<PAGE>
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 JUNE 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
[LOGO]
21ST CENTURY TELECOM GROUP, INC.
(Exact Name of Registrant as specified in its charter)
ILLINOIS 36-4076758
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
WORLD TRADE CENTER
350 NORTH ORLEANS
SUITE 600
CHICAGO, ILLINOIS 60654
----------------- -----
(Address of principal executive office) (Zip Code)
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
August 6, 1998 was 3,493,965.7 shares of Common Stock.
<PAGE>
21ST CENTURY TELECOM GROUP, INC. JUNE 30, 1998 FORM 10-Q
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1 FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets as of June 30, 1998 and
March 31, 1998 3
Consolidated Statements of Income for the Three Months
Ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Changes in Shareholders'
Equity for the Year Ended March 31, 1998 and for the
Three Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 1998 and June 30, 1997 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II -- OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 14
</TABLE>
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND MARCH 31, 1998
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
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ASSETS (UNAUDITED)
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $198,517,347 $217,640,238
Accounts receivable from subscribers 32,129 10,359
Short term investments 10,000,000 10,000,000
Prepayments 743,350 168,152
Inventory 1,656,889 1,991,690
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Total current assets 210,949,715 229,810,439
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements 4,503,766 4,010,868
Other property, plant and equipment 31,495,628 16,588,094
Less--Accumulated depreciation (2,013,359) (1,193,236)
------------ ------------
Net property, plant and equipment 33,986,035 19,405,726
OTHER ASSETS:
Restricted cash collateral reserve 1,796,880 1,796,880
Prepaid franchise fees 3,573,241 3,505,706
Debt issuance costs, net of amortization of $604,416
and $218,411, respectively 7,282,409 7,668,414
Deferred franchise costs, net of amortization of $533,955
and $489,093, respectively 533,720 463,989
Deferred mapping and design, net of amortization of
$70,024 and $58,501, respectively 67,926 79,450
Other deferred costs 2,000 2,000
------------ ------------
Total other assets 13,256,176 13,516,439
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Total Assets $258,191,926 $262,732,604
------------ ------------
------------ ------------
LIABILITIES AND PREFERRED AND COMMON EQUITY
-------------------------------------------
CURRENT LIABILITIES:
Accounts payable $5,842,734 $6,691,683
Other current liabilities 1,064,606 1,756,916
Debentures payable 62,702 52,702
Interest payable 141,201 112,712
Accounts payable to associated company 38,079 138,080
------------ ------------
Total current liabilities 7,149,322 8,752,093
NONCURRENT LIABILITIES:
Debentures payable 18,849 28,849
Interest payable 31,878 42,203
Senior discount notes, net of discount of $153,451,107
and $159,656,983, respectively 209,683,893 203,478,017
------------ ------------
Total noncurrent liabilities 209,734,620 203,549,069
------------ ------------
Total Liabilities 216,883,942 212,301,162
REDEEMABLE PREFERRED STOCK:
13 3/4% senior cumulative exchangeable preferred stock,
.01 par value, 51,833.3 and 50,000 shares outstanding,
respectively 48,479,933 46,492,812
SHAREHOLDERS' EQUITY:
Class A convertible 8% cumulative preferred stock,
no par value,1,554.8 and 1,548.5 shares outstanding,
respectively 22,714,729 21,751,665
Voting common stock, no par value 2,941,354.6 shares issued
and outstanding, 552,611.1 shares of non-voting common
stock issued and outstanding and 1,747,066 secondary common
share warrants outstanding at June 30, 1998 and voting
common stock, no par value 2,939,105.7 shares issued
and outstanding, 550,362.2 shares of non-voting common stock
issued and outstanding and 1,741,738.9 secondary common
share warrants outstanding at March 31, 1998 10,506,071 10,356,136
Retained Deficit (37,011,449) (24,787,871)
Related party purchase, in excess of cost (3,381,300) (3,381,300)
------------ ------------
Total Shareholders' Equity (7,171,949) 3,938,630
------------ ------------
Total Liabilities and Equity $258,191,926 $262,732,604
------------ ------------
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</TABLE>
See accompanying notes to the Consolidated Financial Statements.
Page 3
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21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
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Ended Ended
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June 30, 1998 June 30, 1997
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<S> <C> <C>
Subscriber Revenues $ 139,878 $ 42,497
Expenses
Network operations 978,395 16,063
Depreciation and amortization 876,508 57,505
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Total network expenses 1,854,903 73,568
Sales and marketing 1,046,835 -
General and administrative 3,124,214 1,172,530
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Total sales, marketing, general and
administrative expense 4,171,049 1,172,530
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Total operating expenses 6,025,952 1,246,098
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Operating loss (5,886,074) (1,203,601)
Interest and other charges
Amortization of issuance costs
on senior discount notes (393,481) -
Interest income 3,183,987 118,691
Interest expense (6,233,635) (99,839)
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Interest and other charges, net (3,443,129) 18,852
------------ -----------
Net loss (9,329,203) (1,184,749)
Preferred stock requirements (2,894,399) (736,192)
------------ -----------
Net loss attributable to common shares $(12,223,602) $(1,920,941)
------------ -----------
------------ -----------
Weighted average common shares
outstanding 3,493,273.7 2,374,109.1
Basic and diluted loss per weighted
average share $ (3.50) $(0.81)
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
Page 4
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21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A RELATED PARTY
TOTAL COMMON STOCK PREFERRED STOCK RETAINED DEFICIT PURCHASE
----- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, MARCH 31, 1997 $(2,960,337) $5,946,904 $ - $(5,522,830) $(3,381,300)
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 - - - -
----------- ----------- ----------- ------------ -----------
BALANCES, MARCH 31, 1998 3,938,630 10,356,136 21,751,665 (24,787,871) (3,381,300)
Net loss (9,329,203) - - (9,329,203) -
Stock issuances 100,000 44,211 55,789 - -
Accrued preferred stock dividends (1,770,292) - 521,755 (2,292,047) -
Preferred stock accretion (216,808) - 385,520 (602,328) -
Stock option accrual 105,724 105,724 - - -
----------- ----------- ----------- ------------ -----------
BALANCES, JUNE 30, 1998 $(7,171,949) $10,506,071 $22,714,729 $(37,011,449) $(3,381,300)
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
CLASS A
UNEARNED COMMON COMMON SHARE PREFERRED
COMPENSATION SHARES WARRANTS SHARES
------------ ------ ------------ ---------
<S> <C> <C> <C> <C>
BALANCES, MARCH 31, 1997 $(3,111) 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 3,111 - - -
------- ----------- ----------- -------
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 option accrual - - -
------- ----------- ----------- -------
BALANCES, JUNE 30, 1998 $ - 3,493,965.7 1,747,066.0 1,554.8
------- ----------- ----------- -------
------- ----------- ----------- -------
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
Page 5
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21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(9,329,203) $(1,184,749)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 876,508 57,505
Amortization of debt discount 6,205,876 -
Amortization of issuance costs on senior discount notes 393,481 -
Stock compensation 105,724 667
(Increase) decrease in accounts receivable (21,770) 96,663
(Increase) in prepayments (582,674) (260,443)
Decrease in inventory 334,801 -
(Increase) in prepaid franchise fees (67,535) (74,795)
(Increase) in deferred charges (114,594) (63,507)
(Decrease) in accounts payable to associated company (100,000) -
Increase in interest payable 18,164 11,740
(Decrease) in accounts payable
and other accrued liabilities (655,258) (111,423)
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NET CASH USED IN OPERATING ACTIVITIES (2,936,480) (1,528,342)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,286,411) (257,646)
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NET CASH USED BY INVESTING ACTIVITIES (16,286,411) (257,646)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Class A preferred stock 100,000 -
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 100,000 -
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NET (DECREASE) IN CASH (19,122,891) (1,785,988)
CASH AT BEGINNING OF PERIOD 217,640,238 8,230,942
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CASH AT END OF PERIOD $198,517,347 $6,444,954
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</TABLE>
See accompanying notes to the Consolidated Financial Statements.
Page 6
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21ST CENTURY TELECOM GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
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
For the three months ended June 30, 1998 and 1997, per share amounts were
based on weighted average common shares outstanding of 3,493,273.7 and
2,374,109.1 shares, 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 months ended June 30, 1998 and 1997.
At June 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) 330,072.2 employee vested 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 June 30, 1997, these potential common shares included: (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, (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. SUPPLEMENTAL CASH FLOW INFORMATION
For the three month periods ended June 30, 1998 and 1997, the Company did
not pay any interest or income taxes.
Page 7
<PAGE>
4. CLASS A CONVERTIBLE 8% CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
PREFERRED
---------
SHARES AMOUNT
------ ------
<S> <C> <C>
March 31, 1998 1,548.5 $21,751,665
April 14, 1998
Proceeds 6.3 55,789
Accrued Dividends - 521,755
Accretion - 385,520
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June 30, 1998 1,554.8 $22,714,729
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------- -----------
</TABLE>
On April 14, 1998, an investor contracted with the Company to purchase
6.3316 shares of the Company's Class A Convertible 8% Cumulative Preferred Stock
(which included 5,327.1 secondary warrants) at a price of $15,793.84 per share,
totaling $100,000. In addition, 2,248.9 shares of voting and 2,248.9 shares of
nonvoting common stock were issued as part of the sale. Of the total sales
price of $100,000, $55,789 was allocated to the Class A Preferred Stock, and
$44,211 was allocated to the secondary warrants, voting and non-voting common
stock. The fair market value of the common stock at the date of the sale was
estimated to be $4.50 per share.
5. 13 3/4 % SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK
<TABLE>
<CAPTION>
PREFERRED
---------
SHARES AMOUNT
------ ------
<S> <C> <C>
March 31, 1998 50,000 $46,492,812
May 15, 1998
Stock Dividend 1,833.3 *
Accrued Dividends - 1,770,313
Accretion - 216,808
-------- -----------
June 30, 1998 51,833.3 $48,479,933
-------- -----------
-------- -----------
</TABLE>
* The amount of the dividend was $1,833,333. Of this amount, $973,924 was
accrued as of March 31, 1998.
On May 14, 1998, the Board of Directors declared a quarterly dividend of
0.036667 of one share of 13 3/4 % Exchangeable Preferred Stock, per each share
of 13 3/4 % Exchangeable Preferred Stock outstanding, payable on May 15, 1998.
An additional 1,833.3 shares of 13 3/4 % Senior Cumulative Exchangeable
Preferred Stock were therefore issued on May 15, 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. Options vest over 48 months from the date of employment and expire
after ten years. Options vested under this plan increased 31,279.3 to 319,109.2
during the quarter ended June 30, 1998. In connection with the plan, an
additional $105,724 of compensation expense was recognized during the quarter
ended June 30, 1998.
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. Two
executive officers of the Company are eligible for awards under the Executive
Plan. On June 30, 1998, an executive officer was awarded 53,000 options under
the Executive Plan. The exercise price of options which is determined by the
Board of Directors to be the fair market value of the underlying Common Stock is
$4.50 per share. The options vest over 48 months from the date of employment and
expire after ten years. At June 30, 1998, 10,963 options were vested.
Under the Key Management Plan and the Employee Plan, 150,000 and 50,000
options, respectively, are available for grant. No options were granted
under either plan at June 30, 1998.
Page 8
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7. SUBSEQUENT EVENTS
On August 5, 1998, the Company entered into a revolving credit facility
with BankBoston, N.A., as administrative agent for itself and other lenders, and
Bank of America National Trust and Savings Association, as documentation agent
for itself and other lenders, for an aggregate amount of $40,000,000. No
borrowings have been made under this facility as of date.
On August 11, 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 August 1, 1998,
payable on August 17, 1998. An additional 1,781.78 shares of 13 3/4 % Senior
Cumulative Exchangeable Preferred Stock will be issued on August 17,
1998 for settlement of these dividends.
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, the "Risk Factors" set forth
in the Company's Registration Statement on Form S-4 (333-47235).
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 June 30, 1998, the Company had an accumulated deficit of $37,011,449. As
the Company anticipates that it will continue 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
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
REVENUES. The Company generated subscriber revenues of $139,878 for the
three months ended June 30, 1998 versus $42,497 for the three months ended June
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 June 30, 1998, the
Company was providing service to 4,734 connections in 15 bulk MDU's and 35 right
of entry ("ROE") contracted buildings. As of June 30, 1998, there were 3,071
backlogged connection orders for bulk MDU and ROE customers.
EXPENSES. The Company incurred operating expenses of $6,025,952 and
$1,246,098 for the three months ended June 30, 1998 and 1997, respectively. The
increase in operating expenses resulted from activities required to accelerate
the network build-out, operate the franchise and deliver services. The
component of operating expenses that represents network operating costs related
to the delivery of cable and internet services increased from $16,063 for the
three months ended June 30, 1997 to $978,395 for the three months ended June 30,
1998. 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. Depreciation and amortization costs were $876,508 and
$57,505 for the three months ended June 30, 1998 and June 30, 1997,
respectively. The increase in depreciation and amortization costs is primarily
attributable to the amortization of leasehold improvements upon the occupation
of the space in the Apparel Center and the depreciation of the network equipment
as it is placed into service. Selling, general and administrative expenses were
$4,171,049 and $1,172,530 for the three months ended June 30, 1998 and June 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. Interest expense increased from
$99,839 to $6,233,635 due primarily to the amortization of the debt discount
associated with the Senior Discount Notes issued in February 1998. Interest
income increased from $118,691 to $3,183,987 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 of $393,481 for the
quarter ended June 30, 1998 resulted from the issuance costs associated with the
Senior Discount Notes issued in February 1998 and their subsequent amortization.
NET LOSS. For the three months ended June 30, 1998 and 1997, the Company
incurred net losses amounting to $9,329,203 and $1,184,749, respectively. The
Company expects its net losses to continue to increase as it
Page 10
<PAGE>
introduces new services and as the Company continues to build-out the DRS
Network and seeks to expand its business.
LIQUIDITY AND CAPITAL RESOURCES
The cost of development, construction and start-up activities of the
Company will require substantial capital. As of June 30, 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 $2,936,480 for the three months
ended June 30, 1998, and $1,528,342 for the three months ended June 30, 1997.
Net cash used in operating activities for the three months ended June 30, 1998
resulted principally from the Company's net loss from operations, payment of a
commitment fee related to the $40 million revolving line of credit, payment of
an affiliated company accounts payable and an increase in deferred charges.
These items were offset by amortization of the discount on the 12 1/4% Senior
Discount Notes, depreciation expense, stock compensation expenses and the
decrease in inventory.
Cash flow used in investing activities totaled $16,286,411 in the three
months ended June 30, 1998 and $257,646 in the three months ended June 30, 1997.
Cash requirements in the three months ended June 30, 1998 consisted of costs for
continued deployment of the network in the Area 1 franchise and installation and
facilitating the telephone switching equipment in the Telephone Operations
Center (TOC), which is located in an expansion of the Network Operations Center,
co-located at the corporate headquarters. Cash requirements in the three months
ended June 30, 1997 consisted primarily of the purchase and construction of
Headend equipment.
Cash flow from financing activities was $100,000 in the three months ended
June 30, 1998 and $0 in the three months ended June 30, 1997. In the three
months ended June 30, 1998, the private sale of Class A Preferred Stock
generated $100,000.
The Company estimates that its aggregate capital expenditure
requirements related to DRS Network construction in Area 1 for the period
ended June 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 $90
million is expected to be spent during calendar year 1998. The Company will
fund these expenditures from the net proceeds 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 BankBoston, N.A. and
Bank of America NT&SA to provide supplemental financing. No borrowings have
been made under this facility as of date.
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. The Company is
in contact with its major suppliers regarding this issue. However, 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 affect on its business.
Page 11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Exhibit No. Document
<S> <C>
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 1/4 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 Stirred 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
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
12.1 Statement regarding Computation of Earnings Ratio to
Fixed Charges
- -------------------------------------------------------------------------------
21.1* Subsidiaries of the Company
- -------------------------------------------------------------------------------
27.1 Financial Data Schedule
- -------------------------------------------------------------------------------
</TABLE>
*Incorporated herein by reference to the Company's S-4 Registration Statement
filed on March 3, 1998 (Commission File No. 333-47235).
Page 12
<PAGE>
(b) REPORTS ON FORM 8-K
None
Page 13
<PAGE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Glenn W. Milligan Chairman of the Board of August 14, 1998
------------------------ Directors
Glenn W. Milligan
President, Chief Executive
/s/ Robert J. Currey Officer and Director August 14, 1998
------------------------
Robert J. Currey
/s/ Ronald D. Webster Chief Financial Officer August 14, 1998
-------------------------
Ronald D. Webster
/s/ Byron E. Hill Corporate Controller August 14, 1998
-------------------------
Byron E. Hill
</TABLE>
Page 14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------
Exhibit No. Document
- -------------------------------------------------------------------------------
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 1/4 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 Stirred 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
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
12.1 Statement regarding Computation of Earnings
Ratio to Fixed Charges
- -------------------------------------------------------------------------------
21.1* Subsidiaries of the Company
- -------------------------------------------------------------------------------
27.1 Financial Data Schedule
- -------------------------------------------------------------------------------
</TABLE>
*Incorporated herein by reference to the Company's S-4 Registration Statement
filed on March 3, 1998 (Commission File No. 333-47235).
Page 15
<PAGE>
21ST CENTURY TELECOM GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES, INTEREST CHARGES
AND PREFERRED STOCK REQUIREMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
------------ ------------
Ended Ended
----- -----
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
1. EARNINGS
a) Loss before interest expense and income taxes $(2,702,087) $(1,084,910)
b) Portion of rental expense representative of the
interest factor (68,235) (15,003)
----------- -----------
Total of 1(a) and 1(b) $(2,633,852) $(1,069,907)
2. COMBINED FIXED CHARGES
a) Total interest expense $ 6,627,116 $ 99,839
b) Portion of rental expense representative of the
interest factor 68,235 15,003
c) Dividends and accretion on Class A Convertible 8%
Cumulative preferred stock 907,275 736,192
d) Dividends and accretion on 13 3/4% Senior Cumulative
Exchangeable preferred stock due 2010 1,987,124 -
----------- -----------
Total Combined Fixed Charges (2(a) through 2(d)) 9,589,750 851,034
----------- -----------
Total Interest Charges (2(a) through 2(b)) 6,695,351 114,842
----------- -----------
Total Preferred Stock Requirements (2(c) through 2(d)) $ 2,894,399 $ 736,192
----------- -----------
3. RATIO OF EARNINGS TO COMBINED FIXED CHARGES (0.27) (1.26)
----------- -----------
----------- -----------
RATIO OF EARNINGS TO INTEREST CHARGES (0.39) (9.32)
----------- -----------
----------- -----------
RATIO OF EARNINGS TO PREFERRED STOCK REQUIREMENTS (0.91) (1.45)
----------- -----------
----------- -----------
4. DEFICIENCY RELATED TO LESS THAN ONE-TO-ONE COVERAGE:
Ratio of Earnings to Combined Fixed Charges $12,223,602 $ 1,920,941
----------- -----------
----------- -----------
Ratio of Earnings to Interest Charges $ 9,329,203 $ 1,184,749
----------- -----------
----------- -----------
Ratio of Earnings to Preferred Stock Requirements $ 5,528,251 $ 1,806,099
----------- -----------
----------- -----------
</TABLE>
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 198,517,347
<SECURITIES> 10,000,000
<RECEIVABLES> 32,129
<ALLOWANCES> 0
<INVENTORY> 1,656,889
<CURRENT-ASSETS> 210,949,715
<PP&E> 35,999,394
<DEPRECIATION> 2,013,359
<TOTAL-ASSETS> 258,191,926
<CURRENT-LIABILITIES> 7,149,322
<BONDS> 209,702,742
48,479,933
22,714,729
<COMMON> 10,506,071
<OTHER-SE> (40,392,749)
<TOTAL-LIABILITY-AND-EQUITY> 258,191,926
<SALES> 139,878
<TOTAL-REVENUES> 139,878
<CGS> 978,395
<TOTAL-COSTS> 2,025,230
<OTHER-EXPENSES> 4,394,203
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,233,635
<INCOME-PRETAX> (9,329,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,329,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,329,203)
<EPS-PRIMARY> (3.50)
<EPS-DILUTED> (3.50)
</TABLE>
