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 March 31, 1999
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
(312) 955-2100
(Address and telephone number of principal executive office)
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_____
On May 7, 1999, 4,218,388.9 shares of the Registrant's Common Stock were
outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 1
Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 3
Consolidated Statement of Changes in Shareholders' Equity for the Three Months Ended
March 31, 1999 4
Notes to Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
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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. The Company
undertakes no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---------------- ----------------
<S> <C> <C>
Current Assets (Unaudited)
Cash and cash equivalents $ 80,607,081 $ 72,901,622
Accounts receivable, less allowances
of $267,117 and $1,376, respectively 487,979 157,082
Short term investments 68,579,008 98,464,936
Inventory 9,873,562 10,385,575
Prepaid expenses and other 592,607 598,878
---------------- ----------------
Total current assets 160,140,237 182,508,093
Property, Plant and Equipment
Leasehold improvements 6,213,451 5,647,709
Property, plant and equipment 72,582,877 57,475,153
Less: accumulated depreciation (6,320,642) (4,814,143)
---------------- ----------------
Property, plant and equipment, net 72,475,686 58,308,719
Other assets
Restricted cash collateral reserve 1,921,496 1,796,880
Prepaid franchise fees 3,726,738 3,685,961
Debt issuance costs, net of amortization of $1,780,011 and $1,386,138, respectively 6,207,232 6,601,105
Deferred franchise costs, net of amortization of $668,543 and $623,681, respectively 333,396 350,144
Bank commitment fee, net of amortization of $130,428 and $78,604, respectively 846,478 898,302
Deferred mapping and design, net of amortization of $104,594 and $93,071, respectively 33,357 44,880
Goodwill, net of amortization of $85,056 10,121,651 -
Other deferred costs 167,464 149,889
---------------- ----------------
Total other assets 23,357,812 13,527,161
---------------- ----------------
Total assets $ 255,973,735 $ 254,343,973
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,037,384 $ 10,688,242
Accrued severance 1,527,500 1,230,000
Notes payable 2,000,000 -
Accrued expenses and other 1,755,283 1,261,982
---------------- ----------------
Total current liabilities 14,320,167 13,180,224
Senior discount notes, net of discount of $133,968,672 and $140,681,223, respectively 229,166,328 222,453,777
Notes payable 2,000,000 -
Other long term obligations 475,939 -
Redeemable Preferred Stock
13 3/4% senior cumulative exchangeable preferred stock, $.01 par value
57,364.49 and 55,458.12 shares outstanding, respectively 54,775,458 52,617,006
Shareholders' Equity
Class A convertible 8% cumulative preferred stock, no par value 25,582,814 24,611,966
Voting and non-voting common stock 11,104,889 7,862,836
Common shares to be issued 123,432 123,432
Retained deficit (81,575,292) (66,505,268)
---------------- ----------------
Total shareholders' equity (44,764,157) (33,907,034)
---------------- ----------------
Total liabilities and shareholders' equity $ 255,973,735 $ 254,343,973
================ ================
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21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
---------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Operating revenues $ 1,125,401 $ 65,491
Operating expenses
Network operations 1,528,602 518,408
Sales and marketing 1,130,708 948,991
General and administrative 3,847,882 3,082,412
Depreciation and amortization 1,699,765 768,420
----------------- ----------------
Total operating expenses 8,206,957 5,318,231
----------------- ----------------
Operating loss (7,081,556) (5,252,740)
Interest expense (6,343,302) (3,603,721)
Interest income 1,889,502 1,889,189
Amortization of issuance costs (405,368) (218,411)
----------------- ----------------
Net loss (11,940,724) (7,185,683)
Preferred stock requirements (3,129,300) (1,946,535)
----------------- ----------------
Net loss attributable to common shares $ (15,070,024) $ (9,132,218)
================= ================
Weighted average common
shares outstanding 3,784,703.8 3,330,474.0
Basic and diluted loss per share $ (3.98) $ (2.74)
================= ================
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21st CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------------
1999 1998
----------------- ----------------
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Operating Activities
Net loss $ (11,940,724) $ (7,185,683)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 1,699,765 768,420
Amortization of debt discount 6,712,551 3,478,017
Amortization of debt issuance costs 405,368 218,411
Stock compensation 105,580 123,165
Changes in operating assets and liabilities:
Receivables, net 12,845 8,863
Other current assets 528,274 (1,474,226)
Accounts payable (1,894,730) 657,683
Accrued expenses and other
current liabilities (118,109) 1,342,883
Noncurrent assets and liabilities, net (250,803) (18,680)
----------------- ----------------
Net Cash Used for Operating Activities (4,739,983) (2,081,147)
----------------- ----------------
Investing Activities
Capital expenditures (15,047,522) (5,662,450)
Purchases and sales/maturities of short term investments, net 29,885,928 (10,000,000)
Acquisition, net of cash acquired (2,392,964) -
----------------- ----------------
Net Cash Provided by (Used for) Investing Activities 12,445,442 (15,662,450)
----------------- ----------------
Financing Activities
Proceeds from issuance of senior discount notes - 200,000,000
Proceeds from issuance of class A preferred stock,
net of issuance costs - 1,421,381
Issuance costs related to senior discount notes - (7,886,825)
Proceeds from issuance of exchangeable preferred stock,
net of issuance costs - 48,025,236
Payment under interim credit facility - (8,000,000)
Payable to bank - 419,068
----------------- ----------------
Net Cash Provided by Financing Activities - 233,978,860
----------------- ----------------
Increase in Cash and Cash Equivalents 7,705,459 216,235,263
Cash and Cash Equivalents at Beginning of Period 72,901,622 1,404,975
----------------- ----------------
Cash and Cash Equivalents at End of Period $ 80,607,081 $ 217,640,238
================= ================
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21ST CENTURY TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
<CAPTION>
Common Shares Class A
Total Common Stock to be Issued Preferred Stock Retained Deficit
--------------- --------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Balances, March 31, 1998 $ 3,938,630 $ 6,974,836 $ $ 21,751,665 $ (24,787,871)
Net loss (32,788,712) (32,788,712)
Stock issuances 223,432 44,211 123,432 55,789
Accrued preferred stock dividends (5,437,332) 1,620,938 (7,058,270)
Preferred stock accretion (686,841) 1,183,574 (1,870,415)
Stock options 843,789 843,789
--------------- --------------- --------------- ------------------ ------------------
Balances, December 31, 1998 (33,907,034) 7,862,836 123,432 24,611,966 (66,505,268)
Net loss (11,940,724) (11,940,724)
Stock issuances 3,136,473 3,136,473
Accrued preferred stock dividends (1,939,140) 558,877 (2,498,017)
Preferred stock accretion (219,312) 411,971 (631,283)
Stock options 105,580 105,580
--------------- --------------- --------------- ------------------ ------------------
Balances, March 31, 1999 $ (44,764,157) $ 11,104,889 $ 123,432 $ 25,582,814 $ (81,575,292)
=============== =============== =============== ================== ==================
Common Shares Common Share Class A
Common Shares to be Issued Warrants Preferred Shares
--------------- --------------- --------------- ------------------
Balances, March 31, 1998 3,489,467.9 1,741,738.9 1,548.5
Net loss
Stock issuances 4,498 27,429.2 5,327.1 6.3
Accrued preferred stock dividends
Preferred stock accretion
Stock options
--------------- -------------- --------------- ------------------
Balances, December 31, 1998 3,493,965.7 27,429.2 1,747,066.0 1,554.8
Net loss
Stock issuances 696,994.0
Accrued preferred stock dividends
Preferred stock accretion
Stock options
--------------- -------------- --------------- ------------------
Balances, March 31, 1999 4,190,959.7 27,429.2 1,747,066.0 1,554.8
=============== ============== =============== ==================
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21ST CENTURY TELECOM GROUP, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Consolidation and Presentation
21st Century Telecom Group, Inc. ("21st Century" or the "Company") is a
Chicago-based company incorporated in October 1992. 21st Century is an
integrated, facilities-based communications company, which seeks to be the first
provider of bundled voice, video and high-speed Internet and data services in
selected midwestern markets beginning with Chicago's Area 1. The City of Chicago
has awarded the Company a 15-year renewable franchise for Area 1. Area 1
stretches more than 16 miles along Chicago's densely populated lakefront skyline
including the nation's second largest business and financial district.
The Company's accounting and reporting principles conform to generally
accepted accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation. Management believes the
Company operates in only one reportable segment.
The condensed consolidated financial statements 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 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. Acquisition of Business
On February 26, 1999, the Company acquired EnterAct Corp. ("EnterAct"), a
Chicago-based provider of Internet access and commercial data services. EnterAct
has approximately 50 employees. The majority of EnterAct's approximately 10,000
customers are residential dial up Internet access customers; however, a
significant portion of EnterAct's 1998 calendar year revenues were derived from
Internet, data and consulting services provided to its business customer base.
The Company issued 696,994 shares of its no par value common stock valued by the
Company at $4.50 per share to certain officers of EnterAct and agreed to pay an
additional $6,500,000. The Company paid $2,500,000 at the closing and issued two
non-interest bearing notes totaling $4 million. The notes are payable to
executives of EnterAct over two years, one half due on the first anniversary
date and one half due on the second anniversary date. This acquisition was
accounted for as a purchase and accordingly the purchased assets and assumed
liabilities have been recorded at their fair market values at the date of
acquisition. The purchase price exceeded the estimated fair market value of the
net assets acquired resulting in goodwill in the amount of $10,206,706, which is
being amortized using the straight line method over 10 years. In addition, a
stock option plan was approved and options were awarded to certain employees of
EnterAct. EnterAct became the Company's Business Services Group, developing,
marketing and selling data and telephony services to the business community.
Since the acquisition of EnterAct was accounted for as a purchase its
results of operations have been included with the Company's since the date of
acquisition. Had the Company reflected the acquisition as of the beginning of
the period, its revenues would have increased approximately $710,000, for the
three months ended March 31, 1999. Comparatively, had the Company reflected the
acquisition as of January 1, 1998, its revenues would have increased
approximately $529,000 for the three months ended March 31, 1998. All other
reportable supplemental pro forma information would not be materially different
than the reported amounts.
3. Earnings Per Share
Basic per share amounts were based on weighted average common shares
outstanding, excluding common stock equivalents, of 3,784,703.8 and 3,330,474.0
shares for the three months ended March 31, 1999 and 1998, respectively. Given
the anti-dilutive effect of including common stock equivalents in the
calculation, diluted earnings per share amounts are not presented.
At March 31, 1999, common shares issuable pursuant to options and warrants
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) 699,163.2
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 March 31, 1998, common shares issuable pursuant to options and warrants
included: (1) 1,302,868.9 common share warrants related to the Class A
Convertible 8% Cumulative Preferred Stock, (2) 438,870 common share warrants
related to the 13 3/4% Senior Cumulative Exchangeable Preferred Stock, (3)
1,250,000 options issued in connection with certain Directors' guarantee of a
loan, (4) 287,829.9 employee vested stock options, and (5) 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 and 13 3/4% Senior
Cumulative Exchangeable Preferred Stock.
4. Class A Convertible 8% Cumulative Preferred Stock
Preferred
Shares Amount
------------ ----------------
December 31, 1998 1,554.8 $24,611,966
Accrued Dividends - 558,877
Accretion - 411,971
------------ ----------------
March 31, 1999 1,554.8 $25,582,814
============ ================
5. Exchangeable Preferred Stock 13 3/4 % Senior Cumulative
Preferred
Shares Amount
------------- ----------------
December 31, 1998 55,458.12 $52,617,006
February 15, 1999
Stock Dividend 1,906.37
Accrued Dividends 1,939,140
Accretion 219,312
------------- ----------------
March 31, 1999 57,364.49 $54,775,458
============= ================
On February 15, 1999, the Company issued 1,906.37 shares of Exchangeable
Preferred Stock as the quarterly dividends on the 13 3/4% Senior Cumulative
Exchangeable Preferred stock due 2010.
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 549,578 were outstanding as of March 31, 1999. Options vest
over 48 months from the date of employment and expire after ten years. Options
vested under this plan as of March 31, 1999, totaled 390,064.3.
Effective April 14, 1998, the Company established three 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 March 31, 1999, all 331,200 shares
available under the Executive Plan were awarded. Effective March 6, 1998,
278,200 options were awarded to an executive officer. 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 March 6, 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. On April 14, 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. All options vest over 48 months from the
date of employment and expire after ten years. At March 31, 1999, 197,751.9
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 March 31, 1999, a total
of 146,500 options were granted under the Key Management Plan, 23,500 of which
vested immediately. A total of 27,625 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 options under these plans vest over four years
beginning July 1, 1999 and expire 10 years from date of grant.
Effective February 26, 1999, the Company established three new additional
stock option plans related to the former employees of EnterAct. EnterAct was
acquired by the Company on February 26, 1999. The plans are: the 21st Century
Telecom Group, Inc. 1999 Stock Incentive Plan (the "1999 Stock Incentive Plan"),
the 21st Century Telecom Group, Inc. 1999 ISP Stock Plan (the "1999 ISP Stock
Plan"), and the 21st Century Telecom Group, Inc. ISP Employee Stock Option Plan
(the "ISP Employee Stock Option Plan").
Under the 1999 Stock Incentive Plan 60,000 options are available for grant
primarily to specifically named former employees of EnterAct. On February 26,
1999, 51,000 of the shares available under the 1999 Stock Incentive Plan were
awarded to such employees with an additional 4,205 options awarded to newly
hired employees of the Company in March 1999. Options related to both awards
have an exercise price of $4.50 which is equal to the $4.50 fair market value
determined by the Board of Directors. All options vest at 25% of the total
shares subject to the option, so that the option is fully vested on the fourth
anniversary of the grant date. At March 31, 1999, there were no options vested.
Under the 1999 ISP Stock Plan 599,958 options are available for grant to
specifically named former employees of EnterAct. On February 26, 1999, all
599,958 shares available under the 1999 ISP Stock Plan were awarded at various
exercise prices with the vesting status determined by the respective measurement
dates. The series "A" option price is $35.26 that is subject to a measurement
date of the second anniversary date of the grant and expires on the seventh
anniversary date of the grant. The series "B" option price is $45.33 that is
subject to a measurement date of the second anniversary date of the grant and
expires on the seventh anniversary date of the grant. The series "C" option
price is $65.48 that is subject to a measurement date of the third anniversary
date of the grant and expires on the eighth anniversary date of the grant.
Unless terminated, all options vest at 100% on the measurement date provided the
fair market value per share of the stock is equal to or greater than the
exercise price per share on the measurement date. If on the measurement date the
fair market value per share of the stock is less than the exercise price per
share the option shall terminate in its entirety. Depending upon the reason and
timing for termination of employment, there are specific provisions that allow
the employee to exercise vested shares for a period up to one year after
termination of employment. Specific vesting guidelines related to change of
Company control or death or disability of the employee could result in 100%
vesting of options prior to the measurement dates previously stated. At March
31, 1999, there were no options vested.
Under the ISP Employee Stock Option Plan 98,703 options are available for
grant to specifically named former employees of EnterAct. The ISP Employee Stock
Option Plan was created by the Company as a substitute for EnterAct's previous
option plan. On February 26, 1999, 98,678 shares available under the 1999 ISP
Employee Stock Option Plan were awarded at an exercise price of $4.50 which is
equal to the $4.50 fair market value determined by the Board of Directors. All
options vest at 50% on the first anniversary of the original grant date, 75% on
the second anniversary of the original grant date and 100% on the third
anniversary of the original grant date. Depending upon the reason for
termination of employment, there are specific provisions that allow the employee
to exercise vested shares within 60 days of termination of employment. Options
expire after ten years from the date of grant. At March 31, 1999, 57,847 options
were vested.
7. Bank Revolving Credit Facility
On February 26, 1999, the Company entered into a letter of credit which was
secured by $2 million under the Company's bank revolving credit facility. The
letter of credit serves as security for a promissory note due to executives of
EnterAct.
8. Subsequent Event
On April 12,1999, 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 May 1, 1999,
payable on May 17, 1999. An additional 1,971.9 shares of 13 3/4% Senior
Cumulative Exchangeable Preferred Stock will be issued on May 17, 1999 for
settlement of these dividends.
<PAGE>
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 transition
period from April 1, 1998 to December 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 in this report.
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 March 31, 1999, the Company had a retained deficit of $81,575,292. 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.
The Company acquired EnterAct Corp. ("EnterAct") on February 26, 1999. The
acquistion was accounted for as a purchase. As such, its results of operations
have been included since the acquisition date.
Results of Operations
Revenues
The Company generated subscriber revenues of $1,125,401 and $65,491 for the
three months ended March 31, 1999 and 1998, respectively. 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. The acquisition of EnterAct, the Company's
Business Services Group ("BSG"), contributed to over 40% of the total increase
in revenues during the three months ended March 31, 1999 when compared to the
corresponding prior period. The Company's BSG offers dial-up access to the
Internet, as well as an expanding line of commercial business services,
including, web hosting, Internet consulting, co-location and networking. At
March 31, 1999, the Company was providing service to 21,633 connections in 56
bulk MDU's and 158 right of entry ("ROE") buildings. As of March 31, 1999, there
were 3,377 backlogged connection orders for bulk MDU and ROE customers.
Expenses
The Company incurred operating expenses of $8,206,957 and $5,318,231 for
the three months ended March 31, 1999, and 1998 respectively. The increase in
operating expenses resulted from activities required to accelerate the network
build-out, operate the franchise and deliver services. Approximately, $436,000
of the increased operating expenses were due to the acquisition of EnterAct.
Network Operations
The component of operating expenses that represents network operating costs
related to the delivery of cable and internet services increased $1,010,194
during the three months ended March 31, 1999, when compared to the corresponding
prior period. 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 March 31, 1999.
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 $4,978,590 and $4,031,403
for the three months ended March 31, 1999 and 1998, 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 to support Information Technology functions established within the
Company, as well as certain key sales and marketing positions. Subsequent to the
first quarter of 1998, the Company established a state-of-the-art call center
staffed with customer service professionals and technical support specialists
available 24 hours a day, seven days a week which has contributed to the
increase in general and administrative expenses for the three months ended March
31, 1999 when compared to the corresponding prior period.
Depreciation and Amortization
Depreciation and amortization costs were $1,699,765 and $768,420 for the
three months ended March 31, 1999 and 1998, respectively. The increase in
depreciation and amortization costs is primarily attributable to the increase in
plant placed into service as the Company continues to buildout its network.
Interest and Other Charges
Interest expense increased $2,739,581 during the three months ended March
31, 1999, when compared to the corresponding prior period. The increase was due
primarily to the amortization of the debt discount associated with the Senior
Discount Notes having been issued in February 1998, thus the three months ended
March 31,1998 received less than a full quarter of amortization. Amortization of
issuance costs on Senior Discount Notes was $405,368 and $218,411 during the
three months ended March 31, 1999 and 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 ended March 31, 1999 and 1998, the Company incurred net
losses amounting to $11,940,724 and $7,185,683, 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 $4,739,983 for the three months
ended March 31, 1999, and $2,081,147 for the three months ended March 31, 1998.
Net cash used for operating activities for the three months ended March 31, 1999
resulted principally from the Company's net loss from operations 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 provided by investing activities totaled $12,445,442 in the
three months ended March 31, 1999. Cash flows used for investing activities
totaled $15,662,450 in the three months ended March 31, 1998. Cash requirements
in the three months ended March 31, 1999 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 also located at the corporate headquarters. The sale and
maturity of short term investments, which was partially offset by purchases,
caused cash provided by investing activities to increase. On February 26, 1999,
the Company acquired EnterAct, a Chicago-based provider of Internet access and
commercial data services. EnterAct has approximately 50 employees. The majority
of EnterAct's approximately 10,000 customers are residential dial up Internet
access customers; however, a significant portion of EnterAct's 1998 calendar
year revenues were derived from Internet, data and consulting services provided
to its business customer base. In connection with this transaction, the Company
issued 696,994 shares of its no par value common stock to certain officers of
EnterAct and agreed to pay an additional $6,500,000. The Company paid $2,500,000
at the closing and issued two non-interest bearing notes totaling $4 million.
The notes are payable to executives of EnterAct over two years, one half due on
the first anniversary date and one half due on the second anniversary date. In
addition, a stock option plan was approved and options were awarded to certain
employees of EnterAct. EnterAct became the Company's Business Services Group
developing, marketing and selling data and telephone services to the business
community. Cash requirements in the three months ended March 31, 1998 consisted
primarily of the cost of building and equipping the NOC and facilitating the
corporate headquarters and network construction.
Cash flows from financing activities totaled $233,978,860 in the three
months ended March 31, 1998. In the three months ended March 31, 1998, the
private sale of $200 million in Senior Discount Notes; the sale of $50 million
in Exchangeable Preferred Stock; and the sale of Class A Preferred Stock;
generated a net of $192,113,175, $48,025,236 and $1,421,381, 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 until completion during the year
2001, will total approximately $250 million, of which approximately $70 million
has been spent since the construction of Area 1 was initiated. 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. On October 30, 1998 the Company entered into Amendment No. 1 to its
bank revolving credit facility which adjusted certain operating covenants. On
February 26, 1999, the Company entered into a letter of credit which was secured
by $2 million under its bank revolving credit facility. The letter of credit
serves as security for a promissory note due to executives of EnterAct.
Impact of Year 2000
The Company has been actively and aggressively working to ensure Year 2000
compliance which included an awareness program started in the third quarter of
1998. The Company has initiated a formal program to address the Year 2000 issue
that includes a project office. The Company has substantially completed a
comprehensive inventory and assessment of Information Technology (IT) and non-IT
related systems and equipment that may be affected by Year 2000 issues. The
Company has contracted with a third party to assist with its Year 2000
assessment. Management does not anticipate any significant future expenditures,
apart from approximately $70,000 in fees charged by this third party and certain
system components not covered by service maintenance agreements, in conjunction
with the Year 2000 issue. The Company has completed the replacement of all
financial systems to meet Year 2000 compliance. Substantially all of the
remaining critical business systems have been certified by the vendors to be
Year 2000 compliant. The Company's testing plan may include unit testing as well
as regression analysis. The replacement and remediation of IT and non-IT systems
is expected to be substantially complete in the third quarter of 1999. The
Company is assessing the Year 2000 readiness of its critical vendors and
suppliers and has sent letters inquiring as to their status regarding their Year
2000 readiness. The Company will perform additional procedures as necessary to
evaluate risks associated with third parties and will consider these risks when
establishing contingency plans. The Company is developing contingency plans to
mitigate the potential disruptions that may result from Year 2000 issues. These
plans may include securing alternative sources for critical vendors and
suppliers, as well as other measures considered appropriate by management and
are anticipated to be completed in the third quarter of 1999.
While the Company believes its efforts to avoid any material adverse
effect on the Company's operations or financial condition will be successful,
given the complexity and risks, there can be no assurance these efforts will be
successful. Risks include, but are not limited to, the readiness of vendors,
suppliers, and remediation projects. However, the Company does not anticipate
any disruptions in the ability to provide our products and services subsequent
to December 31, 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.
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
None.
<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.
Signature Title Date
President, Chief Executive Officer
/s/ Robert J. Currey and Director May 12, 1999
- ---------------------------
Robert J. Currey
/s/ Ronald D. Webster Chief Financial Officer May 12, 1999
- ---------------------------
Ronald D. Webster
<PAGE>
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 1/4
Senior 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).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Data From the Consolidated
Financial Statements Included as Part of the Company's March 31, 1999 10-Q
</LEGEND>
<CIK> 0001056751
<NAME> 21st Century
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 80,607,081
<SECURITIES> 68,579,008
<RECEIVABLES> 755,096
<ALLOWANCES> 267,117
<INVENTORY> 9,873,562
<CURRENT-ASSETS> 160,140,237
<PP&E> 78,796,328
<DEPRECIATION> 6,320,642
<TOTAL-ASSETS> 255,973,735
<CURRENT-LIABILITIES> 14,320,167
<BONDS> 229,166,328
54,775,458
25,582,814
<COMMON> 11,104,889
<OTHER-SE> 81,451,860
<TOTAL-LIABILITY-AND-EQUITY> 255,973,735
<SALES> 1,125,401
<TOTAL-REVENUES> 1,125,401
<CGS> 1,528,602
<TOTAL-COSTS> 2,659,310
<OTHER-EXPENSES> 5,953,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,343,302
<INCOME-PRETAX> (11,940,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,940,724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,940,724)
<EPS-PRIMARY> (3.98)
<EPS-DILUTED> (3.98)
</TABLE>
