Cash Used for Investing Activities (116,206,885) (4,317,278)
------------ ----------
Financing Activities
Proceeds from issuance of class A preferred stock,
net of issuance costs 100,000 1,026,000
------- ---------
Net Cash Provided by Financing Activities 100,000 1,026,000
------- ---------
Decrease in Cash and Cash Equivalents (124,604,167) (6,001,485)
Cash and Cash Equivalents at Beginning of Period 217,640,238 8,230,942
----------- ---------
Cash and Cash Equivalents at End of Period $ 93,036,071 $ 2,229,457
================= ================
21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Class A
Preferred Retained Related Party Unearned
Total Common Stock Stock Deficit Purchase Compensation
Balances, March 31, 1997 ..............$ (2,960,337) $ 5,946,904 $ $ (5,522,830) $ (3,381,300) $ (3,111)
Net loss .............................. (15,030,544) (15,030,544)
Reclassification of Class A preferred
stock to permanent equity ........... 16,794,963 16,794,963
Stock issuances ....................... 2,597,380 2,597,380
Exchange of initial and debt warrants
for voting and non voting common
shares ..............................
Accrued preferred stock dividends ..... (973,958) 1,872,892 (2,846,850)
Preferred stock accretion ............. (87,014) 1,300,633 (1,387,647)
Class A preferred stock proceeds
allocated to related common share
warrants ............................ 825,037 (825,037)
Class A preferred stock issuance
costs allocated to related common
share warrants ...................... (10,834) 10,834
Exchangeable Preferred Stock
proceeds allocated to related
common shares warrants .............. 2,700,000 2,700,000
Exchangeable Preferred stock
issuance costs allocated to related
common share warrants ............... (106,636) (106,636)
Stock option accrual .................. 972,865 972,865
Stock compensation .................... 28,800 28,800
Amortization of unearned
compensation ........................ 3,111 3,111
----------- ------------ ------------ ------------ ------------ ------------
Balances, March 31, 1998 .............. 3,938,630 10,356,136 21,751,665 (24,787,871) (3,381,300) 0
Net loss .............................. (20,320,951) (20,320,951)
Stock issuances ....................... 100,000 44,211 55,789
Accrued preferred stock dividends ..... (3,562,633) 1,069,996 (4,632,629)
Preferred stock accretion ............. (468,567) 780,302 (1,248,869)
Stock options ......................... 669,017 669,017
------------ ------------ ------------ ------------ ------------ ------------
Balances, September 30, 1998 ..........$(19,644,504) $ 11,069,364 $ 23,657,752 $(50,990,320) $ (3,381,300) $ 0
============ ============ ============ ============ ============ ============
Common Class A
Share Preferred
Common Shares Warrants Shares
Balances, March 31, 1997 .............. 2,374,343.6 1,161,307.6
Net loss ..............................
Reclassification of Class A preferred
stock to permanent equity ........... 1,380.3
Stock issuances ....................... 168.2
Exchange of initial and debt warrants
for voting and non voting common
shares .............................. 1,100,724.4
Accrued preferred stock dividends .....
Preferred stock accretion .............
Class A preferred stock proceeds
allocated to related common share
warrants ............................ 141,561.3
Class A preferred stock issuance
costs allocated to related common
share warrants ......................
Exchangeable Preferred Stock
proceeds allocated to related
common shares warrants .............. 438,870
Exchangeable Preferred stock
issuance costs allocated to related
common share warrants ...............
Stock option accrual ..................
Stock compensation .................... 14,399.9
Amortization of unearned
compensation ........................
------------ ----------- --------
Balances, March 31, 1998 .............. 3,489,467.9 1,741,738.9 1,548.5
Net loss ..............................
Stock issuances ....................... 4,497.8 5,327.1 6.3
Accrued preferred stock dividends .....
Preferred stock accretion .............
Stock options .........................
------------ ------------ --------
Balances, September 30, 1998 .......... 3,493,965.7 1,747,066.0 1,554.8
============ ============ ========
21ST CENTURY TELECOM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Preparation of Interim Financial Statements
The condensed consolidated financial statements have been prepared by 21st
Century Telecom Group, Inc. ("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 financial statements include all adjustments, consisting only of
normally recurring adjustments, necessary for a fair statement of results for
each period shown. These unaudited consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's latest Annual Report on Form 10-K. Certain amounts reported in
prior periods have been reclassified to conform to the current period
presentation.
2. Earnings Per Share
Basic per share amounts were based on weighted average common shares
outstanding of 3,493,965.7 and 2,379,679.4 shares for the three months ended
September 30, 1998 and 1997, respectively and 3,493,621.6 and 2,376, 917.0
shares for the six months ended September 30, 1998 and 1997, respectively.
The potential common shares discussed in the following are considered to be
anti-dilutive. Therefore, they are excluded from the earnings per share
calculations for the three and six months ended September 30, 1998 and 1997.
At September 30, 1998 potential common shares included: (1) 1,308,196
common share warrants related to the Class A Convertible 8% Cumulative Preferred
Stock, (2) 438,870 common share warrants related to 13 3/4% Senior Cumulative
Exchangeable Preferred Stock, (3) 1,250,000 options issued in connection with
certain Directors' guarantee of a loan, (4) 539,426.9 vested employee stock
options, and (5) 18,994.7 common share warrants issued to a financial advisor.
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 and 13 3/4% Senior Cumulative Exchangeable Preferred Stock.
At September 30, 1997, these potential common shares included: (1)
1,214,578.6 common share warrants related to the Class A Convertible 8%
Cumulative Preferred Stock, (2) 1,037,975.8 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, (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. 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.
3. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income." This statement requires that all
items recognized under accounting standards as components of comprehensive
income be reported in a full set of general purpose financial statements. The
Company does not have any components of comprehensive income to report.
4. Class A Convertible 8% Cumulative Preferred Stock
Preferred
Shares Amount
------------ ----------------
March 31, 1998 1,548.5 $21,751,665
April 14, 1998
Proceeds 6.3 55,789
Accrued Dividends - 1,069,996
Accretion - 780,302
------------ ----------------
September 30, 1998 1,554.8 $23,657,752
============ ================
5. 13 3/4% Senior Cumulative Exchangeable Preferred Stock
Preferred
Shares Amount
------------ ----------------
March 31, 1998 50,000 $46,492,812
May 15, 1998
Stock Dividend 1,833.3
August 17, 1998
Stock Dividend 1,781.8 *
Accrued Dividends 3,562,654
Accretion 468,567
------------ ----------------
September 30, 1998 53,615.1 $50,524,033
============ ================
* The amount of the dividend was $1,781,771. Of this amount, $863,886 was
accrued as of June 30, 1998.
On August 11, 1998, the Board of Directors declared a quarterly dividend of
0.034375 of one share of 13 3/4 % Exchangeable Preferred Stock, per each share
of 13 3/4 % Exchangeable Preferred Stock outstanding as of August 1, 1998,
payable on August 17, 1998. An additional 1,781.8 shares of 13 3/4 % Senior
Cumulative Exchangeable Preferred Stock were therefore issued on August 17,
1998.
6. Stock Based Compensation Plans
Effective January 30, 1997, the Company established a common stock option
plan. No options were granted under this plan until October 1997. Options to
purchase 728,667.8 shares of the Company's stock were originally granted under
the plan of which 645,407.4 were outstanding as of September 30, 1998. Options
vest over 48 months from the date of employment and expire after ten years.
Options vested under this plan increased 27,554.8 to 346,664.0 during the
quarter ended September 30, 1998. In connection with the plan, an additional
$93,135 and $198,859 of compensation expense was recognized during the three and
six months ended September 30, 1998, respectively. During the quarter ended
September 30, 1998, an executive participant in this plan separated from the
Company. This executive was originally granted 91,083.5 shares of which 34,936.1
shares were fully vested as of September 30, 1998. Certain aspects of his
employment contract, including the status of his claim to fully vest all
remaining unvested shares, are in arbitration.
Effective April 14, 1998, the Company established three new additional
stock option plans: the Executive Plan, the Key Management Plan, and the
Employee Plan.
Under the Executive Plan, 331,200 options are available for grant to two
executive officers of the Company. As of September 30, 1998, all 331,200 shares
available under the Executive Plan were awarded. On June 30, 1998, an executive
officer was awarded 53,000 options under the Executive Plan at an exercise price
of $4.50 per share, which was determined by the Board of Directors to be the
fair market value of the underlying common stock. On September 30, 1998 the
remaining 278,200 were awarded. The exercise price of the 278,200 shares was
established at $1.12 per share which is less than the $4.50 per share fair
market value determined by the Board of Directors. One half of the 278,200
shares awarded on September 30, 1998 or 139,100 shares vested immediately and a
total of $470,158 was recorded as compensation expense as a result of the
vesting of the 139,100 options. All remaining options vest over 48 months from
the date of employment and expire after ten years. At September 30, 1998,
170,762.9 options were vested.
Under the Key Management Plan and the Employee Plan, 150,000 and 50,000
options, respectively, were available for grant. As of September 30, 1998 a
total of 103,000 options were granted under the Key Management Plan, 22,000 of
which vested immediately. A total of 32,100 options were granted under the
Employee Plan. The exercise price of options under both plans, which was
determined by the Board of Directors to be the fair market value of the
underlying Common Stock, is $4.50 per share. All remaining options under these
plans vest over four years beginning July 1, 1999 and expire 10 years from date
of grant.
7. Bank Revolving Credit Facility
On August 5, 1998, the Company entered into a revolving credit facility
with a number of banks for an aggregate amount of $40,000,000. No borrowings
have been made under this facility. In connection with the initiation of its
bank revolving credit facility, the Company incurred $873,931 in bank commitment
fees and other related costs which are being amortized on a straight line basis
over its five year term.
8. Subsequent Events
On October 13, 1998, the Board of Directors declared a quarterly dividend
of 0.034375 share of 13 3/4% Senior Cumulative Exchangeable Preferred Stock per
each share of Exchangeable Preferred Stock outstanding as of November 1, 1998,
payable on November 16, 1998. An additional 1,843.02 shares of 13 3/4 % Senior
Cumulative Exchangeable Preferred Stock will be issued on November 16, 1998 for
settlement of these dividends.
On October 30, 1998, the Company entered into Amendment No. 1 to its bank
revolving credit facility which adjusted certain operating covenants.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion and analysis of the historical results of
operations and financial condition of 21st Century Telecom Group, Inc. (the
Company) and factors affecting the Company's financial resources. This
discussion should be read in conjunction with the consolidated financial
statements, including the notes thereto, set forth herein under "Financial
Statements" and the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998. This discussion contains forward-looking statements which
are qualified by reference to, and should be read in conjunction with, the
Company's discussion regarding forward-looking statements as set forth herein
under "Forward-Looking Statements."
General
21st Century was awarded a franchise in 1996 by the City of Chicago that
allows for the construction of the Distributed Ring-Star (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. Since
inception, 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 year since its inception, and
as of September 30, 1998, the Company had a retained deficit of $50,990,320. As
the Company continues to expand its operations, it anticipates that it will
continue to incur net losses during the next several years as a result of (i)
substantially increased depreciation and amortization from the construction of
networks, (ii) significantly increased operating expenses as it builds its
subscriber base and (iii) interest charges associated with the Senior Discount
Notes. 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.
Results of Operations
Revenues
The Company generated subscriber revenues of $280,159 and $420,037 for the
three and six months ended September 30, 1998 versus $37,158 and $79,655 for the
three and six months ended September 30, 1997. The increased subscriber revenues
resulted from the installation of service into contracted buildings on the new
DRS network and sales efforts to increase penetration of services into these
buildings. At September 30, 1998, the Company was providing service to 7,733
connections in 20 bulk MDU's and 69 right of entry ("ROE") buildings. As of
September 30, 1998, there were 3,524 backlogged connection orders for bulk MDU
and ROE customers.
Expenses
The Company incurred operating expenses of $7,573,309 and $13,599,261 for
the three and six months ended September 30, 1998, respectively and $2,227,440
and $3,473,538 for the three and six months ended September 30, 1997,
respectively. The increase in operating expenses resulted from activities
required to accelerate the network build-out, operate the franchise and deliver
services. Also contributing to this increase are one-time employment related
costs in general and administrative expenses including severance costs for
separated employees and recruiting costs for certain key new hires.
Network Operations
The component of operating expenses that represents network operating
costs related to the delivery of cable and internet services increased $780,583
and $1,742,915 during the three and six months ended September 30, 1998,
respectively when compared to the corresponding prior periods. This increase is
directly related to the continued ramp-up in the design and construction of the
network, acquisition of video programming, and the addition of employees. The
increase was also impacted by the start up of the Company's telephony operations
during the quarter ended September 30, 1998. Telephony expenses included
connection and usage charges for testing the new switch and consulting costs.
Selling, General and Administrative
Selling, general and administrative expenses were $5,361,666 and $9,532,715
for the three and six months ended September 30, 1998, respectively compared to
$1,942,702 and $3,115,232 for the three and six months ended September 30, 1997,
respectively. The increase in selling, general and administrative expenses
reflects the Company's acquisition and servicing of subscribers, promotion
costs, and the addition of employees. During the three months ended September
30, 1998, the Company redirected its sales and marketing efforts to allow for
the development of a new marketing image program. The costs associated with this
new program will appear in subsequent quarters. Additionally, the Company
incurred general and administrative expenses of approximately $1,000,000 of
one-time employment related costs for the separation of certain employees and
for the recruitment of certain key employees.
Depreciation and Amortization
Depreciation and amortization costs were $1,220,384 and $2,096,892 for the
three and six months ended September 30, 1998, respectively compared to $74,062
and $131,567 for the three and six months ended September 30, 1997,
respectively. The increase in depreciation and amortization costs is primarily
attributable to depreciation of the network equipment as it is placed into
service and the amortization of leasehold improvements upon the occupation of
the space in the Network Operations Center at corporate headquarters.
Interest and Other Charges
Interest expense increased $6,338,697 and $12,472,493 during the three and
six months ended September 30, 1998, respectively when compared to the
corresponding prior periods due primarily to the amortization of the debt
discount associated with the Senior Discount Notes issued in February 1998 and
the correction of an over accrual recorded in the three months ended September
30, 1997, related to the previous quarters activity. Interest income increased
$2,732,961 and $5,798,257 during the three and six months ended September 30,
1998, respectively when compared to the corresponding prior periods due
primarily to interest earned on the increased level of cash held by the Company
as a result of the issuance of the Senior Discount Notes and Exchangeable
Preferred Stock in February 1998. Amortization of issuance costs on Senior
Discount Notes was $407,346 and $800,827 during the three and six months ended
September 30, 1998, respectively. These charges resulted from the issuance costs
associated with the Senior Discount Notes issued in February 1998 and their
subsequent amortization.
Net Loss
For the three and six months ended September 30, 1998, the Company incurred
net losses amounting to $10,991,748 and $20,320,951, respectively compared to
$1,875,798 and $3,060,547 for the three and six months ended September 30, 1997,
respectively. 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.
Liquidity and Capital Resources
Net cash used for operating activities was $8,497,282 for the six months
ended September 30, 1998, and $2,710,207 for the six months ended September 30,
1997. Net cash used for operating activities for the six months ended September
30, 1998 resulted principally from the Company's net loss from operating and
payment of a commitment fee related to the $40 million revolving line of credit.
These items were partially offset by amortization of the discount on the 12 1/4%
Senior Discount Notes, amortization of debt issuance costs, depreciation
expense, and stock compensation expenses.
Cash flows used for investing activities totaled $116,206,885 in the six
months ended September 30, 1998 and $4,317,278 in the six months ended September
30, 1997. Cash requirements in the six months ended September 30, 1998 consisted
of costs for continued deployment of the network in the Area 1 franchise and
installing and facilitating the telephone switching equipment in the Telephone
Operations Center (TOC), which is co-located at the corporate headquarters. Also
contributing to the increase in cash used for investing activities was an
increase in short term investments which reflects an effort to improve returns
on monies previously classified as cash. Cash requirements in the six months
ended September 30, 1997 consisted primarily of the purchase and construction of
Headend equipment.
Cash flows from financing activities was $100,000 in the six months ended
September 30, 1998 and $1,026,000 in the six months ended September 30, 1997.
In the six months ended September 30, 1998 and 1997, the private sale of Class
A Preferred Stock generated $100,000 and $1,026,000, respectively.
The cost of network development, construction and start-up activities of
the Company has required and will continue to require substantial capital. The
Company estimates that its aggregate capital expenditure requirements related to
DRS Network construction in Area 1 for the period ended September 30, 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 approximately $55 million is expected to be
spent during calendar year 1998. The Company will fund these expenditures from
the net proceeds of the sale of the 12 1/4% Senior Discount Notes and the 13
3/4% Senior Cumulative Exchangeable Preferred Stock. In order to retain funds
available to support its operations, the Company has no expectation of paying
cash interest on the Senior Discount 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. There can be no assurance that the Company will be able to
obtain any additional debt or equity financing, or that the terms thereof will
be favorable to the Company or its existing creditors or investors. On August 5,
1998 the Company entered into a $40 million bank revolving credit facility with
a number of banks to provide supplemental financing. No borrowings have been
made under this facility. On October 30, 1998 the Company entered into Amendment
No. 1 to its bank revolving credit facility which adjusted certain operating
covenants.
Impact of Year 2000
The Company believes that its Information Technology (IT) and non IT
systems and equipment are Year 2000 compliant and is currently in preliminary
contract negotiations with an independent third party to perform an overall
evaluation of the Company's Year 2000 compliance. The Company anticipates that
this independent evaluation will confirm that apart from fees charged by this
independent party, of which the amount is not yet known, no future expenditures
are necessary in conjunction with the Year 2000 issue. The Company is currently
evaluating whether a contingency plan is necessary, but has not adopted specific
contingency plans nor incurred any costs for the Year 2000 issue at this time.
The Year 2000 issue may have an effect on some of its customers and suppliers,
and thus indirectly affect the Company. The Company is in contact with its major
suppliers regarding this issue, however, it is not currently possible to
quantify the aggregate cost to the Company with respect to customers and
suppliers with Year 2000 problems. The Company plans to complete preliminary
evaluations of its major suppliers' compliance with Year 2000 issues and to
determine whether a contingency plan is necessary by December 31, 1998. The
Company anticipates completing its communications with its major suppliers
regarding the Year 2000 issue not later than the first quarter of 1999. The
Company has not incurred incremental costs to date and believes the total cost
of the Year 2000 project will not have a material effect on its results of
operations.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement requires companies to
report financial and descriptive information about their reportable operating
segments. Generally, companies are required to report financial information on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company will adopt SFAS No.
131 for financial statements as of and for the year ended December 31, 1998, and
does not believe the effect of adoption will be material.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
authoritative guidance for the capitalization of certain computer software costs
developed or obtained for internal applications. Costs incurred during the
preliminary project stage, as well as training and data conversion costs, are to
be expensed as incurred. The SOP is effective for fiscal years beginning after
December 15, 1998. The Company has not yet quantified the impacts of adopting
SOP 98-1 on its financial statements, but it does not believe the effect of
adoption will be material.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company has not yet quantified the impacts of adoption on its financial
statements but does not believe the effects of adoption will be material.
Forward -Looking Statements
When used in this Report, the words "intends," "expects," "plans,"
"estimates," "projects," "believes," "anticipates," and similar expressions are
intended to identify forward-looking statements. Except for historical
information contained herein, the matters discussed and the statements made
herein concerning the Company's future prospects are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. Although the Company believes that its
plans, intentions and expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such plans, intentions or
expectations will be achieved. There can be no assurance that future results
will be achieved, and actual results could differ materially from the forecast
and estimates. Important factors that could cause actual results to differ
materially include, but are not limited to, the Company's limited operating
history, including a history of losses, significant capital requirements, high
leverage, debt service requirements and restrictive covenants related to its
outstanding securities, ability to complete DRS Network construction, its
dependence on key personnel and ability to manage growth. The Company's future
results may also be impacted by other risk factors listed in its Registration
Statement filed on Form S-4 (333-47235). In addition, such forward-looking
statements are necessarily based upon assumptions and estimates that may be
incorrect or imprecise and involve known and unknown risks and other facts.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance upon such forward-looking statements.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits are listed in the Exhibit Index.
(b) Reports on Form 8-K
On Current Report 8-K, dated August 13, 1998, under "Item 5. Other
Events," the Company filed a press release which announced the promotion of
Robert Currey to President and Chief Executive Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive Officer
/s/ Robert J. Currey and Director November 13, 1998
- ---------------------
Robert J. Currey
/s/ Ronald D. Webster Chief Financial Officer November 13, 1998
- ---------------------
Ronald D. Webster
/s/ Byron E. Hill Corporate Controller November 13, 1998
- ---------------------
Byron E. Hill
EXHIBIT INDEX
- ---------------------------------------------- ---------------------------------
Exhibit
Number Description of Exhibits
- ------ --------------------------------------------------------------------
3.1* Amended Articles of Incorporation
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
3.2* By-laws
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
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 1/4Senior Discount Notes Due 2008
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
4.2* Form of the 12 1/4Senior Discount Notes Due 2008
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
4.3* Indenture dated as of February 15, 1998 between the Company and
IBJ Stirred Bank & Trust Company, as Trustee, with respect to the
Exchange Debenture
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
4.4* Form of the 13 3/4Senior 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
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
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, 1998 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
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
21.1* Subsidiaries of the Company
- ------ --------------------------------------------------------------------
- ------ --------------------------------------------------------------------
27.1 Financial Data Schedule
- ------ --------------------------------------------------------------------
*Incorporated herein by reference to the Company's S-4 Registration
Statement filed on March 3, 1998 (Commission File No. 333-47235).